The Iran Nuclear Deal at Two: A Status Report

What’s the issue? The 2015 Iran nuclear accord is as successful as it remains fragile. President Trump has warned he will scuttle it unless Congress, in coordination with Europe, unilaterally alters its terms, an outcome which is unlikely and a violation of the deal. Meanwhile, friction between Iran, the U.S. and their regional rivals is growing and could undermine the deal’s implementation.

 

Why does it matter? Iranians are frustrated by problems with sanctions relief, international banking ties and a hoped-for economic upsurge. Washington is frustrated by Iran’s regional activism, prompting more militarised U.S. responses and possible new sanctions. The resulting frictions have fuelled domestic Iranian protests, U.S.-Europe tensions, dangers of the deal’s unraveling, and conflict in the Middle East.

 

What should be done? Attempts to renegotiate the deal through brinksmanship or unilateral demands are unlikely to work. The deal’s other signatories need both to persuade the U.S. not to renege on its commitments and to preserve sufficient incentives for Tehran to remain in the deal, even if Washington reneges on it or if U.S. actions continue to eat away at Iran’s economic benefits.

 

Executive Summary

 

It could have been worse. President Trump’s 12 January decision to waive sanctions while threatening to withdraw from the Joint Comprehensive Plan of Action (JCPOA) – the July 2015 nuclear agreement between Iran and the five permanent members of the UN Security Council plus Germany (the P5+1) – unless Congress and Europe agree to unilaterally alter its terms, leaves the deal in the state of limbo it acquired shortly after his election. Still, given his unpredictability, manifest hostility to the deal, abhorrence at the thought of validating anything that bears his predecessor’s mark and the unrest that has shaken Iran, speculation had been rampant that he would announce the agreement’s demise. But celebration is premature. The White House decision constitutes little more than a reprieve: taken at face value, the standard Trump insisted be met by May in order for the U.S. to remain in the deal is inconsistent with the JCPOA. The accord’s other signatories should use this period to encourage the U.S. not to withdraw while considering ways to sustain the accord regardless of U.S. actions. Its collapse would reignite a crisis that could deepen tensions in a tumultuous region and strike a hard-to-reverse blow to multilateral diplomacy and the non-proliferation regime.

 

As it enters its third implementation year, the JCPOA continues to serve its essential purpose: last year, Tehran scrupulously adhered to its nuclear obligations, according to the International Atomic Energy Agency (IAEA), rendering an undetected dash toward nuclear weapons impossible. This apparently is only of marginal interest to the Trump administration, which continues to denounce the accord as flawed because some of its nuclear restraints expire between 2026 and 2031 and because it fails to address Iran’s broader policies, including its ballistic missiles program and support for non-state actors in the region.

Trump took a first major step toward undermining the JCPOA in October, when he refused to certify the accord on the grounds that the sanctions it suspended were not proportionate to Iran’s nuclear steps. Pressed by most of his cabinet members, who argued that withdrawal from the deal would be diplomatically costly, he has continued to waive the sanctions. But the administration has both imposed other economic penalties and discouraged international business with Iran, thereby putting Tehran in the uncomfortable position of having to comply with the deal’s nuclear restrictions while only partially benefiting from its economic rewards. Trump also tasked Congress with passing legislation that would unilaterally alter the terms of the JCPOA. As some of his backers put it, his message was plain: either fix the deal, or I will nix it.

 

By the time Trump once again had to decide whether to waive the sanctions, his approach had not borne fruit. This in no small part is because unilateral alteration of the JCPOA would constitute a violation and thus would isolate the U.S., something even many Republican members are loath to do. Congress to date has been unable to find a compromise that simultaneously placates the White House, complies with the deal and is acceptable to the Europeans. So this time he upped the ante: he made clear he would pull the plug on the JCPOA if over the next 120 days Congress and Europe failed to meet his demands.

For its part, and for the time being, Tehran has complied with the deal, focused on winning the international blame game and ensuring continued European economic dealings. But patience could be wearing thin. Iran’s favourable diplomatic posture hasn’t helped inside Iran, where the accord’s dividends have been slow to materialise, dashing popular expectations and contributing (alongside deeply rooted dissatisfaction at mismanagement, endemic corruption, and political and socio-economic deprivation) to unrest and protests in several cities. Should those dividends further erode as a result of U.S. actions – more uncertainty, more sanctions, or pulling out of the deal – Iran could respond in damaging fashion.

 

Europe, with which Iran’s trade has nearly doubled in the past year, arguably holds the key to the deal’s survival: it needs both to persuade the U.S. not to renege on its commitments and to preserve sufficient incentives for Tehran to remain in the deal even if Washington does so or if its actions continue to eat away at Iran’s economic benefits. But here too there is uncertainty over how effective Europe can be. The Trump administration would like to act in unison with its European partners, but not at all costs; it could decide to go its own way notwithstanding European opposition. And the imposition of U.S. secondary sanctions on European companies doing business in Iran would confront them with the choice of either scaling back their (still relatively modest) Iranian trade and investment or risk jeopardising access to the far larger and more lucrative U.S. market.

 

Fear that the president might keep his word and walk away from the deal likely will motivate European actors and members of the U.S. Congress to seek ways to mollify Trump without endangering the JCPOA. Several Republicans and Democrats in the U.S. Congress already have been floating draft legislation that would meet the White House half-way. For their part, France, Germany, the UK and the European Union (EU) have been debating how to signal greater concern about Iran’s ballistic-missile program and regional activities, considering what to do once some of the nuclear restrictions expire and weighing their reaction to passage of the above-mentioned U.S. legislation. How Trump’s bombastic 12 January ultimatum will affect their calculus – and whether his tough rhetoric still leaves room for compromise – remains uncertain.

 

There was some ambiguity in the president’s language that it is worth testing, but only up to a point. Should Congress pass legislation or Europe agree to U.S. measures that constitute JCPOA violations – for example by threatening automatic sanctions snapback if Iran engages in activity permitted under the deal – they would be complicit in the deal’s breakdown. This in turn would render it virtually impossible to keep Iran from taking reciprocal measures of its own. In other words, steps designed to forestall a U.S. pullout from the deal could end up killing it. Neither the U.S. Congress nor Europe should have anything to do with them.

 

If the Trump administration is determined to breach the JCPOA, better it do so on its own, and better Europe then do what it can to save it. Key would be to ensure sufficient diplomatic and economic dividends for Iran provided Tehran abides by its commitments and even though these dividends undoubtedly would fall short of the full realisation of what the JCPOA envisioned. For this to happen:

  • Europe should move beyond rhetorical support and ensure the JCPOA’s survival by providing cover for its businesses in the event of unwarranted U.S. secondary sanctions. According to an exclusive Crisis Group survey of more than 60 senior managers at multinational companies actively pursuing opportunities in Iran, this could be achieved if Iran remains committed to its JCPOA obligations and European countries pre-emptively revive their “Blocking Regulations”, shielding their companies from U.S. extraterritorial sanctions. Europe so far has been wary of taking a step that could prompt a trade war with the U.S., but may now feel its own security is at stake. It should also reach agreements on a bilateral EU plan to invest in the Iranian economy and a long-term energy partnership with Tehran, while diplomatically engaging on its regional policies and human rights record.
     

  • Iran should take several steps of its own. It should put its house in order by improving its banking standards and creating a less corrupt and more transparent business environment; this is not only essential to attract foreign capital and technology, but also to address popular grievances. To increase Europe’s confidence in its intentions, Tehran should bolster cooperation with the 1996 Comprehensive Nuclear Test-Ban Treaty (CTBT) organisation, sign the 2002 Hague Code of Conduct (HCOC) against ballistic-missile proliferation, and release dual-nationals arrested in Iran on dubious charges.
     

  • The U.S. Congress should refrain from altering the JCPOA’s terms by threatening to reimpose sanctions even if Iran abides by the deal. Such legislation might defer an immediate crisis, but it would violate a delicately balanced multilateral accord and undermine U.S. credibility as a reliable negotiating partner. Congress could reduce the president’s certification burden, strengthen sanctions’ snapback provisions tied to potential Iranian JCPOA violations, and express its sense that there needs to be a supplemental deal, but it must not be complicit in killing a deal that is working.

That the JCPOA, despite Trump’s antagonism, has outlived other multilateral accords that he rolled back is a testament to its utility and possibly its strength: the agreement has put a lid on Iran’s nuclear program and opened the door to its economic rehabilitation. But its other signatories should not assume that it can withstand further blows. They ought to defend it proactively, before it gets too late.

 

Washington/Brussels, 15 January 2018

 

I.Introduction

 

The process that led to the 14 July 2015 Joint Comprehensive Plan of Action (JCPOA) was long and torturous: it took more than a decade of diplomatic fits and starts and a perilous cycle of mutual escalation for Iran and the P5+1/E3+3 (the UN Security Council’s five permanent members plus Germany) to reach it. The accord received unanimous Security Council endorsement on 20 July 2015, and entered into force on 18 October 2015. This triggered Iran’s rollback of its nuclear program and cooperation to resolve longstanding questions raised by the International Atomic Energy Agency (IAEA) about its past nuclear activities.

Implementation Day occurred on 16 January 2016, after the IAEA certified that Iran had fulfilled its key commitments under the agreement, prompting sanctions relief. Since then, the JCPOA has transformed Iran from the most sanctioned country in the world to the one with the most rigorously monitored nuclear program. It also opened the door to Iran’s economic rehabilitation, even if the pace of recovery in the aftermath of sanctions relief has been more sluggish than anticipated. In last year’s status report, Crisis Group noted that implementation of the complex agreement was not flawless. Iran committed several technical violations and struggled to normalise its international banking ties.

 

Implementation of Iran’s nuclear commitments has improved in the 2017-2018 period and the JCPOA’s Joint Commission (the seven negotiating parties, coordinated by the EU) has proven adept at problem-solving. Major financial institutions remain circumspect, however, hampering Iran’s re-integration into the global economy and dashing inflated public expectations of rapid economic recovery. The reasons for these delays in sanctions relief are manifold, ranging from concerns over a possible snapback, to the overall uncertainty created by the Trump administration, to internal deficiencies of the Iranian economic environment.

A key question is what the business community, which plays a critical role in generating the deal’s economic dividends and makes autonomous decisions, will do. To better understand its calculus and possible response to key policy shifts, Crisis Group commissioned a survey of more than 60 senior managers at multinational companies actively pursuing opportunities in Iran (see detailed results in Appendix A). This survey’s results, in conjunction with interviews conducted with officials from Iran, the P5+1, and the IAEA over the past year, have informed our analysis and policy recommendations in this report.

Another development occurred as year two reached its end: protests erupted across Iran in late December 2017, resulting in at least two dozen deaths and thousands of detentions. While not directly related to the JCPOA, the events nonetheless were connected. Polls show the deal remains popular, but hopes that it would lead to rapid economic recovery have been dashed, adding to disgruntlement over economic conditions, from chronic unemployment to endemic corruption and glaring income inequalities. President Hassan Rouhani over-promised and under-delivered, both because his government genuinely expected greater JCPOA returns and because it hyped anticipated benefits to sell the deal to domestic detractors.

 

As the protests started waning, Rouhani admitted that the ruling elite was out of touch with the population and that dissent reflected widespread demands for a more open society and polity. Ayatollah Khamenei, however, while acknowledging economic problems, put the blame on a triangle of enemies: the U.S. and Israel, Saudi Arabia, and exiled Iranian dissidents. Left unanswered is whether the leadership can absorb the shock and implement much needed structural reforms, whether popular or not, that are key to fulfilling the JCPOA’s potential.

 

Projecting the JCPOA’s trajectory as it enters its third year of implementation is impossible without understanding what it has achieved so far, where it has fallen short, and what this implies not just for its future but also for Iran’s relations with the West and its role in the region. This report analyses the second-year record of implementation, draws lessons and offers suggestions for improving and sustaining an accord that remains a net positive for non-proliferation.

 

II.Delivering Results

 

Two years after its implementation, the nuclear accord’s opponents and proponents continue to relitigate its merits, shortcomings, and linkage to other issues like Iran’s growing regional clout, ballistic-missile tests, and human rights record. Amid the noise, it is easy to lose sight of an important fact: the JCPOA’s two key components – restricting and rigorously monitoring Iran’s nuclear program and (to a lesser extent) sanctions relief – are working and delivering concrete results.

 

A.Nuclear Commitments

 

Since January 2016, the IAEA has verified on nine separate occasions, and the UN Secretary-General has attested four times, that Iran is fulfilling its JCPOA obligations. So far, the Trump presidency has neither altered the U.S. approach toward technical aspects of the deal’s implementation nor compelled Iran to change its level of cooperation with the IAEA.Though Iran overproduced heavy water on two occasions during the first year, it committed no technical infringements in the second. Tehran kept a comfortable distance from JCPOA thresholds for stockpiles of sensitive material – ie, 130 metric tons for heavy water and 300kg for low-enriched uranium. Although the Trump administration halted U.S. purchases of Iran’s heavy water, Iran was diligent in transferring its excess material to Oman and is seeking more domestic uses for it – eg, in oil exploration.

 

Debates at the JCPOA’s Joint Commission over diverging interpretations of the accord, especially where its language is ambiguous, continued apace. But these were mostly over technical minutiae. For instance, Iran’s enrichment research and development plan indicated that it would test “roughly” ten advanced IR-6 centrifuges with uranium until 2019, whereas in practice it had deployed thirteen machines. After long debates at the Joint Commission, Iran accepted its Western members’ interpretation that “roughly ten” is eleven.

 

By provisionally implementing the IAEA’s Additional Protocol (AP) to the Comprehensive Safeguards Agreement (CSA), as well as all the supplementary enhanced safeguards and transparency measures outlined in the JCPOA, Iran’s nuclear program is under the most robust inspection regime that currently exists. In 2017, the IAEA had no problem inspecting any sites it needed to access. The fact that the agency did not visit military sites, which Iranian officials have publicly declared off-limits, became a political football. “If inspections of Iranian military sites are ‘merely a dream’, as Iran says, then Iranian compliance with the JCPOA is also a dream”, said U.S. ambassador to the UN, Nikki Haley.

 

Yet, in practice, there was no crisis, as the IAEA has the authority to visit any location it deems necessary; and benefits from a unique feature of the JCPOA – beyond the CSA/AP – that requires Iran to grant access to any suspect sites within 24 days or face activation of a dispute resolution mechanism and possible sanctions snapback. The IAEA apparently has had no grounds to request access to military sites; and, despite the rhetoric, has been granted access by Iranian officials to such sites in the past. It should be sufficient reassurance that the IAEA’s verification is iterative – going through repeated rounds of inspections and analysis – and that, without full access, the agency could never draw its so-called “broader conclusions”, which Iran deeply cares about because they imply that all nuclear material and activities in Iran are purely civilian. Politicising verification is sure to backfire – unless the goal is to find a pretext for undermining the JCPOA.

 

One of the JCPOA’s most innovative elements became one of its most controversial in 2017: Section T, concerning activities that could contribute to the design and development of a nuclear explosive device. The Nuclear Non-Proliferation Treaty (NPT) fails to define what manufacturing a nuclear weapon entails. Section T closes that loophole by explicitly banning certain activities and dual-use material related to nuclear weaponisation. It is, however, the only section in the JCPOA’s nuclear section that neither explicitly names the IAEA nor specifies Iran’s commitments.

 

The deal’s detractors charge that the agency is unable to verify Iran’s compliance under this provision. The fact that IAEA’s director general, Yukiya Amano, noted that “our tools are limited” and “more clarification would be helpful” reinforced these claims. But the push to do more to verify Section T seems aimed more at instigating an inspection crisis, which critics could then use to suggest Iran is in non-compliance, than at addressing a real verification concern: in fact, the IAEA has the authority under UN Security Council Resolution 2231 to monitor all of Iran’s nuclear commitments and has confirmed that it is doing so with regards to Section T. Its director general’s request for clarification stems from the lack of detail about the verification mechanism itself, rather than a lack of authority or access; but the Joint Commission has not been able to guide the agency on these issues because of its own internal divisions on how far the IAEA should go. Above all, Section T was devised primarily as a deterrent to ensure that weaponisation activities are unambiguously banned with no sunset provisions.

These controversies notwithstanding, other members of the P5+1 demonstrated their commitment to the JCPOA by materially investing in Iran’s nuclear program: Russia started constructing a second nuclear power plant in the southern Iranian port city of Bushehr and continued conducting feasibility studies for transforming the bunkered Fordow enrichment plant into an international physics centre; China continued work on modernisation of the heavy-water reactor in Arak, a joint project between Iran, China and the U.S.; and the EU held two high-level seminars on nuclear cooperation with Iran and invested €20 million (about $24.4 million) in enhancing the country’s nuclear safety practices. While Iranian scientists have regained access to and even hosted IAEA’s technical workshops, nuclear cooperation with other countries beyond the P5+1 has lagged. The Trump administration’s hostility toward the agreement, and deliberate efforts to obstruct such cooperation, is one reason for limited progress on this front.

 

The JCPOA’s procurement channel for Iran to access dual-use material and equipment, managed by the Joint Commission’s procurement working group, received and processed eighteen applications (compared to only six in the 2016-2017 period) related to export of dual-use technology to Iran. Critics pointed to a German intelligence report indicating that Iran is continuing illicit procurement of proliferation-sensitive material outside of the channel. The public version of that report, however, noted that it was mostly related to Iran’s missile program, which is not covered by the deal, and that the evidence “did not reveal any violation of the [JCPOA]”.

 

B.Sanctions Relief Commitments

 

During the reporting period, the impact of sanctions relief on the indicators of Iran’s macroeconomic performance became increasingly tangible, even though benefits failed to reach the general population, dashing expectations and contributing to popular unrest throughout the country.

 

According to the International Monetary Fund (IMF), Iran – buoyed by a post-sanctions resurgence of oil sales – achieved 12.5 per cent economic growth during the Iranian fiscal year (March 2016-March 2017) and is projected to grow 4.2 per cent in the 2017/2018 period. Inflation was contained at single digits. Iran’s trade with the EU grew by a factor of 1.6 in the first nine months of 2017 compared to the same period last year, reaching €14.8 billion (about $18 billion). Iran signed major investment contracts, including the symbolically significant $4.8 billion agreement with French energy giant Total to invest in an Iranian off-shore natural gas field. Overall, the country absorbed around $8 billion in foreign direct investment and secured lines of credit for projects in Iran by banks in Europe and East Asia.

 

Nevertheless, significant challenges remain. The Rouhani administration clearly has over-promised and under-delivered, as Iran’s impressive growth figures flatter to deceive: unemployment has grown since the nuclear deal; poverty and income inequality have increased, and export figures for 2017 indicate that non-oil exports shrank.Persistent reluctance of first-tier international banks hampered Iran’s reintegration into the global economy by hindering clearing services and the financing of large contracts.

 

The causes are manifold. There are legal or compliance risks, pertaining to possible violations of remaining (and in the U.S. case, new) U.S. and EU sanctions on Iran. In 2017, Congress enacted the Countering America’s Adversaries through Sanctions Act of 2017, imposing sanctions on individuals and entities associated with Iran’s ballistic-missile program or the sale or transfer to Iran of military equipment and the Islamic Revolutionary Guard Corps (IRGC). The Iranian parliament retaliated by enacting its own measure, entitled “Countering America’s Terrorist and Adventurist Actions”.

 

For its part, the administration blacklisted nearly 100 Iran-related individuals and entities for their involvement in Iran’s ballistic-missile program, support for non-state actors and human rights violations. It also labelled the IRGC as a terrorist entity; the first time an official branch of a state’s armed forces has been designated as such, and significant because of the IRGC’s expansive role in Iran’s opaque economy, which in turn renders due diligence particularly cumbersome. The IRGC had threatened to retaliate by treating U.S. forces in the region as terrorists and warned against U.S. presence in the range of Iran’s ballistic-missiles, but so far has not taken any such measures.

 

No less chilling for investment is the threat that sanctions suspended under the deal may be reimposed, given the Trump administration’s hostile rhetoric toward the JCPOA and repeated threats to walk away from it. Unilateral U.S. sanctions can be resumed by simple executive order; a snapback mechanism embedded in the accord can reinstate UN sanctions if one party contends that Iran has reneged on its commitments. There are also political or reputational risks – a lever that Trump reportedly employed to dissuade nations at the July 2017 G-20 summit from doing business with “nations that sponsor terrorism, especially Iran”. Iran blasted this, not without justification, as a JCPOA violation, even though the Trump administration did not see it as such. Some of Iran’s regional rivals have also pressed Western companies to choose between investing in Iran or doing business with them.

 

Iran’s banking system is still designated by the Financial Action Task Force (FATF), which sets anti-money laundering and counter-terrorism financing standards for financial institutions worldwide, as a high-risk and non-cooperative jurisdiction. The Rouhani administration took substantial steps to improve transparency within the Iranian financial system and enhance banking standards. In response, the FATF suspended its counter measures requiring enhanced due-diligence in dealing with Iranian banks in June 2016, a decision it renewed in June 2017 and will reassess in February 2018 after the deadline for Iran’s implementation of agreed reforms lapses on 31 January. Some operational risk remains, however: rampant corruption and cumbersome regulations are among the myriad endemic challenges that make it difficult to do business in Iran.

 

Crisis Group’s survey of senior managers with direct responsibilities for Iran business at multinational companies shows that 79 per cent of firms pursuing opportunities in Iran have delayed their plans since the JCPOA’s implementation. The overwhelming majority (57 per cent) indicate that the primary reason for the delay was fear of U.S. sanctions snapback, followed by Iran’s weak regulatory environment (11 per cent) and legal protections, among other risks (see graph 3 in Appendix A). When asked to name the primary obstacle to their market rollout in Iran, respondents again cited above all the risks associated with U.S. sanctions compliance (32 per cent), followed by lack of access to financing (21 per cent) and political and reputational risks (15 per cent).

 

Most companies have clearly delayed major commercial decisions regarding Iran because of exogenous risks, though they acknowledge the internal deficiencies of Iran’s business environment, which a majority (79 per cent) believe Iran has failed to address adequately. An executive of a French insurance company summed up the prevailing sentiment: “Iran’s internal issues, from corruption to mismanagement, are not more or less complicated than any other frontier market. What’s different is the Damocles sword of sanctions hanging over the market”.

 

III.The Year of Living Dangerously

 

Since assuming office, President Trump has repeatedly excoriated the JCPOA as one of the “worst and most one-sided transactions”, and an “embarrassment to the U.S.”. Yet while the administration was conducting an inter-agency strategic review of U.S. policy toward Iran, of which the JCPOA was only one element, it held its end of the bargain by continuing to periodically issue congressionally mandated certifications of Iran’s compliance and extend sanctions relief. It did so reluctantly; the president and some of his close advisers publicly expressed deep scepticism. Each affirmative action to extend sanctions relief was, however, followed by fiery statements condemning Iran’s regional or domestic policies and adding new designations to the U.S. sanctions list.

 

Finally, in October, despite a widely-shared view among Trump’s national security team that Iran was complying, the president refused to recertify the JCPOA on the grounds that sanctions relief had not been proportionate to steps Iran has taken. This option allowed the White House to signal its opposition to the deal; created doubts as to its survival without taking immediate responsibility for torpedoing it; and shifted that burden to Congress, which could use an expedited process by a simple majority – devised under the 2015 Iran Nuclear Agreement Review Act (INARA) – to restore the suspended U.S. nuclear-related sanctions.

The administration highlighted three main justifications for this decision. The first is the only one that relates to the JCPOA itself. It revolves around what the administration calls its “sunset provision”, a misnomer that refers to the fact that various – but not all – restrictions imposed on Iran’s nuclear program expire at some point and which critics say provides Iran with a patient pathway to building nuclear weapons. In reality, while some provisions restricting Iran’s nuclear program lapse between 2025 and 2030, other important ones are permanent. The second concerns Iran’s ballistic-missile program. And the third has to do with Iran’s regional policies, which the administration denounces as destabilising and expansionist, and as violating the spirit of the deal. The White House also announced a new Iran strategy that was long on what the U.S. deems Iranian wrongdoings and short on how Washington intended to address them. In the meantime, it declassified intelligence regarding Tehran’s past ties with al-Qaeda and provided information on Iran’s purported cooperation with North Korea and alleged provision of missiles to Huthi rebels in Yemen.

 

The other countries that negotiated the deal all reacted to the administration’s failure to recertify it with expressions of continued support for the JCPOA. Iran shrugged off the decision. Rouhani said, “[Trump’s] speech tonight showed that the [JCPOA] is much stronger than what this gentleman thought during the presidential campaign. This is an international, multilateral deal. It is not a document between Iran and the U.S. that he can treat the way that he likes”.

The administration and key lawmakers, their rhetoric notwithstanding, were disinclined to reimpose nuclear-related sanctions, which would be tantamount to a unilateral U.S. exit from the deal and thus a recipe for U.S. isolation and condemnation by its allies. Instead, they gravitated toward a more subtle but potentially damaging approach: they threatened to legislate an automatic snapback of sanctions that Congress previously had suspended if, among other things, Iran were to expand its nuclear program, as the agreement entitles it to, after some of the JCPOA’s restraints lapse.

 

Depending on its precise language, such an attempt to force alteration of the JCPOA could well constitute a violation of the accord. But its enactment requires 60 votes in the Senate and thus buy-in from Democrats, who conditioned their support on compliance with the JCPOA and bringing European allies on board. Several weeks of intensive congressional consultations and discussions with France, Germany, the UK and the EU so far have not produced any concrete result. Consumed with tax reform and other legislative priorities, Congress delayed negotiations. What internal deliberations have occurred have yet to result in consensus on a bill that would tighten nuclear restrictions on Iran pursuant to the White House’s desire, end the Trump’s obligation to certify or decertify the deal every 90 days and secure buy-in from U.S. allies.

 

In late 2017-early 2018, work was continuing on finding a legislative solution. Privately, European officials expressed willingness to work with the administration in order to ensure Trump waived the sanctions, while expressing concern that the drafts they had seen were inconsistent with the JCPOA. They also made clear their willingness to work more closely with the U.S. to curb Iran’s ballistic-missile program and counter its regional activities. But they refuse to hold the JCPOA’s fate hostage to agreement on such measures. As one official put it, “the best way for us to work more closely with Washington on issues of concern is for them to put the JCPOA aside and reassure us it will not be tinkered with. If the U.S. wants a common front, that’s the way to produce it”.

 

Some of the deal’s critics have seized on French President Emmanuel Macron’s stated willingness to supplement the agreement by addressing ballistic missiles and extending the duration of some constraints on Iran’s nuclear program as a sign that Paris is open to a renegotiation. That appears to be a mistaken and self-serving interpretation. Macron, like leaders of all other P5+1 states, repeatedly has emphasised the primary importance of preserving the JCPOA. True, France and others wish to address other aspects of Iran’s approach, like its ballistic-missile program or regional activities, and see pressure and diplomacy as twin tools to that end. But they do not propose doing so by holding the JCPOA hostage or threatening to violate it in the event such a supplemental deal cannot be reached.

 

While Trump, echoing Israeli Prime Minister Benjamin Netanyahu’s recommendation to “fix or nix” the deal, threatened that “in the event we are not able to reach a solution working with Congress and our allies, then the agreement will be terminated”, the risks associated with a go-it-alone U.S. policy of tanking the deal combined with the prospect of Congress coming up with a legislative answer led him to kick the can down the road once more.

 

On 12 January, while again refraining from recertifying Iran’s compliance with the JCPOA, and “despite [his] strong inclinations”, Trump extended the waivers suspending U.S. nuclear-related sanctions as required by the deal. But he warned that this was the last extension he would implement unless Congress and Europe “fix[ed] the deal’s disastrous flaws”. Of Congress, he demanded bipartisan legislation that would do the following:

  • “demand that Iran allow immediate inspections at all sites requested by international inspectors”;
     

  • “ensure that Iran never even comes close to possessing a nuclear weapon”;
     

  • “contain no expiration date” for these provisions, and link automatic snapback of U.S. nuclear sanctions to Iran’s refusal to oblige by them; and finally,
     

  • “explicitly state that long-range missile and nuclear weapons programs are inseparable, and that Iran’s development and testing of missiles should be subject to severe sanctions”.

Simultaneously, Trump insisted that the Europeans agree “to fix the terrible flaws of the Iran nuclear deal” in such a manner that new multilateral sanctions would be imposed if Iran at any time “develops or tests long-range missiles, thwarts inspections, or makes progress toward a nuclear weapon”. In parallel, the Trump administration levied a new set of sanctions against Iran, targeting fourteen officials and institutions involved in repressing the protesters in early January, in weapons proliferation and cyber activities.

 

The statement is somewhat fuzzy in several substantive aspects. The conditions required of Congress are not strictly identical to those demanded of Europe; the latter is asked to agree to fix the deal, not to fix it; and some of the requirements addressed to both actors are somewhat vague and, perhaps, open to interpretation. This could leave some wiggle room for negotiations. But substantive imprecision was matched by tonal clarity: “this is a last chance”, Trump said, asserting that absent a fix, and Europe’s agreement he would “not again waive sanctions”. And, haziness aside, it is hard to escape the conclusion that by fix he means making the accord’s constraints everlasting and subjecting Iran to new, automatic U.S. and multilateral sanctions for activity permitted by the JCPOA. That is both unrealistic and plainly at odds with the deal

 

A year into the Trump administration, questions continue to surround its ultimate objective with regard to the JCPOA – or whether it even has one. It often argues that the JCPOA is flawed because it only delays Iran’s nuclear capabilities, has insufficient inspection authorities, provided Iran with excessive upfront sanctions relief, and failed to curb Iran’s ballistic-missile program and regional clout. But its opposition to the JCPOA stems less from the accord’s technical details, or scope, or implementation record than from its narrow nature as an arms-control agreement that allows an adversary to come in from the cold and normalise its nuclear program without altering its policies more broadly. Senator Tom Cotton, an ally of the administration, put it unambiguously: “Let’s understand the Iranian threat. It’s not the deal’s technical flaws, though there are a lot of those. The threat is not the nature of Iran’s weapons; it’s the nature of Iran’s regime”.

Questions over whether arm-twisting as opposed to diplomatic engagement (with Europe, but also Iran and other JCPOA co-signatories) would produce better results, or whether derailing the accord would strengthen or weaken U.S. ability to negotiate a better one or address other outstanding concerns often appear mere afterthoughts. Moreover, if the objective was, as a senior White House official put it, “to prevent the nuclear tail from wagging the rest of the Iran-policy dog”, as it accuses its predecessor of doing, its refusal to recertify the deal has brought the JCPOA and its future back into the spotlight, overshadowing most other debates.

 

IV.Candle in the Wind?

 

The Trump administration’s simultaneous decisions not to recertify the JCPOA, extend sanctions relief, and impose new sanctions while threatening to kill the deal next time – which a prominent critic of the deal dubbed “decertify, waive and slap” – has bought four additional months for Washington to decide what it will do. Legislation that partly addresses White House concerns over the JCPOA might still be within reach, but several risks exist: such a bill might violate the deal’s plain language (eg, by unilaterally extending the time horizon of certain constraints, or by tying sanctions snapback to activities not covered by the JCPOA, such as Iran’s ballistic-missile program) and thus potentially trigger a parallel Iranian violation; no such bill might emerge and Trump could decide to reimpose sanctions in May; the U.S. and Europe could fail to concur on a so-called “supplemental agreement”, again provoking resumption of U.S. sanctions; a clash could occur involving the U.S., Iran and their respective allies; and continued imposition of U.S. sanctions – such as those announced on 12 January – could be viewed by Tehran as inconsistent with the deal and, by incrementally eroding its economic benefits, lead Iran to question the JCPOA’s value.

 

The mere prospect of one of these outcomes, let alone their realisation, could seriously destabilise the JCPOA and threaten its survival. The White House might welcome this, as it would allow the U.S., as a senior Iranian official said, “to have its cake and eat it, too”: either by ensuring that Iran complies with the agreement’s nuclear provisions without enjoying its economic benefits, or by pushing Iran to exit the deal. Already, failure to issue the certification in October, which had no immediate practical consequence and, in the words of a Trump administration official, was a “big nothing-burger”, adversely affected future plans of half the companies surveyed by Crisis Group – a dynamic that could have a snowball effect, as 67 per cent report that “the apparent movement of other companies in the market” is somewhat or very important to their company’s decision-making (see graph 2 in Appendix A).

 

One potentially damaging measure already could be in the works: an attempt to derail Iran’s ability to purchase civilian aircraft by claiming Iran uses these to ferry weapons and military personnel to Syria. Boeing, Airbus and ATR (a Franco-Italian aircraft manufacturer) have signed contracts to sell around 300 jetliners to Iranian airlines worth nearly $40 billion. Since coming to office, the Trump administration has not issued any new licenses for delivering aircraft to Iran; scuttling these deals would violate a U.S. commitment under the JCPOA to facilitate these sales.

 

Iran’s strategy, absent a blatant U.S. violation that would render the political costs of remaining in the deal unbearable and the economic advantages insufficient, is to play victim, blame Washington and hope to erode new U.S. sanctions by driving a wedge between the U.S. and its partners. As a senior Iranian official said:

The Trump administration wants to turn the JCPOA into an empty shell by creating uncertainty around it and depriving us of its economic dividends. By not playing into their hands, remaining committed to the deal, and refraining from provocations, we will isolate them and turn their sanctions into an empty shell. This is Iran’s strategic patience at play.

 

Although some hardline voices in Tehran advocate retaliation by resuscitating Iran’s nuclear program and reducing cooperation with the IAEA, there seems to be a consensus within the senior leadership that Iran should not be the first to violate the JCPOA. What is less certain is how Iran would respond should the U.S. patently violate or withdraw from the deal, enshrine the deletion of the JCPOA’s various expirations dates in law or if the accord’s benefits were to diminish to the point where preserving it becomes indefensible in Iran. Some Iranian officials have indicated that under such circumstances, Iran would ratchet up its nuclear program beyond the threshold permitted by the JCPOA. Ultimately, Tehran’s decision likely will be guided both by political interests (such as the desire to maintain robust relations with Europe and isolate the U.S.), and commercial considerations, ie, maintaining trade and business relations with the rest of the world.

 

Developments not directly related to the JCPOA also could strain it beyond breaking point. As detailed and explained in Crisis Group’s Trigger List, escalation on one front could provoke escalation on another: perceived or real U.S. JCPOA violations could prompt Iran to respond asymmetrically by targeting U.S. forces in Iraq or Syria, in turn provoking a U.S. military response; another Huthi missile launch against Saudi Arabia could result in U.S. or Saudi retaliation against Iran; an Israeli airstrike against a target in Syria could trigger Hizbollah retaliation, in turn engulfing Lebanon.Rising tensions also could push Iran to double down on its ballistic-missile program. Any of these could prompt tighter U.S. economic retribution and eventually make it impossible for Trump to continue waiving sanctions – or politically easier not to do so.

 

Dialogue that could alleviate the growing sense of impending crisis seems unlikely. The Trump administration has closed the small diplomatic openings crafted with Iran during the nuclear talks. Ayatollah Khamenei feels vindicated in his habitual mistrust of the U.S. Iran sees no justification or need to initiate the first de-escalatory move toward its regional rivals, while Saudi Arabia is convinced that only after it has restored strategic balance might dialogue be useful. This is a recipe for a precarious standstill that could deliberately or inadvertently descend into direct conflict.

 

V.Hoping for the Best, Preparing for the Worst

 

In short, if the U.S. currently has decided not to walk away from the deal, there is little room for complacency. Trump has put himself in a rhetorical corner and other U.S. steps or regional events could endanger the JCPOA’s survival. It is not too soon for other co-signatories, and Europe in particular, to think of measures that would ensure Tehran remains compliant in the face of diminishing economic returns or, worse, a full-fledged U.S. pullout.

For now, Washington’s European allies likely will continue to explore whether there is a viable path to placate the White House. This will be a tough balancing act, as dealing with U.S. concerns in the way the White House has suggested most probably would entail a violation of the very deal European engagement is designed to salvage. The same holds true for Democrats and some Republicans in the U.S. Congress, who will look to Europe’s assessment before concluding whether legislation designed to “fix” the JCPOA in fact contravenes it. Discussions in Congress and between the administration and its European allies have focused in particular on the so-called sunset clauses; they also have touched upon other, non-nuclear topics including Iran’s ballistic-missile program.

Optimally, these would have been addressed in renewed negotiations between the P5+1 and Iran aimed at forging a follow-on agreement. But if President Trump truly sought such a better-for-better agreement, along the lines Crisis Group recommended before his inauguration, it would have taken a starkly different route: building trust by implementing the JCPOA in good faith and then exploring mutually-beneficial arrangements that would strengthen some of the JCPOA’s nuclear provisions or add non-nuclear ones in return for positive incentives, such as relief from U.S. primary embargo.

That road seems foreclosed, at least for the time being: Iranian leaders have made plain they will not renegotiate a just-concluded deal under pressure from a co-signatory that is threatening to walk away and whose compliance with the agreement’s provisions they already question.Even the more pragmatic among the Iranian leaders believe that renegotiation with an administration that is seeking maximalist objectives, such as indefinite limits on Iran’s nuclear program, through a pressure-centric approach is bound to fail and could bring down the JCPOA with it. As a close confidante of Rouhani put it, “there will be no negotiations with the U.S. before 2020. If Washington believes it can negotiate with the same government it says it wants to topple, it is deluding itself. Moreover, Rouhani and Foreign Minister Javad Zarif have exhausted their political capital on the JCPOA and don’t have much to show for it”.

Instead, the administration has resorted to the threat of unilaterally altering the existing accord. As seen, Trump has insisted on tying the reimposition of sanctions to Iranian steps that would be compliant with the JCPOA after certain constraints lapse. This is risky. While, in the words of a senior European official, it would constitute a “crisis deferred”, sanctions imposed for such reasons likely would represent a JCPOA violation to which Iran could react, setting in motion a dynamic that eventually could unravel the deal.   Tying the reimposition of sanctions to Iran’s ballistic-missile activities, would also conflict with the JCPOA. It would make no sense for Europe (or Congressional Democrats for that matter) to try to save the deal in a manner that risks killing it – only this time, with their imprimatur.

 

Even as efforts to mollify Trump in a manner consistent with the deal continue, therefore, Europe should think of a Plan B: how to preserve the essence of the deal in terms of Iran’s obligations irrespective of Washington’s actions, just as members of the international community have sought to salvage the Paris Climate accord despite the U.S.’s withdrawal, or Pacific nations have put together an alternative trade pact despite Trump’s rejection of the Trans Pacific Partnership.

Discussion in Tehran and European capitals has centred on whether Europe could effectively stand up to U.S. pressure and continue to engage in business transactions with Iran should U.S. secondary sanctions be reimposed. European businesses would face the choice of either scaling back their (relatively modest) Iranian trade and investment or risk jeopardising access to the far larger and more lucrative U.S. market. As U.S. officials see it, this is a no-brainer. In response, European officials publicly claim that as long as key European stakeholders remain united and Iran remains committed to the deal, they can guarantee Iran’s economic incentives and keep the deal from unravelling by protecting their businesses against U.S. sanctions – though in private many are far less sanguine.

Europe’s determination to protect the deal stems less from economic than from political calculations – the fear that breaking the deal would heighten regional tensions, potentially unleash Iran’s nuclear program, and call into doubt the reliability of multilateral agreements. Even so, there is only so much Europe could do in the face of a reimposition of U.S. secondary sanctions or, should it come to that, a return of UN sanctions that they would feel bound to implement. An increasing number of companies inevitably will have cold feet and opt to either stay away from or leave Iran. The majority of respondents in our survey – 83 per cent – believe that if the U.S. unilaterally reimposed sanctions, European and Asian companies would be “very to somewhat” averse to trade and investment with Iran (see graph 6 in Appendix A).

 

Still, even with shrinking economic benefits Iran might be better off complying with the deal and preserving business ties with Europe than walking away entirely. Many companies represented in the survey conducted compliant business in Iran in the face of past sanctions; 33 per cent did not cease trading with Iran between 2006 and 2015, when multilateral sanctions were at their peak. Executives used a combination of carve-outs, licenses, and de-risking (reducing their footprint in the U.S. market) to protect Iran business ties under those conditions. Moreover, some 54 per cent of senior executives indicated that “assuming Iran remains committed to the nuclear deal”, enforcement by Europe of blocking regulations – which protect companies from U.S. penalties – would “positively affect the decision to invest in Iran” (see graph 8 in Appendix A).

 

So long as the U.S. reimposes sanctions unilaterally while Iran remains in compliance with its JCPOA commitments, Europe can help ensure that Iran fares better with than without a deal. Other JCPOA signatories would be in a position to work with at least some companies and ensure a modicum of economic engagement. Perhaps this is why a majority of respondents – 64 per cent – believe that the nuclear deal is “very/somewhat likely” to survive even if the U.S. were to withdraw from it (see graph 7 in Appendix A). This confidence, if cultivated, could help preserve the accord. Based on these considerations:

  • France, Germany, the UK, Russia and China should clearly and publicly reiterate their position that they will neither alter the JCPOA nor comply with unwarranted unilateral U.S. sanctions on Iran and will continue to abide by their own obligations.
     

  • European countries in particular should revive their “Blocking Regulations” prohibiting compliance with U.S. extraterritorial sanctions, thereby making clear that they will not give effect to U.S. judgments and administrative determinations pursuant to such sanctions, and that companies will be reimbursed for fines and other damages incurred for alleged sanctions violations. Although European officials are loath to resort to these measures, which have rarely been enforced and could lead to a transatlantic trade war, the costs arguably would be less than those incurred if Iran were to resume its nuclear program and prospects of U.S. or Israeli military action were revived. 
     

  • Europe could also negotiate a long-term energy partnership with Iran and/or a bilateral investment agreement, demonstrating its long-term commitment to the JCPOA and sending a strong signal to both Tehran and Washington. 
     

  • To overcome the banking bottleneck, a public European body could help smaller to medium size firms conduct due diligence in Iran to ensure their local partners are not targeted by the remaining EU or UN sanctions. This would be akin to the role played by the European Bank for Reconstruction and Development in Eastern Europe after the Soviet Union’s dissolution, and elsewhere today.
     

  • The EU could expedite the process of allowing Iran to become a European Investment Bank partner to support private sector and infrastructure development in the country. 
     

  • While protecting the JCPOA and bolstering trade with Iran, European countries should diplomatically engage Tehran to find options for deescalating tensions in the region and enhancing the country’s human rights record.
     

  • To respond to and facilitate Europe’s proactive efforts, Iran should enact the FATF’s legal instrument against anti-money laundering and counter-terrorism financing before the FATF’s action plan deadline at the end of January 2018. Continued progress on these fronts would facilitate Iran’s reintegration into the global financial system by enhancing financial transparency and governance, thus encouraging greater economic investment in the country.

Other steps could help both bolster Iran’s incentives to remain in the deal and international confidence that Iran’s nuclear program will remain strictly civilian, while reducing regional tensions – all of which would make it politically easier for Europe to remain economically and diplomatically engaged with Tehran. To that end:

  • Various countries could increase their nuclear cooperation with Tehran, for example over nuclear safety and security, for which the JCPOA’s Annex III provides a good starting point. 
     

  • As a means of addressing concerns over the JCPOA’s sunset provisions, either existing enrichment consortiums, like Urenco, or regional governments could approach Tehran to start a multinational enrichment plant, which would allow peer scrutiny over Iran’s nuclear program even after its JCPOA limitations elapse. 
     

  • Iran could invite officials from the 1996 Comprehensive Nuclear Test-Ban Treaty (CTBT) organisation to Tehran, start transmitting data from CTBT monitoring stations on its soil to the international data centre in Vienna and set a timeframe for ratifying the CTBT in accordance with Ayatollah Khamenei’s fatwa against nuclear weapons and the global Treaty on the Prohibition of Nuclear Weapons that Iran signed in 2017. 
     

  • With regards to its missile program, Iran could sign the 2002 Hague Code of Conduct (HCOC) against ballistic-missile proliferation, which would commit Iran to providing pre-launch notifications for ballistic-missiles and space-launch vehicles and submission of an annual declaration of the country’s related policies. 
     

  •  An even more significant and long overdue step would be to release dual nationals arrested in Iran on dubious charges, who are being held as virtual hostages – an issue that has poisoned relations with the West and could provide ammunition for those who advocate more sanctions.

Finally, even as it seeks to mollify the White House, the U.S. Congress should be very careful about any legislation that would restore sanctions in response to Iranian actions either not covered or allowed by the JCPOA. Depending on how it is worded, such a bill could represent a clear-cut violation of the accord, giving license to Iran to act in reciprocal fashion. It also would set an unwelcome precedent of U.S. unreliability and thus further dim prospects for a diplomatic resolution of the nuclear crisis on the Korean peninsula.

 

The Trump administration already possesses all the tools required to sanction Iranian ballistic-missile activity, support for militant groups or human rights violations without contradicting the JCPOA. Congress could pass legislation that reduces the administration’s certification burden, bolsters the prospect of sanctions reimposition in reaction to Iranian violations of the nuclear deal that the JCPOA adjudication mechanism fails to remedy, and express its sense that the U.S. administration should seek a follow-on agreement to address concerns over the outer years of the existing one. But it should not be complicit in an effort to undo the deal by stealth.

 

VI.Conclusion

 

Successful implementation of the JCPOA unfortunately has done little to strengthen it despite the absence of any viable alternative mechanism for achieving its important goals. The deal is capping Iranian nuclear activity right now; it seems illogical to weaken or even abrogate it over fears about what Iran might do more than a decade from now; with the agreement unravelling, that growth could begin as soon as tomorrow. It seems equally irrational to unshackle Iran’s nuclear program while simultaneously seeking to roll back its regional influence and curtail its ballistic-missile program. Yet such is the mindset among some U.S. officials and some of their outside backers.

 

If the White House subscribes to this warped logic, there is no reason for other JCPOA signatories to do likewise. Even as they continue seeking to persuade the Trump administration to stick to the deal, they ought to be prepared to move beyond the sterile and often counterproductive Washington policy debate and do their best to sustain the accord with or without active U.S. participation.

https://www.crisisgroup.org/middle-east-north-africa/gulf-and-arabian-peninsula/iran/181-iran-nuclear-deal-two-status-report?utm_source=Sign+Up+to+Crisis+Group%27s+Email+Updates&utm_campaign=31367c2c53-EMAIL_CAMPAIGN_2018_01_16&utm_medium=email&utm_term=0_1dab8c11ea-31367c2c53-359909997

 

(c) 2017 International Crisis Group 

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