Benjamin Netanyahu’s meeting with President Barack Obama on Monday went as well as could be hoped. The Israeli prime minister stressed his oft-repeated desire for the US to establish “red lines” for Iran, but avoided any appearance of a disconnect with Washington. Mr Obama promised that the US would watch Israel’s back and continue to deploy the latest tool in its diplomatic arsenal: financial sanctions, in this case powerful disincentives to importing Iranian oil. So we are unlikely to see an Israeli military strike soon, as 
Mr Netanyahu seems willing to give sanctions time to work.

Hopes that tensions might be eased through a diplomatic compromise were boosted yesterday when the US, Britain, France, Germany, Russia and China said they would go back to the negotiating table with Iran to discuss its nuclear programme.

In the meantime, Mr Obama faces an extremely difficult task: remaining tough on Iran without sabotaging the US economic recovery. While the strategy of squeezing Iran financially is logical, it comes with serious economic risks that are not often recognised. The old distinction between the financial and security spheres no longer holds: geopolitics drive markets even as markets drive geopolitics.

In the context of improving global growth, removing too much Iranian oil from the world’s energy supply could cause an oil price rise that would halt the recovery even as it does some economic damage to Iran. For perhaps the first time, sanctions have the potential to be “too successful”, hurting the sanctioners as much as the sanctioned.

Since the US began a concerted effort at the end of last year to dissuade and disrupt the purchase of Iran’s oil among its customary buyers, Japan, South Korea and the European Union have all agreed to reduce or stop entirely their imports. Other buyers have not started buying more Iranian oil in response. China has not yet indicated that it will increase volume as many expected, and India seems poised to make at least modest cuts. It is this last fact, not just geopolitical tensions, that accounts for much of the increase in recent oil prices.

Experts do not believe that oil-producing countries have the spare capacity to replace more than a small amount of Iranian crude without causing the oil price to increase. This would help no one involved: not Israel, not Mr Obama’s re-election bid and not anyone seeking to prevent Iran’s acquisition of nuclear weapons.

This presents Mr Obama with a dilemma. The main economic risk to his re-election is that the US plunges back into a recession. The main foreign policy risk is a mishandling of the Iranian situation. But sanctions, the best method for handling Iran, imperil the economy; and relieving financial pressure on Iran could reduce oil prices and aid the US recovery – but would also lead to undesirable outcomes in the Gulf, whether an Israeli strike or, worst of all, Iranian development of weaponised nuclear capacity.

The Obama administration knows that whichever policy choice the president makes, his Republican rival will highlight its failings. If he loosens sanctions, the Republicans will call the president weak on Iran and insufficiently supportive of Israel; if overly effective sanctions cause an oil price rise, they will say that Mr Obama’s energy policy is hurting Americans. The predicament threatens to make foreign policy, an issue on which Mr Obama did not seem vulnerable, a serious liability electorally.

But all is not lost for the president. He must maintain his tough public rhetoric on sanctions while privately signalling to China and India – and only China and India – that they should continue buying Iranian oil, but at a large discount from market price. Forcing Tehran to sell discounted barrels would result in a substantial fall in its oil revenues with less impact on global energy prices and less harm to the world economy.

It’s a tricky diplomatic line to walk, to be sure. It will probably not assuage the administration’s critics either domestically or in Israel. But it may be the only way to ensure that sanctions work as intended: hurting Iran, and not the world – or the president’s re-election chances.

The writers are president and practice head at Eurasia Group respectively. The article was co-authored with David Gordon, h ead of research at the risk consultancy group