Heres a western think tank report on the state of the jcpoa at the beginning of 2019,naturally it takes a rather western-centric bias as one would expect,tho I did have to laugh at claims that irans attempts at eliminating terrorists that were using eurostates as safe territory to plot attacks on iran was putting the deal at risk.Evidently it never seemed to have occurred to the eurovassals that allowing these groups to operate on their soil in the first place was not only putting the deal at risk but potentially the lives of their own citizens as well.But hey,its just more good old,bad old,western double standards and hypocrisy I guess.
On Thin Ice: The Iran Nuclear Deal at Three
Remarkably, the Iran nuclear deal has survived the Trump administration’s withdrawal. Now it must weather 2019, its year of greatest peril, as mounting U.S. pressure tests Iranian patience. With Europe’s help, Tehran must keep sticking to the agreement in anticipation of sunnier times ahead.
What’s new? The Iran nuclear deal is entering its fourth year of implementation, with Iran remaining in full compliance with its obligations. Meanwhile, the Trump administration, which unilaterally withdrew the U.S. from the deal in May 2018, has reimposed punitive sanctions on Iran. These have started to bite.
Why does it matter? The U.S. appears to believe that economic and other pressure will compel Iran to renegotiate, suspend its ballistic missile program or reduce its regional footprint, or even trigger regime-shaking unrest. Iran’s patience to date could snap, leading it to violate the nuclear deal itself or retaliate against U.S. assets nearby.
What should be done? To prevent an escalation, Tehran should continue complying with the deal, exercise restraint and help calm regional conflicts. It should also reform its banking sector. Other remaining signatories should engage Iran diplomatically and economically. Candidates in the 2020 U.S. presidential election should say they would rejoin the deal if elected.
Executive Summary
That the Iran nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA), has so far survived the May 2018 U.S. withdrawal is remarkable, owing much to the other signatories’ efforts to keep it alive. But with Washington actively undermining the deal through reimposition and aggressive enforcement of sanctions, with increasing risks of spillover from growing regional tensions, and reports that some U.S. officials want a confrontation, the agreement remains highly vulnerable. Iran might well persist with its present approach of complying with the deal and waiting out the Trump administration, but it will require continued efforts by Europe in particular, as well as Russia and China, to provide it with diplomatic and economic incentives. Tehran could facilitate these efforts by enhancing its banking standards and demonstrating its ability to play a more constructive role in the region, starting with pressing the Huthis in Yemen to fully implement the initial deal brokered by the UN special envoy. Democratic candidates in the 2020 U.S. presidential election should affirm their intent to rejoin the deal.
It is easy to lose sight of the fact that the JCPOA, entering its fourth year of implementation, is serving its primary objective. According to the International Atomic Energy Agency (IAEA), Iran’s nuclear program remains contained within the limits imposed by the deal. Yet the deal’s core bargain (ie, sanctions relief in return for nuclear restrictions and monitoring) has unravelled, as the reimposition of U.S. sanctions has deprived Iran of most of the promised benefits. While unilateral, U.S. sanctions are proving effective: they have left Iran with rapidly dwindling oil revenues and contributed to skyrocketing inflation.
While Washington’s ultimate goals are not entirely clear, the U.S. administration appears determined to push Iran’s economy down to the ground, international investors and traders out of the country, and the Iranian people into the streets. For some officials, the objective is to bring Iran back to the negotiating table; for others, to pressure it to curb its regional actions and ballistic missile program; and for still others, to destabilise or even topple the regime.
The JCPOA’s fate now seems to depend on a three-way race against the clock: the U.S. is trying to bring maximum pressure to bear on Iran in the minimum amount of time in the hope that Iran’s economy crumbles; Iran is exercising patience in the hope that the Trump administration fails, becomes distracted or is ousted from power in 2020; and Europe has embarked on an earnest but largely symbolic scramble to prevent the deal’s derailment by offering Iran enough economic and diplomatic incentives for it to remain in the deal without deepening the trans-Atlantic rift.
Against the low probability of renegotiation, given Tehran’s reluctance to validate Trump’s pressure policy, or of regime change, and considering Iran’s extensive experience in surviving economic duress and suppressing dissent, Washington might succeed in strangling Iran’s economy without achieving any of its goals. Instead, it could lead Iran to evade the deal’s nuclear constraints or to use its proxies to target U.S. assets in the region. Both steps in turn could provoke a military confrontation. To add another element of uncertainty: political jockeying in both capitals is likely to increase in the run-up to Iran’s 2020 parliamentary and 2021 presidential elections (and a potential transition to a new supreme leader), and the U.S. presidential election in 2020.
Even assuming the deal survives until these potential turning points, reverting to the status quo ante might not be sustainable. If Trump wins re-election, it would be hard to imagine Iran weathering another four years of crippling sanctions. If a Democratic candidate were to prevail, he or she might well agree to resume U.S. compliance with the deal, but also face strong pressure to fortify the JCPOA, given that in 2024 the sun will set on key limits on Iran’s uranium enrichment capacity.
In other words, at some point in the future there is a high probability that a successor agreement building on the JCPOA will be required. While Iran does not wish to contemplate this scenario at present, the fact is that none of the parties to the JCPOA is fully satisfied with the deal – neither Iran, because even under the Obama administration sanctions relief was insufficient, nor the U.S. or Europe, because certain nuclear constraints will expire relatively quickly and the deal does not limit Tehran’s ballistic missile program and regional activities. The next two years could thus be well spent exploring options for a more sustainable successor arrangement that advances all sides’ interests.
Ultimately, the same calculus that brought Iran and world powers to com-promise after thirteen years of standoff and two years of intensive negotiations, and which has led remaining JCPOA signatories to preserve it without the U.S., still holds: the alternatives to this agreement – a race between sanctions and centrifuges that could culminate in Iran obtaining the bomb or being bombed – would be much worse. They still can and should be avoided.
Tehran/Washington/Brussels, 16 January 2019
I. Introduction
In an era that now seems a distant memory, the Joint Comprehensive Plan of Action (JCPOA) received unanimous UN Security Council endorsement on 20 July 2015. It entered into force on 18 October 2015, and started being implemented on 16 January 2016 – after the International Atomic Energy Agency (IAEA) certified Iran’s fulfilment of its commitments – triggering sanctions relief. In the last two years’ status reports, Crisis Group noted that while Iran improved over time in meeting its nuclear commitments, sanctions relief failed to deliver on Iran’s (arguably inflated) expectations of an economic payoff.
Donald Trump’s election in November 2016 made matters far worse. Trump, as candidate, had sworn to withdraw the U.S. from the accord. As president, he took a first stab at undermining the deal in October 2017, when he refused to certify it on the grounds that sanctions relief had been disproportionate to Iranian nuclear concessions. By January 2018, Trump indicated he had run out of patience with his national security team’s efforts – and Congress’s reluctance – to amend the deal. Thus, while renewing U.S. sanctions waivers on 12 January 2018, he declared that he would nix the deal if Congress and Europe failed to fix it by May 2018. After several rounds of intense negotiations between the UK, France and Germany (collectively known as the E3) and the Trump administration, a mutually acceptable compromise among Western powers seemed within reach, but Trump deemed the progress insufficient and pulled the U.S. out of the JCPOA on 8 May 2018, starting the clock on the U.S. sanctions snapback.
The remaining JCPOA signatories have protested Washington’s decision and tried to keep Iran compliant with the deal by actively working to preserve some of its economic dividends.
Though their efforts are politically commendable, their ability to cajole private-sector actors, in particular, has been extremely limited. As a result, unilateral U.S. sanctions have inflicted serious harm on the Iranian economy. At the same time, the Trump administration has outlined – at least – thirteen demands upon Iran entailing an overhaul of its nuclear, foreign and defence policies. It has also launched a diplomatic and information campaign against Iran, coordinated by a dedicated unit at the State Department. The combination of these measures has convinced the Iranian leadership that Washington’s real motive might be more than behaviour change.
As it enters its fourth year of implementation, the JCPOA is growing increasingly vulnerable. This report, which examines what will need to be done to both salvage the deal and avoid a regional escalation, is based on interviews conducted throughout the year with European, Iranian and U.S. officials and private-sector stakeholders, as well as IAEA officials. It analyses the third-year record of implementation and draws lessons from it. It suggests that – besides Iran remaining compliant with the deal and efforts by other remaining co-signatories to provide Tehran with economic and diplomatic incentives to do so – one way of sustaining the accord is to quietly explore ways to bolster it.
II. Implementation Record: A Mixed Bag
The bargain at the JCPOA’s core is delivering mixed results: the accord continues to verifiably restrict and rigorously monitor Iran’s nuclear program, but the U.S. exit and reimposition of its nuclear-related sanctions, supplemented by new ones, have largely deprived Iran of the deal’s promised economic dividends.
A. Nuclear Commitments
Since January 2016, the IAEA has verified Iran’s JCPOA compliance on thirteen separate occasions, and the UN secretary-general has attested six times that Iran is abiding by its JCPOA obligations.
The U.S. withdrawal notwithstanding, Iran has even enhanced its cooperation with the IAEA – a clear attempt at depriving the U.S. of any pretext for shifting the blame to Iran. Tehran committed no technical infringements in the third implementation year and kept a comfortable distance from the JCPOA’s thresholds for stockpiles of sensitive material – ie, 130 metric tonnes for heavy water and 300kg for low-enriched uranium. Iran operated no more than 5,060 IR-1 centrifuges at Natanz and no more than 1,044 IR-1 centrifuges at Fordow.
Progress lagged on the conversion of the heavy-water reactor in Arak into a proliferation-resistant one and the bunkered Fordow facility into a research and medical isotope production centre – but these delays, for which the U.S. withdrawal along with complex negotiations over technical designs and costs were largely responsible, do not constitute a violation of the agreement.
Indeed, the U.S. sanctions snapback compounded the problem. Having designated the Atomic Energy Organisation of Iran (AEOI) and 23 of its subsidiaries as sanctioned entities, the Trump administration granted waivers for the Arak and Fordow projects, as well as the Bushehr power plant, where Russia provides fuel for the existing light-water reactor, repatriates its spent fuel and is constructing two additional power reactor units. While, in the words of a Trump administration official, “these measures demonstrate that the U.S. does not stand in the way of a civilian nuclear program in Iran”, the details of these waivers remain ambiguous, creating doubt about their sustainability, and thus causing additional delays in these facilities’ completion.
Nuclear cooperation, as outlined in JCPOA Annex III, is one of the accord’s key components, yet it is voluntary. In October, the IAEA held an international workshop on radioactive waste management in Iran. The European Union (EU), which has invested €20 million in enhancing the country’s nuclear safety practices, held its third high-level seminar on nuclear cooperation with Iran in November 2018, but tangible progress remains scant. The JCPOA’s procurement channel for Iran to gain access to dual-use material and equipment, managed by the Joint Commission’s procurement working group, also seems to have slowed down. While it received and processed the same number of applications as in 2017 (ie, eighteen) related to export of dual-use technology to Iran, it received only one (from Germany) after the U.S. reimposed its first round of sanctions in August 2018.
By provisionally implementing the IAEA’s Additional Protocol to the Comprehensive Safeguards Agreement, as well as all the supplementary enhanced safeguards and transparency measures outlined in the JCPOA, Iran put its nuclear program under the most robust inspection regime currently in existence.
Nonetheless, Israeli Prime Minister Benjamin Netanyahu strove to prompt an inspection crisis, which could put Iran, if it were to deny UN inspectors access to “suspect” sites, in non-compliance. In April, Netanyahu revealed 55,000 pages of documents and another 55,000 files on 183 CDs that Israeli intelligence operatives removed from a clandestine archive in Tehran in early 2018.
In September, he claimed the existence of another warehouse in Tehran containing “as much as 300 tons of nuclear-related equipment and material” in “15 shipping containers”. He also alleged that the facility had held 15kg of radioactive material that Iran had since dispersed around Tehran. He charged that the IAEA was not doing enough to follow up on information on Iran’s past nuclear weapons work and called on the agency’s director-general to “do the right thing. Go inspect this atomic warehouse. Immediately. Before the Iranians finish clearing it out”. The IAEA, however, did not succumb to pressures to politicise its verification work in Iran. Nor did other countries with whom Israel shared the intelligence alter their approach.
A concern during this period was that, in response to U.S. violations, Iran could tinker with the deal around the edges. While it did not do so, Supreme Leader Ali Khamenei ordered the AEOI to “quickly make preparations to reach to 190,000 SWU [“separative work units”, which are a measure of uranium enrichment capacity]”, in case European efforts to mitigate the impact of U.S. sanctions failed.
In response, the AEOI reopened a plant for the production of uranium hexafluoride (or UF6, which is the feedstock for centrifuges); refurbished the electrical infrastructure at Natanz enrichment site; and built a factory that purportedly can produce rotors for up to 60 advanced centrifuges per day. More recently, Iran announced preliminary steps to design a more efficient 20 per cent fuel assembly for the Tehran research reactor.
None of these steps violates the JCPOA, but, in a clear attempt by Iran to increase the pressure on the remaining parties to the deal, signalled what its unravelling could entail.
B. Sanctions Relief Commitments
Following the lifting of nuclear-related international sanctions in January 2016, the contours of an Iranian economic recovery took shape. Iran’s GDP growth rate was at 1.6 per cent in the year before the deal, and then swelled to 12.5 per cent in the year after it took effect, continuing to grow by 3.7 per cent in 2017-2018. Inflation fell to single digits.
Yet despite the inking of several marquee deals with major foreign firms, normalising banking ties remained a challenge. Growth had already stalled by the summer of 2017 as uncertainties around the JCPOA’s fate drove away much needed foreign investment and left the market in limbo.
The U.S. decision to withdraw from the JCPOA made those fears real. Scores of international companies announced that they would end or suspend their operations in Iran even before U.S. sanctions formally came into effect.
These came in two major tranches: an initial set of non-oil sanctions on 7 August, and a second more significant batch on 5 November against over 700 persons and entities, including around 300 new targets. As per previous sanctions (2010-2013), these latter sanctions targeted Iran’s lifeline: its oil exports. Officially aimed at reducing these exports to nil, the Trump administration’s maximalism helped it remove as much Iranian oil from the market (approximately one million barrels per day) as its predecessor did with international support before the JCPOA. More damaging to the Iranian economy than the reduced volume of oil exports is the requirement under U.S. sanctions that their proceeds, which constitute 35 per cent of government revenue as per the annual budget, remain locked in escrow accounts that can only be used for imports from those countries.
Perhaps most indicative of Iran’s post-sanctions economic troubles is its currency crisis, which saw the rial lose nearly 70 per cent of its value from March to September 2018.
In fact, U.S. sanctions pushed at an open door, exposing inherent weaknesses in Iran’s economy and policymakers’ missteps in addressing them. Even before sanctions snapped back, Iran’s banking sector, burdened by a high percentage of nonperforming loans, was reaching breaking point. Dozens of unlicensed credit unions, which had mushroomed over the past few years, became insolvent in 2017, sending angry depositors into the streets. To calm the situation, the government bailed out these institutions and repaid the depositors, adding to the already ballooning money supply in parallel to slashing interest rates.
To protect their assets or secure a profit, many Iranians started converting their rial holdings into foreign currencies and gold. The increase in demand for hard currencies coincided with challenges Iran faced in repatriating its oil revenues, as in early 2018 financial regulators in Dubai and Turkey severed banking channels to Iran. Sensing the shortage of hard currency, the market panicked and the rial, whose value the government had kept artificially high for six years, started to slide against the U.S. dollar. The government’s response was disastrous, starting with its failure to take precautionary measures. It then exacerbated the crisis by reducing the official exchange rate by about 15 per cent and unifying it with the open-market rate; restricting movement of capital out of Iran; declaring possession of foreign currency in excess of €10,000 illegal; blaming the crisis on speculators, its internal rivals and foreign foes; and shutting down foreign exchange bureaus, while injecting dollars into the market. These steps empowered the black market, accelerated capital flight and permitted rent-seekers to benefit from arbitrage.
Then in August, in a major turnabout, the government decided to stop dictating the exchange rate, allowing the open market to do so. In parallel, however, and to combat the ensuing inflation, it maintained the exchange rate of 42,000 rials to the U.S. dollar for importing $14 billion worth of essential staples. With more revised fiscal policies, the rial regained some ground and was trading at around 116,000 to the U.S. dollar on 14 January 2019 in the open market. Nonetheless, devaluation caused prices of imported consumer goods and domestically produced goods using imported intermediate components to soar. The year-on-year inflation rate in December 2018 reached 34.9 per cent. In August, Iranian officials projected that the country would lose nearly a million jobs by March 2019 as a result of sanctions.
While the currency crisis has had some upsides for the government – eg, allowing it to pay most of its debt to the banking sector and stem capital flight – it took a toll on the Rouhani administration, which many Iranians perceived as impotent at best and incompetent at worst.
The president was forced to replace the Central Bank’s governor in July; in October he made four new appointments to key cabinet positions after parliament impeached the labour and economy ministers; in November he accepted his key pro-market economic adviser’s (Masoud Nili) resignation; and in January 2019 he had to let go of his health minister, who had protested budget cuts. And, in a rare move, parliament summoned the president for questioning.
In parallel, the Rouhani administration has striven to blunt the impact of U.S. sanctions. It has emphasised expanding trade relations with Iran’s neighbours.
An oil bourse, the Iran Energy Exchange, has begun oil sales from the National Iranian Oil Company to private buyers, notwithstanding the oil minister’s concerns that it may lead to massive embezzlement, as during previous sanctions regimes. There are indications that Iran is reviving a practice of blurring its crude-oil shipments by disabling oil tankers’ location transponders. Tehran is also mulling using cryptocurrencies to evade U.S. sanctions.
In August, Supreme Leader Khamenei authorised the establishment of special courts to try economic corruption cases.
If past is prologue, however, efforts to tackle corruption will face an uphill battle at a time when Iran increasingly relies on smuggling and black-market trade to circumvent sanctions. The black market’s allure will also undermine the government’s push to get other power centres to approve a hotly debated series of bills intended to remedy deficiencies in Iran’s anti-money laundering and terrorism financing policies along the lines prescribed by the Financial Action Task Force (FATF) – a key expectation of Europeans trying to help Iran preserve some of its banking channels to the outside world.
As with previous rounds, the new U.S. sanctions inevitably will create winners and losers – and have unintended consequences.
Persons and groups with greatest access to state privileges, particularly the Islamic Revolutionary Guard Corps (IRGC), which controls borders, are best positioned to survive and even thrive in the new environment. In contrast, the middle class and the poor bear the brunt of the economic duress. Reports from Tehran suggest the emergence of a black market in medications and medical supplies amid shortages and rising prices. The U.S. blacklisting of Parsian Bank, one of Iran’s most reputable private-sector institutions, which U.S. Treasury officials allege has links – with seven to eight degrees of separation – to Iran’s paramilitary Basij force, has had a chilling effect. Banking restrictions have also reportedly impeded food imports, while Iranian officials claim that the aviation sector, whose hopes of a post-JCPOA fleet overhaul were dashed, is encountering difficulties refuelling in Europe.
With the World Bank forecasting a marked rise in inflation and a 1.6 per cent economic contraction in 2018-2019 (and a further 3.7 per cent shrinkage in 2019-2020), in addition to skyrocketing unemployment, Iran’s short- to medium-term economic picture is increasingly bleak.
That said, sources of resilience exist within the Iranian economy. The country’s foreign debt to GDP ratio is among the lowest in the world.
It has a cushion of hard currency reserves, estimated at more than $100 billion. Non-oil exports are on the rise, providing Iran with a positive trade balance, and Tehran hopes that the remaining JCPOA signatories and other friendly nations will throw it an additional lifeline. Iran may be under severe sanctions, but the U.S. “maximum pressure” campaign is not air-tight, as market realities compelled Washington to grant eight waivers to key consumers of Iranian energy. Washington allowed two more economic carve-outs: a temporary allowance for Iraq’s import of Iranian electricity and an exclusion for Iran’s Chabahar port. The former was an acknowledgment of Iraq’s ongoing reliance on Iranian natural gas supplies, while the latter was a priority for India as well as Afghanistan.
The full impact of sanctions largely will depend on how far China and India, Iran’s largest oil customers, will go in accommodating U.S. demands to significantly reduce their imports from Iran by April 2019 when existing waivers expire; on Switzerland’s ability to establish a banking channel aimed at supporting humanitarian trade (ie, food, medicine and medical equipment) with Iran;
and on how successful Europe will be in facilitating trade with Iran though its Special Purpose Vehicle (SPV). The mechanism is designed to bypass U.S. restrictions through an accounting firm, backed by the E3’s central banks, that would establish a barter system using credits from Iranian exports to Europe to pay for European exports to Iran without requiring monetary transfers.
That said, even though these factors can make a difference, none is likely to deliver genuine economic relief. Their significance, in other words, will be as much (if not more) political than financial.
III. A Race Against Time
The JCPOA’s fate now seems to depend on a three-way race against time: the U.S. hopes to impose maximum pressure on Iran as quickly as possible in the hope that Iran’s economy crumbles; Iran is exercising patience in the hope that the Trump administration fails, becomes distracted or is voted out of office in 2020; and Europe is scrambling to put more time on Tehran’s clock while avoiding a deepening of the trans-Atlantic rift.
A. Washington: Maximum Pressure
The Trump administration has been clear on two aspects of its Middle East policy: Iran is the source of the region’s ills and sanctions are the chief tool for countering it. Not all officials agree on the ultimate objective, though all agree on the means that ought to be used and that an Iran under economic pressure is better than one that is not.
The administration also is seeking to mobilise its allies against Iran’s ballistic missile tests and a wide range of other purported Iranian misdeeds, ranging from alleged non-compliance with the Chemical Weapons Convention to the treatment of protesters and endemic top-down corruption.
By reinstating sanctions while Iran remains within the restraints of the JCPOA, the U.S. can – in the words of a senior administration official – “have our cake and eat it too”: violate the agreement while Iran abides by it.
Beyond that, some officials are satisfied at the thought that this gambit could deprive Tehran of some resources it uses to project power in the region. Several administration officials, including Trump himself, claim that they already are seeing tangible results, such as diminished Iranian deployment of and financial support for militant groups. It is hard to square these contentions, however, with U.S. accusations of heightened activity by pro-Iranian Shiite groups in Iraq or continued claims of Iranian destabilising behaviour in Yemen.
More hawkish members of the administration go farther in believing that economic distress could prompt domestic unrest – at a minimum compelling the Iranian leadership to focus far more on internal than on external issues.
In what they consider the optimal scenario (despite repeated assertions that regime change is not U.S. policy), sanctions might destabilise the regime and trigger its collapse. National security advisor John Bolton reportedly hopes that Tehran’s reaction to increased pressure – directly or through one of its proxies – could provide the U.S. with the opportunity to conduct military operations against Iran. When in September the U.S. accused Iran of encouraging Shiite militias to target U.S. facilities in Basra and Baghdad, some officials allegedly argued that an appropriate response would be to target Iran itself; Bolton is said to have asked the Pentagon for plans for a military strike in response. Then Secretary of Defense Jim Mattis is said to have opposed any such endeavour. Secretary of State Mike Pompeo’s warning that the U.S. would not stand idly by if Iran were to go ahead with plans for launching satellites sounded equally ominous, possibly presaging some form of retaliation should Iran proceed.
Trump himself, alongside several other officials, still appears interested in and intent on negotiating a new deal with Iran, believing it is only a question of time before pressure drives Tehran back to the bargaining table; indeed – to the apparent consternation of his more hard-line advisers – he has set no precondition for commencing negotiations.
Some officials seem confident that talks between Tehran and Washington will occur before Trump’s first term ends. There are even reports that U.S. officials have reached out to Iranian officials to discuss the fate of U.S. prisoners in Iran and the future of Afghanistan, although to date Iran reportedly has rebuffed the outreach.
So far, there is little evidence that the administration is meeting any of its possible goals. A preliminary internal assessment by the administration described to Crisis Group purportedly concludes that the U.S. approach has yet to curb Iran’s behaviour or entice Tehran back to the negotiating table. Iran has accelerated the pace of its ballistic missile testing, and, according to U.S. officials, continues to transfer missile parts to Huthi rebels in Yemen and to Hizbollah in Lebanon and Syria. More broadly, there is little historical evidence of any correlation between Iran’s economic performance and regional policies.
Likewise, though many European capitals share Washington’s concerns about Iran’s ballistic missile tests and regional activities, the Trump administration’s brazen campaigning, including stark warnings to European firms not to evade U.S. sanctions, has stirred resentment in Europe and thus discouraged the kind of united front sought by the U.S.
As further discussed below, prospects for achieving the other purported U.S. goal (new negotiations on a broader deal) appear dim, given Iran’s fear that agreeing to talks would only validate Trump’s approach and its insistence that the U.S. re-enter into compliance with the JCPOA before the two countries discuss anything more. In the same vein, the more Washington threatens Tehran, the likelier Iran is to double down on policies it deems key to its national security: its ballistic missile program, a legacy of having been a victim of these weapons during the war with Iraq (1980-1988) and its sole reliable conventional deterrent; and the network of partners and proxies it has built in the region in part to protect against external threats.
B. Tehran: Maximum Patience
There is broad consensus in Tehran that waiting out the Trump administration is the best option available to Iran.
At least until now, Iran has seen greater benefit in respecting the nuclear deal, taking advantage of growing U.S.-European tensions, heightened U.S. isolation and EU efforts to mitigate the effect of U.S. sanctions, than in itself violating the accord and reconstituting a united international front against it. As an IRGC strategist put it, “Iran will stay in the JCPOA as long as we can use it to delegitimise U.S. actions”. Iran also appears to have sought to avoid provoking the U.S. – or, as a senior Iranian official put it, “be provoked” – by engaging in more aggressive behaviour in the region, lest it encourage international buy-in to the U.S. pressure campaign or military retaliation. U.S. isolation, confirmation of Iran’s moral high ground by the International Court of Justice, and European efforts have allowed the Rouhani administration to continue on its current path, hoping that Trump will lose in 2020 and that the next U.S. president will rejoin the JCPOA.
In practice, however, U.S. sanctions have turned out to be economically devastating, threatening the sustainability of Iran’s strategic patience policy and increasing pressure in Tehran to respond.
In December, Iran’s former nuclear negotiator, Saeed Jalili, accused the Rouhani administration of weakness and “wasting the country’s time for seven months only to see whether they [Europeans] will ratify [the SPV] or not”. In January 2019, the country’s national security adviser warned that the time for Europe to salvage the deal had ran out. Even members of the Rouhani government are now questioning their own response to the U.S. withdrawal as overly timid.
Iranians regularly convey these frustrations to their European interlocutors, warning of the consequences of the deal’s demise.
They periodically have floated the notion of a less-for-less arrangement, pursuant to which Iran would roll back some of the JCPOA’s restraints and monitoring measures as a means of reciprocating the reimposition of U.S. sanctions. But Europe has firmly rejected any tinkering with the deal’s limits, pointing out that “though we oppose the U.S. withdrawal from the accord, it is for us essentially a non-proliferation agreement – which means that any Iranian violation of its nuclear components would immediately trigger European sanctions”.
Whether the calculus in Tehran will change, and under what conditions, is unclear. Some officials assert that Iran will reach the breaking point if and when its oil exports fall below 700,000 barrels per day, which – they fear – could trigger hyper-inflation and nationwide protests. Domestic politics and jockeying ahead of Iran’s forthcoming elections and a possible struggle to succeed Supreme Leader Khamenei also could play a part, increasing hardline criticism of the Rouhani administration. Rouhani’s weakening could allow the hardliners, who have lost every election in Iran since 2012, to retake the parliament in 2020 and the presidency in 2021, putting them in better position to determine who and what comes after Khamenei. For his part, having watched his economic achievements and popular support vanish, Rouhani is likely to further align himself with the supreme leader, ensuring that even if his presidency seems doomed, he can survive politically beyond it as a potential heir to Khamenei’s mantle.
Should Iran decide that it must respond, its reprisal could take several forms. Tehran could creep past some of the JCPOA’s boundaries both as a show of defiance and in hopes of pressuring the deal’s remaining parties to do more to save it. On the lower end of the spectrum, Iran could overproduce a few kilograms of heavy water beyond the 130-tonne limit imposed by the deal.
Such an infringement would fall in what an EU official called a “grey zone”: an action inconsistent with the accord, but which other co-signatories might not view as a justification for entirely scrapping the deal. Riskier would be a decision to accumulate more than 300kg of low-enriched uranium, enrich at a level higher than 3.67 per cent, testing a higher number of advanced centrifuges than allowed or interfere with IAEA monitoring. A senior Iranian official claimed that some in Tehran were advocating going so far as to withdraw from the non-proliferation treaty, thereby ending all IAEA inspections and limits on Iran’s nuclear program.
Alternatively, Iran could choose to respond asymmetrically by raising pressure on the U.S. presence in the region. This option arguably could be more attractive to Tehran, given that it could hide its hand by using proxies or allies, thereby reducing the risk of a European reaction, and given its relatively strong hand in the region.
Speaking in October, a senior Iranian national security official surmised that the likeliest theatre for such a confrontation might well be Iraq:
We can add more fuel to the fires in Yemen, but that would not directly affect the U.S. There are U.S. forces in Afghanistan, but we lack the kind of assets there that we possess in the Levant. We have the upper hand in Lebanon and Syria, but the situation in both countries is quite fragile and our gains could be quickly reversed by adversaries and even friends. Iraq is where we have experience, plausible deniability and the requisite capability to hit the U.S. below the threshold that would prompt a direct retaliation.
The above scenarios – individually or in combination – are worrying, especially given the risk of miscalculation in the absence of any reliable channels of communication between the U.S. and Iran.
The alternative approach – renewing negotiations with the U.S. – seems unlikely even though it has been debated in Tehran. According to Iranian officials, decision makers considered three options: seriously negotiate with the Trump administration; engage in talks as a means of gaining time; or reject negotiations until the U.S. comes back into compliance with the JCPOA.
They seem to have quickly ruled out both genuine and tactical negotiations, concluding that risks outweighed potential benefits. Any indication of a willingness to talk, they feared, could validate Trump’s approach, demonstrating that pressure works, and thus inviting more.
For Iran to negotiate after it scaled back or froze its nuclear program – and at a time when U.S. sanctions were biting – would have the added disadvantage of allowing the U.S. to deal from a position of relative strength. Moreover, Washington’s harsh rhetoric toward the Iranian leadership has, in the words of a senior Iranian diplomat, rendered the Trump administration “radioactive” in Tehran and therefore “engagement with it a liability, not an asset, for any Iranian politician”.
The precedent of North Korea’s engagement with the Trump administration might plausibly have convinced Tehran to give talks a try. After all, talks between Trump and North Korean leader Kim Jong-un have lessened pressure on Pyongyang without forcing it to markedly curb its nuclear program.
A senior Iranian official mused that talks between Presidents Trump and Rouhani could result in a vague statement including commitments already made by Iran under the JCPOA (eg, a commitment never to seek a nuclear weapon), reduction of economic pressure on Iran, and a declaration of a historic breakthrough by the U.S. president.
Nevertheless, even he had concluded that engaging in talks would be politically perilous and offer overly uncertain returns.
Unlike the North Korean case, moreover, both regional and domestic U.S. forces seem eager for a confrontational relationship with Iran, reducing the likelihood that a summit alone would fundamentally change dynamics.
Too, Trump’s unpredictable and mercurial behaviour, the hardline views adopted by his senior advisers (both Bolton and Pompeo) and his administration’s pursuit of maximalist demands in talks with Pyongyang (at least according to briefings Iranians claim to have received from their North Korean counterparts) further discouraged Iranian advocates of negotiations. Arguably bolstering the case for a wait-and-see approach, some Iranian hardliners interpret U.S. actions in recent weeks (from outreach to Iran to discuss Afghanistan’s future to announcement of a withdrawal from Syria) as signs of growing acceptance of Iran and abating risks of confrontation.
For the time being, the leadership in Tehran seemingly believes that it can remain afloat economically at least until 2021, and does not seem particularly concerned about internal stability.
It rests relatively easy despite a steady stream of demonstrations and strikes by almost all strata of Iranian society, from truckers to teachers, university students, women, dervishes, steel workers in Ahvaz and sugar mill workers in Haft Tappeh. The political elite is taking solace in the fact that although the number of protests is higher than previous years, their scale and scope have not been increasing and that there is no obvious link among protesters in various cities.
Whether the political establishment has taken the correct measure of its domestic challenge is uncertain. But it appears to believe that it understands the scope of popular discontent;
that it has the will and capability to manage and – if necessary – suppress dissent; that it has done the necessary to shield its core constituents – ie, the lower-income, more pious strata – from the effects of U.S. sanctions; and that it has placated other elements sufficiently to prevent their grievances from snowballing into a nationwide crisis.
In an attempt to further undermine the protesters, the leadership has warned against a possible “Syria-cisation (سوریه سازی)” of the country – its violent fragmentation along ethnic and sectarian fault lines, purportedly as a result of efforts undertaken by the U.S. and its allies.
Iran’s projected image of self-confidence is somewhat belied by the government’s aggressive reaction to what it views as attempts to destabilise it. It has thus responded brazenly to attacks claimed by ethnic minorities and the Islamic State (ISIS) with missile strikes in Iraq and Syria, and, according to European officials, targeting dissidents on European soil, as further described below.
C. Brussels: Maxed Out
Europe’s strategy boils down to buying more time: for cooler heads to prevail in Tehran and return to power in Washington. This approach, however, has turned out to be a more difficult undertaking than initially anticipated. Europe awoke to the reality that there is very little state institutions can do to challenge the U.S. dollar’s global pre-eminence or dictate commercial decisions in an open market. This realisation gave rise to debate over the need to restore Europe’s economic sovereignty, but this ambition – assuming it is pursued – is unlikely to bear fruit to Iran’s benefit in the foreseeable future. As a French diplomat put it, “we have been clear with the Iranians that we cannot compensate them for the impact of the U.S. exit, but we will do what we can to help them save face by preserving as much as possible of our economic trade”. For their part, Iranians have a difficult time adjusting to this reality. An Iranian diplomat said, “Europe has the political but not the practical will to stand up to the U.S.”.
In reality, the measures taken by Europe, while symbolically significant, have yet to deliver practical dividends for Iran. In August, the EU updated its 1996 “blocking statute” that prohibits European companies from complying with secondary U.S. sanctions imposed on Iran.
Unless they are specifically authorised to do so, firms that choose to comply with U.S. sanctions could now be subject to fines by European member states. Yet, even though some companies have left Iran specifically citing U.S. sanctions, member states have taken no notable enforcement measures since August. Iranian officials perceive other steps, such as the European Commission’s earmarking €18 million of a €50 million package for projects “in support of sustainable economic and social development” in Iran, as too little, too late.
Brussels has also had a few policy setbacks. The European Investment Bank, which was authorised by the European parliament and commission to lend to European projects in Iran, chose not to do so, lest it jeopardise its ability to raise funds in U.S. markets.
In the same vein, European governments’ efforts to spare the Belgium-based SWIFT financial messaging service came to naught, as the company gave in to U.S. demands to disconnect most Iranian banks (including the country’s central bank) from its network. Refusal of some European member states to host the Special Purpose Vehicle dealt another blow to the credibility of these efforts.
Much will depend on the SPV’s effectiveness as the lynchpin of Europe’s efforts to preserve the JCPOA. The mechanism will be registered in the coming weeks in France, led by a German official, and have the E3 as its shareholders.
While the channel, which offers a sophisticated compensation service for exports from and imports to Iran, is not primarily designed to be a humanitarian one, European officials expect that it will initially be used primarily for food and medicine until more trust is built in its sustainability. A key question is how the U.S. will react.
As a senior EU official put it:
The SPV is not a magic wand. It is designed to give confidence to the market and without creating darkness at the heart of the global financial system. It is a fully transparent mechanism, where due-diligence knowledge could be shared. As a corollary, the U.S. could target it.
While the E3’s central banks’ ownership likely renders targeting the channel politically prohibitive for U.S. regulators, the SPV’s transparent nature renders its users vulnerable to U.S. penalties. Moreover, European companies may err on the side of over-compliance with U.S. sanctions, avoiding business with Iran altogether.
Given these challenges, it is easy to overlook the Europeans’ remarkable achievement in maintaining a united front in support of the JCPOA notwithstanding U.S. pressure (especially on eastern European states) and Europe’s conviction that Iran plotted to kill dissidents on European soil. The latter point was particularly costly and, as a senior European official put it, “plotting assassinations on European soil is the most damaging thing Iran could do after violating the JCPOA and sinking a U.S. warship”.
In so doing, Tehran was playing with fire, risking a significant backlash – including against the JCPOA – by the Europeans. Tehran has publicly referred to these attacks as false-flag operations aimed at driving a wedge between Iran and Europe – and privately as either that, an entrapment operation, or the work of rogue agents – but European officials say they possess strong evidence of Iran’s security apparatus’s involvement in the plots.
On 8 January, the EU approved targeted sanctions against two Iranian officials and a unit at Iran’s intelligence ministry. Iran protested the targeted sanctions, but so far they have not affected either party’s decision to maintain economic and diplomatic ties in an effort to preserve the nuclear deal.
IV. Die Another Day
While the U.S. exit from the JCPOA has not delivered the deal a fatal blow, 2019 could prove even more challenging than the past two years. Politics in Iran and the U.S. are likely to get more contentious as both countries near momentous elections. As sanctions take their toll on the Iranian people, and especially if mitigation efforts by remaining JCPOA signatories prove unsatisfactory, hardline voices in the Iranian leadership that favour leaving the agreement or making the U.S. pay for its actions will grow louder. Their renewed aggressiveness, coupled with electoral calculations, could call into question Iran’s policy of strategic patience.
In Washington, Trump’s unpredictability aside, two developments in 2020 could add more pressure on time in mutually reinforcing ways. One is the U.S. presidential election, which could be both a moment to showcase the results of Trump’s Iran policy and a time to sharpen differences between the administration and Democratic opponents. The second is the scheduled removal of the UN Security Council-imposed conventional arms embargo on Iran that, based on the JCPOA’s timetable, should be lifted in October 2020.
Particularly against the backdrop of national elections, the prospect of an embargo lift will likely amplify hawkish voices looking to increase pressure on Iran and against the JCPOA.
Finally, regional tensions – which have pitted Iran in a simultaneous three-front cold war against the U.S., Israel and Saudi Arabia – inevitably heighten the risk of an inadvertent or deliberate confrontation especially if, as noted above, some U.S. officials see benefit in a military clash. As detailed in Crisis Group’s Iran-U.S. Trigger List, an incident at any one of the points of friction among the parties, be it in Yemen, Syria, Iraq, Lebanon or the Gulf, or related to Iran’s missile tests, could escalate, with unpredictable consequences.
Avoiding these scenarios should be the priority for the coming year and will require several steps. To begin, Iran should not test the JCPOA’s boundaries or escalate regional tensions, either of which actions could persuade Europe to join the U.S. in its pressure campaign and aggravate the potential for of a military confrontation. By demonstrating its willingness to play a more constructive role in the region, it could instead reduce the odds of both.
Arguably the most likely place to start is Yemen, where UN-sponsored talks offer a genuine hope for de-escalation and potential resolution of the four-year long conflict. As detailed in Crisis Group’s reports, just as the U.S and Western countries need to exert pressure on Saudi Arabia and the United Arab Emirates, so too does Iran need to press the Huthis to fully implement the initial deal brokered by the UN special envoy, Martin Griffiths, and engage in peace negotiations in good faith.
Iran’s regional discussions with the E4 (the E3 plus Italy) should be deepened and broadened to other security issues of common interest beyond Yemen. Relatedly, just as belligerent Iranian behaviour on the regional scene could alienate Europe, so too would a violent crackdown on protesters or human rights activists – let alone fresh attempts to kill dissidents on European soil.
If Iran wishes to maximise benefits from the SPV and other banking mechanisms, it should approve and implement outstanding legislation, including two bills on Iran’s accession to international conventions on terrorism financing and transnational organised crime, to fully address the due diligence, transparency, regulatory and other concerns laid out in its FATF action plan. Failure to do so could render the reputational cost of working with the Iranian banking sector prohibitive for international banks, and may lead to the reimposition of suspended FATF counter-measures that would further isolate Iran’s financial sector.
As far as Europe is concerned, it should focus on protecting and maintaining the JCPOA. To that end, the E3 ought to make every effort to ensure that the SPV succeeds, most importantly by providing clear briefings to European firms interested in using it for legitimate trade with Iran. Russia and China should join the SPV, turning it into a stronger multinational mechanism.
Going beyond economic incentives, European states should continue to regularly engage politically with Iranian officials at a high level. This engagement could include, at an appropriate time, a symbolically important visit by the E3’s foreign ministers to Tehran or a meeting of the JCPOA’s Joint Commission (the six remaining participants, coordinated by the EU) at the ministerial level to reaffirm Europe’s commitment to the JCPOA.
Despite resistance by hardliners in Tehran, the EU should also pursue opening of an EU delegation office in Tehran, which could allow the EU to conduct more effective public diplomacy campaign in Iran.
Recognising Iran’s legitimate security concerns, Europe should take the lead in facilitating a regional security dialogue to lay the groundwork for an architecture tolerable to all sides, in which the region’s military imbalance could be addressed.
Engagement does not mean that Europe should be indifferent to Iranian policies with which it has concerns, including human rights violations, plots against Iranian dissidents on European soil, or ballistic missile tests and transfers; rather, it means ensuring that its response to these activities does not undermine or overshadow its efforts to preserve the JCPOA. Any fresh sanctions should be targeted and carried out independently of steps taken to preserve the deal.
The U.S. side is more complicated, as there is little hope that the Trump administration will fundamentally alter its approach. Still, some steps could be useful. The newly seated House of Representatives will have a much greater appetite for oversight of U.S. foreign policy; relevant committees could hold hearings on the administration’s Iran policy to help shine light on where it is creating a risk of conflict and, where necessary, generate political pressure on the White House to take a step back. As the 2020 election season gets underway, Democratic candidates could affirm their intent to rejoin the JCPOA as long as Iran abides by its own obligations. Doing so would send a message to the Iranian leadership that sticking to their nuclear commitments is indeed the wiser approach.
With regard to the administration, though some senior officials might in fact wish to see Iran violate the JCPOA or offer another justification for a more robust response, the president himself appears to genuinely want to negotiate. As discussed above, there are reasons to doubt that Iran will agree in the near term, but the best option would be for the U.S. to propose discreet, confidential talks focused on – but not limited to – the release of U.S. citizens imprisoned in Iran. Under present circumstances, Iran probably would view public negotiations as an unacceptable surrender to U.S. bullying; as occurred under the Obama administration, quiet diplomacy (combined with a lowering of the rhetorical volume) stands a better chance of success at the outset.
Separately, if the Trump administration wants the Iranian people to believe that it harbours no rancour toward them, it ought to avoid impeding humanitarian trade with the country. Specifically, the U.S. should not blacklist Iranian banks or penalise their European or Asian counterparts engaged in humanitarian trade. Optimally, it would facilitate – by issuing licenses or letters of comfort — efforts by the E3 and Switzerland to establish banking channels that allow the Iranian people access to food, medicine and other necessities.
If Iran wishes to maximise benefits from the SPV and other banking mechanisms, it should approve and implement outstanding legislation, including two bills on Iran’s accession to international conventions on terrorism financing and transnational organised crime, to fully address the due diligence, transparency, regulatory and other concerns laid out in its FATF action plan. Failure to do so could render the reputational cost of working with the Iranian banking sector prohibitive for international banks, and may lead to the reimposition of suspended FATF counter-measures that would further isolate Iran’s financial sector.
As far as Europe is concerned, it should focus on protecting and maintaining the JCPOA. To that end, the E3 ought to make every effort to ensure that the SPV succeeds, most importantly by providing clear briefings to European firms interested in using it for legitimate trade with Iran. Russia and China should join the SPV, turning it into a stronger multinational mechanism.
Going beyond economic incentives, European states should continue to regularly engage politically with Iranian officials at a high level. This engagement could include, at an appropriate time, a symbolically important visit by the E3’s foreign ministers to Tehran or a meeting of the JCPOA’s Joint Commission (the six remaining participants, coordinated by the EU) at the ministerial level to reaffirm Europe’s commitment to the JCPOA.
Despite resistance by hardliners in Tehran, the EU should also pursue opening of an EU delegation office in Tehran, which could allow the EU to conduct more effective public diplomacy campaign in Iran.
Recognising Iran’s legitimate security concerns, Europe should take the lead in facilitating a regional security dialogue to lay the groundwork for an architecture tolerable to all sides, in which the region’s military imbalance could be addressed.
Engagement does not mean that Europe should be indifferent to Iranian policies with which it has concerns, including human rights violations, plots against Iranian dissidents on European soil, or ballistic missile tests and transfers; rather, it means ensuring that its response to these activities does not undermine or overshadow its efforts to preserve the JCPOA. Any fresh sanctions should be targeted and carried out independently of steps taken to preserve the deal.
The U.S. side is more complicated, as there is little hope that the Trump administration will fundamentally alter its approach. Still, some steps could be useful. The newly seated House of Representatives will have a much greater appetite for oversight of U.S. foreign policy; relevant committees could hold hearings on the administration’s Iran policy to help shine light on where it is creating a risk of conflict and, where necessary, generate political pressure on the White House to take a step back. As the 2020 election season gets underway, Democratic candidates could affirm their intent to rejoin the JCPOA as long as Iran abides by its own obligations. Doing so would send a message to the Iranian leadership that sticking to their nuclear commitments is indeed the wiser approach.
With regard to the administration, though some senior officials might in fact wish to see Iran violate the JCPOA or offer another justification for a more robust response, the president himself appears to genuinely want to negotiate. As discussed above, there are reasons to doubt that Iran will agree in the near term, but the best option would be for the U.S. to propose discreet, confidential talks focused on – but not limited to – the release of U.S. citizens imprisoned in Iran. Under present circumstances, Iran probably would view public negotiations as an unacceptable surrender to U.S. bullying; as occurred under the Obama administration, quiet diplomacy (combined with a lowering of the rhetorical volume) stands a better chance of success at the outset.
Separately, if the Trump administration wants the Iranian people to believe that it harbours no rancour toward them, it ought to avoid impeding humanitarian trade with the country. Specifically, the U.S. should not blacklist Iranian banks or penalise their European or Asian counterparts engaged in humanitarian trade. Optimally, it would facilitate – by issuing licenses or letters of comfort — efforts by the E3 and Switzerland to establish banking channels that allow the Iranian people access to food, medicine and other necessities.
https://www.crisisgroup.org/middle-...ula/iran/195-thin-ice-iran-nuclear-deal-three
PDF version in farsi
https://d2071andvip0wj.cloudfront.net/195-on-thin-ice-farsi.pdf
PDF version in english
https://d2071andvip0wj.cloudfront.net/195-on-thin-ice.pdf
