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.