Sanctions beckon as Trump cannot resist pulling down the Iran nuclear deal

Published in GSN, 11 May 2018

A new countdown has begun for Iran’s relations with the world. Following President Donald Trump’s heavily telegraphed 8 May decision that the United States would no longer honour its commitments under the Joint Comprehensive Plan of Action (JCPOA), the US is set to reinstate the sanctions on Iran it dropped in January 2016 when the nuclear deal was implemented.

The embargo will be implemented in two stages. Sanctions on the oil and gas, petrochemicals and shipping sectors, as well as measures against Bank Markazi-ye Jomhuri-ye Eslami-ye Iran (Central Bank of Iran), will be re-imposed in 180 days, on 4 November. Other sanctions will return even more quickly, after a 90-day ‘wind down’ period that ends on 6 August. These measures include dealings in the Iranian rial and sovereign debt, trade in gold and other metals and sanctions on the automotive sector. Some 600 Iranians are set to be added to the US Treasury’s list of specially designated nationals (SDNs)

As a result, Iran and the other five JCPOA signatories – France, Germany, the UK, Russia and China – have just a few months to put in place structures that could enable them to keep the deal alive in the face of US opposition and a deteriorating regional situation, which was underlined by Israel’s bombing of Iranian targets in Syria on 10 May.

There was a notable change in tone in the immediate aftermath of the White House announcement from Iranian officials who had previously used bold rhetoric about their ability to quickly restart uranium enrichment and perhaps pull out of the nuclear Non-Proliferation Treaty (GSN 1,054/4). Following Trump’s decision, President Hassan Rouhani said Iran would stick with the deal if “we can achieve what the Iranian nation wanted from the JCPOA”. Trump’s move places the moderate president under even greater pressure from more hardline opponents in the Islamic Republic (GSN 1,054/14).

The remaining JCPOA parties will hold talks in the coming weeks to determine whether it is possible to salvage the deal. All are committed to at least trying. A statement from European Union high representative for foreign affairs Federica Mogherini on 8 May was typical. “As long as Iran continues to implement its nuclear related commitments, as it is doing so far, the European Union will remain committed to the continued full and effective implementation of the nuclear deal,” she said.

What is less certain is what the US plans to do next. According to secretary of state Mike Pompeo, “we will be working with our allies to find a real, comprehensive, and lasting solution to the Iranian threat”. But having torn up one deal a lot of goodwill has been lost. Given the first deal took many years of tough diplomatic effort to get over the finishing line, the idea of creating a more comprehensive arrangement which would suppress Iran’s ballistic missile programme and its activities in Iraq, Syria and elsewhere – which Tehran is unwilling to countenance talking about, at least publically – looks all but impossible to achieve within Trump’s remaining years in office, even were he to win a second term.

No Plan B

A senior State Department official indicated that Washington had not even begun the task of discussing with its allies how to move forward. Indeed, it has made little or no preparations to do so. “We did not talk about a Plan B in our discussions [with the Europeans in the run-up to the decision] because we were focused on negotiating a supplemental agreement, so we did not – we did not talk about Plan B,” the official told a background briefing with media on 8 May.

The presence of so many anti-Iran hawks in Trump’s inner circle – including Pompeo, Treasury secretary Stephen Mnuchin and national security adviser John Bolton – suggests a bellicose approach is more likely to prevail.

Trump’s supporters in the region have been quick to voice their support. Statements of praise gushed from Bahrain, Israel, Saudi Arabia and the UAE, whose minister of state for foreign affairs Anwar Gargash tweeted, “Trump’s decision is the correct one”. Gargash added: “The JCPOA would have to led to a regional nuclear race with little trust in Iran’s intentions. Time for a rethink & a new effective regional plan.” Saudi ambassador to the US (and younger brother of Crown Prince Mohammed Bin Salman) Prince Khalid Bin Salman said the deal had “fuelled Iran’s malicious expansion driven by its extremist ideology. It provided Iran with a financial windfall that it used to further sectarian strife/chaos in the region.”

Others have been slower to go on the record, perhaps because the likes of Oman, Kuwait and Qatar sense they now have far less room to maintain constructive relations with both Iran and the United States.

While the full scale of the political fallout will take time to emerge, some economic impacts from Trump’s decision seem easier to predict. Underlining that geopolitical strife can still have a big impact on markets, crude prices rose more than 3% on 9 May, when Brent crude hit $77.20/bbl – its highest level since November 2014.

Dubai-based Emirates NBD estimates the re-imposition of US sanctions could curb Iranian crude exports by around 500,000 b/d by end-year, although up to 1m b/d could be at risk of disruption. As oil prices rose on the morning after Trump’s announcement, there was speculation that Saudi Arabia was among the producers that may increase output to offset any loss of Iranian crude. However, higher prices will also benefit Riyadh – and the planned Saudi Aramco initial public offering – and its neighbours.

The EU, Russia and China may try to insulate their trade with Iran from the new US sanctions, but the Iranian economy is likely to deteriorate, said emerging markets investor Exotix Capital.

Most Iranians already think things are getting worse. A survey conducted by IranPoll.com in April found that 72% of Iranians thought the general economic situation was bad and 64% thought conditions were getting worse. Rouhani is still reasonably popular: 59% had a ‘very’ or ‘somewhat’ favourable view of the president. But these numbers have been slipping. Iranians are fairly evenly split on the merits of JCPOA: 52% told IranPoll they ‘strongly’ or ‘somewhat’ approved of the deal.

Most Iranians blame the US rather than their own government for the nuclear deal’s failure to live up to expectations and there is likely to be pressure to take retaliatory action. Some 67% of IranPoll.com’s respondents said Tehran should retaliate were the US to take measures in violation of the JCPOA. Hardliners will surely be emboldened by such sentiments, putting at risk efforts by Rouhani and his foreign minister Javad Zarif to rescue a version of the deal (GSN 1,058/1) and increasing the prospects for a ‘conservative/principalist’ candidate to replace Rouhani when presidential elections are next held, in 2020.

Multinationals under pressure

International companies that have entered the Iranian market in recent years also face plenty of questions. Major aircraft manufacturers such as The Boeing Company and Airbus have signed large deals to supply planes to Iranian airlines, but have been slow to deliver. They will now almost certainly have to let these deals wither.

Others may find the situation harder. France’s Total was the only major western international oil company to enter Iran since the JCPOA went into effect, taking a stake in Phase 11 of the South Pars field (GSN 1,056/11). National Iranian Oil Company (NIOC) managing director Ali Kardour said on 6 May that if Total pulled out it would be replaced on the project by China National Petroleum Corporation (CNPC). NIOC will be hit by US sanctions from 4 November.

The long arm of the Treasury

US secondary sanctions – measures aimed at preventing non-US companies and individuals dealing with Iran – will be far-reaching. But without the support of the EU and other major partners, it remains to be seen how well Washington can police and enforce its reinstated measures against Iran.

The US Treasury’s ability to enforce sanctions globally is well-proven. Companies are vulnerable if they have operations in the US, but also if they use dollar-denominated accounts, even if the transactions take place outside the US. Companies which think they have no footprint in the US can find correspondent bank accounts or email traffic has touched the US, putting them in breach of US law. And even if such breaches are technical or fleeting in nature, companies – and banks in particular – have found it is usually easiest to comply with the US Treasury when challenged.

But the US abrogation of the JCPOA may prove a turning point. European governments see increased trade as a means of delivering greater prosperity to Iran, which strengthens the position of reformists in the Islamic Republic. They will not be inclined to turn a blind eye if Mnuchin levies fines and settlements on European companies that seek to trade with Iran in non-lethal areas. As such, Trump’s latest move puts pressure on the US-European axis as much as it does on Iran.