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West considers early sanctions moves in troubled Iran nuclear talks

By Justyna Pawlak and Louis Charbonneau

BRUSSELS/VIENNA (Reuters) - With talks between world powers and Iran over a broad nuclear accord at an impasse, Western governments are considering offering a significant easing of sanctions early on in the process to try to wring concessions from Tehran, diplomats say.

To be effective, such a plan would have to involve clear guidance to companies made wary by U.S. fines for sanctions-busting, be reversible and not go too far, or skeptical U.S. lawmakers would simply reimpose restrictions.

The OPEC oil producer has seen its economy devastated by years of sanctions imposed over its contested nuclear program, which Western states say appears to be aimed at producing a nuclear bomb and Tehran says is purely peaceful.

The prospects for an immediate accord scaling back that program in return for sanctions relief appeared tenuous on Thursday. Diplomats said the six world powers negotiating with Iran - the United States, Russia, China, France, Britain and Germany - were working out terms for an extension of talks, beyond their self-imposed July 20 deadline, instead of seeking to close a deal now.

If there is an agreement in the coming weeks or months, Western diplomats have told Reuters, Iran might still have to wait years, or as long as two decades, to see the complex web of sanctions permanently removed.

Instead, they said, Western states may opt for a patchwork of steps suspending sanctions in various industries that can be easily reinstated if Tehran reneges on its nuclear commitments. The extent of these steps would match Iranian concessions.

"When Iran does something, then we can respond with sanctions relief," one said, speaking on condition of anonymity. "The whole process will take years."

The timing of any easing of oil sanctions - closely watched by the markets - which now prohibit U.S. and European importers from buying Iranian crude and impose severe restrictions on third country purchases, will depend on what Iran offers to do from its side and when.

But some diplomats said restrictions on banking with Iran might have to be eased in step with other industries, such as shipping for example, to make sure companies can finance any newly re-established trade.

"We can be flexible," a senior western diplomat said.

Without access to finance, relief might not materialize, raising questions about the world powers' credibility and endangering the implementation of the accord, they said.

Western companies are eager to enter Iran, a market of nearly 80 million people and vast oil reserves.

But banks have been reluctant to process cash when it became admissible to a certain extent under an interim accord struck between Iran and the world powers last November, which provided modest sanctions relief for some nuclear concessions.

Some experts have said overcoming this reluctance may mean, for example, that the West would have to name several banks that would process transactions allowed under newly allowed relief.

"Overcoming the reticence of international banks to do business with Iran will require the (six powers) to issue clear regulatory guidance about which multilateral sanctions are lifted," said Elizabeth Rosenberg from the Center for a New American Security in a research note.

French bank BNP Paribas agreed earlier this month to pay $9 billion for contravening U.S. sanctions, also against Iran, in a move likely to increase western banks' reluctance to open up for business with Tehran.

THE RIGHT TIMING

How sanctions relief for Iran is introduced might be a crucial factor in ensuring the integrity of any deal, which will likely be implemented over many years.

The West wants Iran to scale back its atom work so much that it would take it a long time, maybe years, to assemble materials for a bomb. To achieve that it wants Iran to limit its capacity to enrich uranium to bomb-grade and subject any remaining work to strict United Nations oversight.

For now, diplomats said, the sides have struggled to match Iranian and western concessions sufficiently to craft a deal, despite holding six rounds of talks since the start of this year coordinated by the EU's top diplomat Catherine Ashton.

Some diplomats have said that as a goodwill gesture towards Iran, the West would be willing to "front-load" some sanctions relief, in return for quick stepping back from atom work.

"It's all meant to be reciprocal," one diplomat from the six powers said.

But experts warn that Congress, where Republicans and some Democrats have called for talks to be abandoned and a return to tough sanctions to deter Tehran from building an atom bomb, may move ahead with new sanctions if they view a deal as too lax.

"If they try to front-load relief too significantly or lift key elements (of the western sanctions architecture) too precipitously, they will inspire a congressional backlash," said Mark Dubowitz of the Foundation for Defense of Democracies, a U.S. think-tank which advocates tougher sanctions.

POLITICAL COMPLICATIONS

Any sanctions relief would have to be closely coordinated between the United States and Europe, some diplomats also said, to ensure Washington's power to punish third countries for contravening its restrictions does not complicate implementation.

It would be difficult, for example, for the Belgium-based SWIFT, which provides banks with a system for moving funds around the world to unblock Iranian banks from using its network to transfer money without some easing of U.S. restrictions.

The Belgian company cut off Iranian banks in 2012 as part of a wider international push to ratchet up sanctions that also included a European Union embargo on purchases of Iranian oil.

The once unthinkable move - considering the extent of dependence of some European countries on Iranian crude - pulled between 450,000 and 600,000 barrels per day off world markets and made it very difficult for global buyers of Iranian crude to insure shipments.

One western diplomat said Iran's immediate goal was to roll back sanctions to what they were prior to EU moves in 2012.

If that happens, EU rules would only allow for the oil embargo to be initially suspended before permanent removal.

A suspension could be easily reversed, while to reimpose such a ban, which took months of painstaking negotiations in 2011 to agree, might be impossible again because it would require a unanimous decision by all 28 EU governments.

In Washington, Obama can theoretically use waivers to allow for some previously sanctioned trade. But a permanent removal of sanctions in many industries would require congressional support, which might be impossible to secure before Iran has completed its side of the deal.

Several diplomats said much of the extensive western sanctions architecture could remain in place even after an accord is concluded.

Many U.S. measures pre-date the nuclear conflict and are related to tensions between Washington and Tehran over a hostage crisis following the 1979 Islamic Revolution.

The domestic U.S. oil embargo would be one example, even if Washington gradually removes pressure on third states not to buy Iranian oil.

(Additional reporting by Fredrik Dahl in Vienna; editing by Philippa Fletcher)

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