The past year has been one of the most consequential in Iran’s modern history. The country has fought two wars, faced a major popular uprising, and lost the supreme leader who had dominated its political landscape since 1989. Now, after a five-week war, Tehran appears poised to conclude a Memorandum of Understanding (MoU) with the United States that could well redefine its place in the regional and global order.Illustration: Pariplab Chakraborty.Paradoxically, these upheavals seem to have created an opportunity for the Islamic Republic rather than a crisis. Having survived an intense confrontation with two of the world’s leading military powers and emerged battered but standing, Iran may now have a final chance to realise the potential that geography, resources and human capital have long promised. The country could yet become the regional power it has always had the capacity to be.The war on Iran that began on February 28 has been a strategic failure for the US-Israeli coalition. The war was not aimed at reopening the Strait of Hormuz; the water was already open when the first bombs fell. Neither was it about diluting Iran nuclear capacity; Iran had already agreed to that in talks mediated by Oman days before the war was launched.The war was about bringing about a collapse of the Iranian state and to that end, the US and Israel assassinated the leader who had actually forbidden the country from making nuclear weapons. Now headed by Mojtaba Khamanei as supreme leader, Iran today is more coherent and confident even though the country suffered massive damage in the war.The agreementThe peace deal that is to be signed on Friday in Geneva is an indication of the Iranian achievement. Details of the agreement have not been revealed. But according to Iran’s Mehr news agency it involves: Permanent and immediate end to war on all fronts, including Lebanon. US commitment to non-interference in Iran’s internal affairs and respect for the sovereignty of the Islamic Republic of Iran. Complete lifting of the naval blockade within 30 days. US commitment to withdraw its forces from around Iran. Reopening of the Strait of Hormuz within 30 days, under Iranian arrangements. Suspension of sanctions on oil and petrochemical product sales and derivatives, and full Iranian access to its financial resources. Reconstruction plans to be presented by the US and its allies, totalling at least $300 billion. A 60-day negotiation period to reach a final agreement on the nuclear issue and the complete removal of US primary and secondary sanctions, UN Security Council resolutions, and IAEA Board of Governors resolutions. Reaffirmation of Iran’s NPT commitment not to produce nuclear weapons. During the negotiation period, the US commits not to add forces to the region and not to impose new sanctions. Release of $24 billion in Iran’s blocked funds during the 60-day final negotiation period, with half of that amount to be made available to Iran before negotiations begin. Establishment of a monitoring mechanism to implement the agreement. The final agreement to be ratified by a UN Security Council resolution. Final negotiations will not begin until half of Iran’s blocked funds are released, oil sanctions are suspended, and the naval blockade is lifted. The final agreement will address only the fate of enriched materials and enrichment, sanctions relief, and Iran’s economic reconstruction programme. Talks on Iran’s missile programme and its support for regional resistance groups have been definitively removed from the agenda.Changed balance of powerIt is clear that the regional balance of power has changed in ways that go beyond the nuclear question. Recent conflicts have demonstrated the growing effectiveness of precision-guided missiles, ballistic missile systems and drones. Iran has shown that it possesses substantial capabilities in all three domains. Equally significant is its ability to protect these assets through extensive underground facilities that have proven difficult to neutralise.The result is a deterrent posture that need not depend on nuclear weapons. Iran’s military performance has highlighted a reality that many regional actors are only beginning to absorb: conventional and missile-based deterrence can impose meaningful costs even on technologically superior adversaries.At the same time, the conflicts have exposed the limitations of the traditional American security architecture in the Gulf. For decades, US military bases scattered across the region served as the ultimate guarantee of stability and deterrence. Today, their effectiveness appears less certain. Already many Gulf Cooperation Council (GCC) countries are reassessing their security ties and attitude towards Iran. In a future where Washington reduces its military footprint – whether by choice or necessity – Iran’s relative influence could grow considerably.Iran’s potentialLocated where it is, Iran has been at the cross-roads of history. Occupying the northern shore of the Persian Gulf, the country borders Iraq, Turkey, Armenia, Azerbaijan, Turkmenistan and Pakistan. More important, perhaps is its southern coastline which faces Saudi Arabia, Bahrain, Qatar, UAE and Oman.Its material resources are equally impressive. The country possesses some of the world’s largest reserves of oil and natural gas, along with significant deposits of copper, iron ore, zinc, lead and gold. But perhaps its greatest asset are its people. Iran is home to a large, educated and youthful population, with significant expertise in engineering, medicine, science and information technology.By any conventional measure, these ingredients should have produced one of the world’s leading middle-income powers. Yet Iran has consistently underperformed relative to its potential. A major reason for this has been its dysfunctional politics, especially after the US-sponsored overthrow of Mossadegh and the installation of the Shah.Under Reza Pahlavi, Iran was one of America’s closest allies in the Middle East. The partnership was so deep that the US supplied Tehran with some of the most advanced weapons in its arsenal, including the F-14 Tomcat fighter and the Phoenix long-range missile system.In 1979, a coalition of religious leaders, leftists, nationalists and liberals shaped the revolution that overthrew the Shah. However, the revolution was undermined almost immediately.Also read: Sobering Lessons From US-Iran Deal: India Must Engage US as Equal Partner, Not a Subordinate OneThe mullah faction under Ayatollah Khomeini, better organised and more ruthless than its partners, systematically displaced every other constituency and replaced the Shah’s autocracy with a theocracy. The result was a layered political system — nominally republican, with a parliament and elections, but one in which candidates were vetted by the supreme leader’s secretariat and ultimate authority rested with unelected clerics. The liberals and leftists who had helped make the revolution found themselves imprisoned or exiled. Many were simply executed. Iran’s potential was subordinated to an ideological project. What emerged was a hybrid structure in which democratic participation existed within tightly controlled limits.As part of this, since 1979, Iran has been locked in a prolonged confrontation with the US.Now into its fifth decade, this has meant persistent sanctions, capital flight, and technological isolation. The economy that should have made Iran a regional anchor has been repeatedly destabilised by this confrontation and by the mismanagement it enables. The young, educated population that represents the country’s greatest long-term asset has voted with its feet: brain drain from Iran is among the highest in the world.Opportunities and challengesThe death of the supreme leader and the prospect of a new relationship with the US therefore arrive at a pivotal moment. Iran now faces a strategic choice. It can continue to define itself primarily through resistance and confrontation, or it can redirect its considerable national energies toward economic development, regional influence and technological advancement.The opportunity is real, but it may not come again. Sanctions relief, access to global markets and a reduction in geopolitical tensions could unleash growth that has been suppressed for decades. Combined with its strategic location and educated population, these advantages could transform Iran into the leading indigenous power of the Gulf and West Asia.The path will not be easy. There are enough spoilers, domestic and foreign, to undermine the opportunity that has appeared before Iran. Domestically, the leadership of Mojtaba Khamanei is still untested and there is no dearth of ideological figures in the powerful Islamic Revolutionary Guards Corps (IRGC) to derail the path to peace.Also read: PM Modi Welcomes US-Iran Deal Without Naming Mediator PakistanIsrael’s deep-seated anxieties about Iranian power mean it will not abandon its goal of complete dismantlement of Iran’s deterrent capabilities, not merely the nuclear programme. Managing Israeli concerns, along with Iran’s extended network of non-state partners – including the Houthis in Yemen and Hizbullah in Lebanon – will be essential to any durable regional settlement. An MoU between Washington and Tehran is a necessary condition for stability, but far from a sufficient one.Prime Minister Narendra Modi made a strategic blunder in believing that the US-Israeli strike would lead to a quick regime change in Iran. New Delhi looked away as Khamenei was assassinated, and its messages to Gulf countries were tantamount to a condemnation of Iran. Indeed, India co-sponsored a UN Security Council resolution that condemned Iranian attacks on GCC countries and Jordan while remaining silent about the US-Israeli attacks on Iran. Russia and China abstained from this.India’s ties with Iran were already in tatters on account of US sanctions pressure since 2019. Now we may actually witness the sight of Washington rebuilding its ties through sanctions relief and other measures, while we remain what we have been since the onset of the war – bystanders. India may find itself doubly marginalised – estranged from Tehran and increasingly peripheral to a Gulf that is recalibrating around a new regional order.Manoj Joshi is a Distinguished Fellow, Observer Research Foundation, New Delhi.This piece was first published on The India Cable – a premium newsletter from The Wire – and has been updated and republished here. To subscribe to The India Cable, click here.