What is particularly sad about this display of all-around diplomatic incompetence [by the US] is that the Iranians were not “playing for time” with their continued expressions of interest in a deal to refuel the TRR, and their announcement about increasing their enrichment levels should not have come as a surprise. As Foreign Minister Mottaki said himself in Munich last week, Iran see itself as having three options for dealing with the need to refuel the TRR:
1) Iran could purchase new finished fuel for the TRR. This was the original Iranian proposal for dealing with the problem, communicated to the IAEA last summer. The Iranians believed that this could meet their need to refuel the TRR and also allow the international community to show its good faith in dealing with them. They also believed that, if they bought finished fuel, they would have no need to enrich to higher levels and provoke concern, especially in Washington—thereby providing the international community with a confidence-building measure.
2) Iran could enrich its own uranium to the 19%+ level required for TRR fuel. The IAEA, by the way, says that it does not consider uranium enriched to any point under 20 percent as highly enriched uranium.
3) Iran could swap some of its current stockpile of low-enriched uranium (LEU) for finished fuel. Currently, Iran has enriched uranium only to 3-4 percent, according to the IAEA.