By Clifford Kupchan
August 9, 2010, Rianovosti

With the European Union's adoption of tough sanctions last week, the west has finally succeeded in gaining leverage over Tehran. Reports this week of an assassination attempt against President Mahmoud Ahmadi-Nejad, whether accurate or not, will augment that leverage by causing jitters throughout the Iranian elite.

But this will not buy much unless it is used in concert with diplomacy; a diplomatic settlement of the nuclear crisis is the prize. Washington and Brussels should move quickly to use their new influence by crafting and offering Tehran a deal on the final status of its nuclear programme.

Diplomacy now has a better chance than in the past. The recent sanctions are the main reason for this. The UN passed a resolution on June 9, the US implemented additional measures on June 16, July 1 and August 3, and the EU adopted its surprisingly severe regime on July 26.

The new measures strike hard at Iran's financial, energy, trade and transport sectors. Regarding finance, EU companies are now prohibited from providing insurance to Iranian companies, which impairs the movement of cargos to and from Iran. The EU has also frozen the assets of many Iranian banks. A new US law mandates sanctions on any foreign bank that does business with a US-sanctioned Iranian bank. Washington's goal is to give foreign banks a choice of doing business either in the US or the Iranian market. Most will sprint from Iran.

Regarding energy, US measures expose any foreign company that exports petroleum to Iran to punishment, playing off Iran's need to import more than 30 per cent of its gasoline needs. EU businesses are also now banned from new investment in the sector. Most European energy companies have already left Iran, but now the path back is blocked. On trade, EU governments and companies are now prevented from providing new medium or long-term trade financing to Iran. Finally, on transport, Iran's state shipping line has been sanctioned and Iranian cargo planes are banned from Europe.

These sanctions will definitely hurt Tehran. The cost of doing business will rise for Iranian entities involved with foreign markets. Iran's hydrocarbon production is now locked into a downward trajectory, as high quality western technology is off-limits. Given that oil exports currently account for roughly half of Iran's budget revenue, a production decline will sting.

The Iranian regime is surprised at how hard it has been hit. Tehran has in the past reacted to sanctions with defiance. This time it has mixed harsh rhetoric with calls for a resumption of diplomacy in the autumn. There is a rare public debate in the Iranian press over the extent to which sanctions will hurt. Furthermore, Iran intends to embark within months on an ambitious programme to eliminate subsidies, which now cost roughly $70bn annually. That could be destabilising and Tehran will probably seek to avoid economic trouble on the foreign and domestic front simultaneously.

Washington and Brussels should move fast, before Iran adjusts to its new situation. The first challenge is to craft a common position on what kind of Iranian nuclear programme can be tolerated. Without this, the west will have no bottom line. First, Iran must agree to strict limits on the amount of low enriched uranium it can stockpile, as that material can be used to make a bomb. Second, the west must insist on very intrusive inspection rights. Finally, Iran must clarify credible allegations that it is taking steps to make nuclear weapons. Russia and China would be very likely to agree to this stance.

The west should stop insisting that Iran suspend uranium enrichment. Based on my discussions with Iranian leaders and elites across the political spectrum, Tehran will continue to refuse. But the west's offer on the rest of Iran's programme should be non-negotiable; Iran will try to chip away at every element and must be confronted with an unswerving position. If Iran accepts, it would receive the plethora of benefits currently on offer, including help obtaining light water reactors, permission to renew its civil aviation fleet and assistance with its energy sector. If Tehran refuses, the US, EU and other nations should impose even harsher sanctions.

The west has leverage. It is time to go for the gold - a diplomatic settlement of the nuclear crisis.

lifford Kupchan is a research director at Eurasia Group and a former US State Department official