Arguably, growing tensions over Iran’s nuclear impasse represent today’s greatest international security challenge. Current Western sanctions against Iran are biting hard, but they are also hurting both the Iranian population and global consumers. With rising concerns over a possible “supply shock” — as Iran struggles to sell its oil and alternative producers such as Saudi Arabia and Libya scramble over dwindling spare capacity — energy prices are inching closer to their staggering 2008 levels. While commodity markets are already feeling the shockwaves, global consumers are struggling to keep pace with rising energy costs.

Economists are seriously concerned that growing tensions in the Persian Gulf are undermining global recovery. In the event of a direct conflict, the world economy could slip into the abyss of a double-dip recession. The last thing the world needs is a major conflict at the heart of a democratizing region so vital to global economic stability. A U.S. or Israeli war with Iran would not only lead to a humanitarian tragedy but would put the entire Middle East on the precipice of conflagration — possibly dragging other great powers such as China and Russia into the picture.

With so many reasons to reconsider the military option and rethink the sanctions track, there is a growing feeling that this crisis can only be solved by a diplomatic grand bargain between America and Iran – something that the public in Iran and the United States are increasingly endorsing.

Sanctions Don’t Work

History tells us that sanctions rarely achieve their intended objectives, as clearly demonstrated by the case of North Korea, where the regime successfully pushed forward with its nuclear program despite successive rounds of sanctions. There are also massive unintended consequences to sanctions: civilian populations in Iraq, as well as North Korea, suffered protracted humanitarian crises under heavy sanctions.

In neither case was there a change in the regime or a significant alteration in behavior. Moreover, sanctions only encourage intransigence on the part of dictators, who pin the responsibility for their nation’s misery on meddling foreign powers. In Iran’s case, as I have previously argued, the sanctions are hurting the Iranian economy, but the regime will always have enough money to funnel into its nuclear program. In the end, the sanctions, if further pursued, may only radicalize and impoverish Iran’s people, gradually undermining the country’s vibrant middle class and civil society.

The West is naive to think that it can bring the Iranian regime to its knees by imposing increasingly crippling sanctions, not least because Tehran has a significant ability to retaliate against any assault and to withstand shocks, be they military or politico-economic. Iran’s influence on global energy markets is also considerable, albeit in a gradual decline. For its part, a fiscally challenged and strategically overstretched America is also in a weaker position to take on Iran. Not to mention the rise of China and its growing assertiveness in the Asia-Pacific region, which is perhaps a greater strategic concern for America and its allies in Asia.

What Went Wrong?

The Iranian nuclear impasse has dragged on for more than a decade precisely because the United States has not made a sustained effort to test the utility of diplomacy. The Bush administration refused to bless the European efforts to resolve the Iranian nuclear issue, especially 2002-2006, and generally dismissed diplomacy as an opportunity for Iran to drag its feet and avoid sanctions. Moreover, the Bush policy was to dissuade Iran’s nuclear enrichment altogether, unless the Iranians agreed to an excessively intrusive inspection regime.

On the other hand, the Obama administration has favored a multilateral approach toward Iran. As brilliantly detailed in Trita Parsi’s book, A Single Roll of the Dice: Obama’s Diplomacy with Iran, President Obama’s only shot at diplomacy with Iran was ultimately too limited in scope and truncated in duration. In 2009, fresh into office, Obama initiated a series of back-door negotiations with Iran’s top political factions. When the deal fell apart because of Iran’s internal political jostling, President Obama shortsightedly abandoned the whole venture. Since then, the United States has devoted its energies to marshaling international support for sanctions designed to cripple Iran rather than engage it.

Nor was this initial attempt backed by a concrete effort to develop institutionalized channels of communication between the two countries. The United States has no diplomatic presence whatsoever in Iran. The two countries have no regular or even intermittent high-level contact. So the gulf of mistrust and mutual suspicion runs deep since intelligence networks rather than diplomats handle much of the information-gathering and strategic-political assessments.

A year after the 2009 blunder, Brazil and Turkey were able to pull off the unexpected, convincing Iran to agree to a nuclear swap deal whereby Tehran would surrender the lion’s share of its enriched uranium in exchange for highly enriched medical isotopes from abroad. To be clear, the deal wasn’t designed to resolve the whole nuclear impasse per se, but it represented an important step toward sustained confidence building and an eventual diplomatic resolution. This point was apparently lost on Israeli and Western officials, who dismissed the entire deal as too limited and argued that Iran did not subject a “sufficient” amount of its enriched uranium to the deal.

Brazil and Turkey did exactly what the Obama administration was – and is – supposed to do. They not only talked to all the power centers in Iran, from the executive to the legislative and the office of the Supreme Leader but they also heavily invested in mutually respectful and patient diplomacy. It was a classic exercise of shuttle diplomacy, as the two emerging powers engaged in repeated high-level visits to Iran and held dialogues with Iran’s top leaders. The fact that both Brazil and Turkey had normal relations and institutionalized interactions with Iran ameliorated Tehran’s anxieties, paving the way for fruitful dialogue.

From Nixon to Obama

There are many parallels between Sino-American relations in the 1960s and 1970s and today’s U.S.-Iran relations. During the Cold War, America not only largely avoided direct conflict with China but was also able to build a measure of understanding with Beijing in its efforts to isolate the Soviet Union. In the early 1960s, faced with an emergent Chinese nuclear capability, the Americans chose the path of caution and relied on the logic of containment and mutually assured destruction. Over the succeeding years, the Americans, especially under the watch of President Nixon and the guidance of Secretary of State Henry Kissinger, engaged in a series of confidential, back-door talks where the two powers agreed on a range of common strategic interests. America not only normalized ties with China; it also gave its erstwhile rival an implicit security guarantee. The whole venture was summed up in the so-called Shanghai Communiqué, which has served as the foundation for four decades of (generally) mutually beneficial relations between the two powers.

Crucially, the deal encouraged China to engage in almost two decades of diplomatic charm offensives and economic liberalization, which greatly contributed to regional security and international trade. By piercing through the veneer of ideology, the Nixon administration was able to appreciate the rational side of a seemingly vitriolic communist China. The Obama administration needs to employ the same kind of realpolitik toward Iran.

The Ultimate Solution

Compared to Chairman Mao’s ideological zeal, which culminated in the Cultural Revolution and the Great Leap Forward and ended in the deaths of tens of millions of people, the Iranian regime displays a considerable amount of rationality and subtlety. Beyond all its rhetoric, bluster, and low-intensity power projection, the Islamic Republic has never engaged in offensive conventional warfare or sought a direct military confrontation with America and other Western powers. Besides, in conventional terms, Iran’s predominantly defensive (and outdated) military hardware hardly constitutes a direct threat to American interests.

Iran’s ultimate objective – similar to other rising powers in history – is two-fold: recognition as a status-quo regional power and a security guarantee from Western powers, especially the United States. Meanwhile, given Tehran’s deep regional influence, it could assist global efforts at stabilizing Iraq, Syria, and Afghanistan.

There are signs that Iran might be contemplating a possible “Tehran Communiqué” with America. The Western sanctions against Iran’s financial and energy sectors are biting hard enough to strengthen the hand of Iranian pragmatists calling for more flexibility in nuclear negotiations, so the Iranians are sending strong signals that reflect their growing willingness to negotiate over their nuclear program. However, this opportunity must be seized quickly, since the sanctions will hardly be enough to dissuade the regime from pursuing nuclear mastery if it so chooses. Meanwhile, if sanctions are not properly re-calibrated in light of Iran’s diplomatic overtures, then they could lead to blowback and a collapse in negotiations.

As the Belgian-based SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, pushes ahead with its plans to expel blacklisted Iranian banks — including the Iranian Central Bank — Tehran is on the verge of being completely frozen out of the global financial system. Already under a barrage of sanctions, the Iranian economy is reeling from double-digit inflation, marked depreciation in currency, and huge disruptions in foreign trade. Iranian traders are not only struggling to import basic commodities, from food to refined petroleum, but they are also finding it increasingly difficult to secure credit for their international transactions. Global insurers are shunning Iranian crude, with the Iranian regime increasingly struggling to find enough customers for its oil exports. Meanwhile, Iran’s “eastern partners” from China to India have been exploiting Tehran’s isolation by pushing for heavy discounts and barter deals, starving Tehran of both hard currency and high-quality commodities.

The sanctions are also placing tremendous costs on the global economy as well as consumers around the world. If the West continues to push forward with crippling sanctions, then the more hawkish elements within the Iranian leadership could gain the upper hand and call for more radical counter-measures. So it is crucial to calibrate the sanctions track and reverse it as soon as there are encouraging signs of cooperation. Otherwise, the sanctions will gain a life of their own and the negotiations could completely break down, bringing the world closer to the possibility of a great conflict.

Diplomatic Green Shoots

There are some encouraging signs on the ground. In addition to allowing two rounds of IAEA inspections at other sites, Iran has allowed inspectors into its military complex in Parchin. The last time the IAEA was granted permission to inspect the site was back in 2005, when the reformists, under President Khatami, had a tenuous control over Iran’s nuclear policy. Moreover, Tehran has also agreed to an upcoming comprehensive nuclear negotiation with the great powers, the so-called P5+1. The Iranian regime is also increasingly consolidated as it moves away from internal bickering toward a more coherent and robust nuclear policy. With recent parliamentary elections firmly shifting the balance of power in favor of the traditional conservative factions, Tehran is feeling more confident about making legitimate and necessary compromises on the nuclear issue.

Time is of the essence. On one hand, Iran is moving toward nuclear self-sufficiency by expanding its centrifuges, increasing its level of enrichment, and expanding its nuclear sites across the country. On the other hand, the Israelis and Republicans – arguing that Iran is near the so-called zone of immunity – are stepping up their pressure on Washington to re-adjust its red lines: essentially, stopping Iran not from building a nuclear bomb but from developing the capability for it. However, intent on avoiding unnecessary tragedy, President Obama has courageously rebuffed the hawks’ calls for military confrontation by maintaining that diplomacy should be allowed to run its course and that the red line is if and when Iran actually starts to build a bomb.

In response, Iran’s Supreme Leader, Ayatollah Ali Khamenei, hailed Obama’s caution on war by stating, “This talk is good talk and shows an exit from illusion.” To sweeten the deal, the Iranians also called for a retrial of an American citizen on the death row. Recent polls also suggest that a majority of Americans favor diplomatic engagement with Iran over the military option. It’s not clear if President Obama will push the envelope by pursuing a “grand bargain” with Tehran. But real diplomacy is the only viable choice.