US-Iran may meet in Pakistan. How you will know if talks are going well.

The U.S. and Iran are poised for negotiation talks in Pakistan this week as the two-week cease-fire nears an end. Whether the two countries succeed in find an offramp for the conflict—and even whether the talks occur—remains in doubt.

There is back and forth on who will be attending but Vice President JD Vance is expected to leave for Islamabad on Tuesday. Iranian state media had indicated its delegation may skip talks following the U.S. seizure of an Iranian ship in the Strait of Hormuz; other reports suggest they are sending negotiators.

The next 24 hours will be critical, geopolitical strategists say, as they look to see if how Iran retaliates for the ship seizure, whether by targeting a U.S. ship or attacking assets in other Gulf countries.

More ship seizures by the U.S. could lead to further escalation. “This version of the Islamic Republic will retaliate, either by striking at a U.S. ship or closing the Strait of Ada, which would have a dramatic effect on energy prices,” says Trita Parsi, co-founder and executive vice president of the Quincy Institute for Responsible Statecraft.

While analysts see divisions among the Iranians, they note that even the so-called pragmatists are aligned with the regime ideology. Where they differ is on how much economic flexibility the country gets in any peace deal with the U.S.

Foreign Minister Abbas Araghchi, a veteran diplomat, and President Masoud Pezeshkian want to end the war, even with concessions, as long as a third-party or others in the region backstop a resolution while hard-liners in the Islamic Revolutionary Guard want immediate economic sanctions relief, says Muhanad Seloom, an assistant professor at the Doha Institute for Graduate Studies who previously served in the U.S. State Department and U.K. Ministry of Defense.

Whereas the moderate politicos believe survival itself is a victory, the military fears “a death by a thousand cuts” and wants to end with a posture that shows their strength and gets at least some immediate sanctions relief, Seloom says.

Most Iran experts don’t see these divisions as big enough to spoil a potential de-escalation. If the U.S.-Iran meeting in Islamabad comes together, who attends will be a gauge of where things go.

“If it’s the status quo and Araghchi and Parliament Speaker Mohammad Bagher Ghalibaf are still the main interlocutors, that means the so-called “pragmatists” are still playing a significant role internally in the debate,” says Elisa Catalano Ewers, senior fellow for Middle East Studies at the Council for Foreign Relations who previously worked in the National Security Council and Defense Department. “If they are replaced by a more military-centric figure, it could be a different signal.”

For investors, the critical question is when the Strait of Hormuz will be passable with lowered risk given the growing economic toll around the world. Analysts want to see a clear agreement on who will clear ships or if they will be able to move freely again.

U.S. negotiators should focus narrowly on reopening the strait for now, said Richard Haass, the longtime president of the Council on Foreign Relations and a top foreign policy advisor to Colin Powell during President George W. Bush’s administration.

“The nuclear issue can be kicked down the road, so long as Iran doesn’t take any steps to change the status of its nuclear program,” he said. “If the nuclear program is successfully parked for three months or six months, it’s no big deal.”

Haass thinks the U.S. could agree to a framework where several regional powers—including Iran—work together to manage the Strait, potentially collecting fees for such things as oil spills or removing mines.

In return for ships to move freely, Ewers says, Iran is probably looking for an unfreezing of assets—possibly of funds held in Oman or Qatar, which are in the billions, for limited transactions such as to buy wheat or medical supplies.

If a compromise is reached to reopen the Strait, one sign it is durable will be if Gulf countries begin to transit through the Strait and restart flights in the region, Seloom says. He noted that airlines are restarting trips from Qatar.

The 2015 Iran nuclear deal took 20 months to reach. But even a de-escalation in the current war could help. The clock is in favor of both sides finding an off-ramp as jet fuel shortages in Asia will soon spread to Europe, fertilizer shortages will begin to seep into food prices and elevated energy prices will begin to take a bigger bite out of consumers’ budgets.

Write to Reshma Kapadia at reshma.kapadia@barrons.com