The Iran Deal: Where We Stand, and What Comes Next

By: John Hardie

The status quo is on thin ice, but will it crack? And when?

On January 15, Iranian nuclear supremo Ali Akbar Salehi hurled a thinly-veiled threat at the European Union. Suggesting that failure to provide his country with economic aid would lead Iran to reconstitute banned elements of its nuclear program, Salehi warned that he would need only “four days” to enrich uranium up to 20 percent purity—well beyond the limit allowed under the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action. Yet Iran’s economic fortunes are unlikely to improve. With its commitment to the deal beginning to waver, the coming months will be crucial in determining both Tehran’s nuclear status and its long-term relations with the West.

Since President Donald Trump withdrew from the JCPOA in May, the Islamic Republic has felt its economy wither as the U.S. re-imposed the sweeping sanctions that had been lifted under the deal. Its currency, the rial, has plummeted in value while inflation and the cost of living have soared. Iran’s oil exports, its primary source of revenue and hard currency, have plunged by more than 50 percent—a decline made more painful by a coinciding drop in oil prices. Under heavy U.S. pressure, the global financial messaging service SWIFT disconnected most major Iranian banks, further crippling Iran’s capability for foreign commerce.

Iran is now facing deep economic recession, along with resultant spikes in poverty and unemployment, despite its GDP being mere months ago projected to grow by an annual rate of around four percent. Already dealing with simmering social and political unrest, the Iranian regime has had to fight to stave off popular disaffection, stretching a budget less than half the size of last year’s to pay for additional outlays on internal security and the poor.

For their part, the JCPOA’s three European signatories, or E3—Germany, France, and the UK—have fought to preserve the accord by providing Iran with legalfinancial, and diplomatic backing. But while their efforts may have bought Tehran some symbolic and political support, they have largely failed to stop European firms from fleeing the Iranian market. For most sizable companies and banks, the risk of losing access to the U.S. market and financial system—coupled with the Trump administration’s demonstrated willingness to take punitive action against allies and enemies alike—far outweighs the value of their business in Iran.

Seeking to impose costs on Washington and pressure Europe to take stronger action, Tehran has ramped up its nuclear activity within the limits allowable under the JCPOA. Supreme Leader Ayatollah Ali Khamenei issued orders last year to expand Iran’s enrichment capacity, bolster its capability to manufacture advanced centrifuges, and resume production of nuclear feedstock (natural uranium hexafluoride, or UF6). Just last week, the Atomic Energy Organization of Iran shipped 30 tons of ‘yellowcake’ uranium to its primary enrichment facility, in Isfahan.

Still, Tehran’s reaction has so far been remarkable mostly for its restraint. Inspectors from the International Atomic Energy Agency, a nuclear watchdog, report that Iran continues to meet its obligations under the deal, including key restrictions on centrifuges and uranium enrichment. At least for now, Khamenei seems to think his best option is simply to wait Trump out—to hold the diplomatic high ground and avoid making an enemy out of Europe, while collecting the deal’s remaining benefits such as the impending removal of a UN arms embargo—on the bet that the upcoming U.S. presidential election will put a more amenable interlocutor in the Oval Office. 

But November 2020 is a long way off. Though the status quo may seem relatively stable, the possibility of its collapse cannot be ignored. Indeed, recent events suggest that Tehran’s patience may already be running thin.

In recent weeks, prominent Iranian officials and clerics have increasingly taken to public forums to trumpet their dissatisfaction with the JCPOA. Ranging from warnings that Tehran’s threats of withdrawal are “no bluff” to assertions that Europe has “missed its chance” to save the agreement, some of these messages represent attempts to induce stronger action from Europe and mollify restive domestic audiences. Others, however, are merely cynical ploys aimed at capitalizing politically or even killing the deal. 

Desperate to find their country an economic lifeline, and facing intense pressure from Iran’s hardline factions, President Hassan Rouhani and other pro-JCPOA Iranian officials have staked much on a long-promised EU plan to revive trade with Iran. The crux of this scheme hinges on a so-called “Special Purpose Vehicle”—essentially a clearing house designed to facilitate barter-like exchanges without using the dollar, thus theoretically avoiding exposure to U.S. sanctions. However, despite insisting for months that the SPV is just around the corner, Brussels’ promises have yet to materialize into tangible relief for Iran. 

With Tehran’s frustration threatening to boil over, the E3 rushed to announce last week that the trade-facilitation mechanism, officially dubbed the Instrument In Support Of Trade Exchanges, or INSTEX, was finally ready—only to add that it would take several more months to become operational. Even then, the mechanism’s impact will likely be modest. Few, if any, additional countries seem eager to join in. And as Iranian critics have pointed out, the vehicle will likely cover trade in only humanitarian goods already exempt from U.S. sanctions. Larger firms will be wary of using it for even exempted transactions—particularly given the difficulty of navigating the blacklisted government entities and other legal landmines which pervade even non-sanctioned sectors of the Iranian economy.

What’s more, recent evidence suggests EU preconditions may prevent INSTEX from even getting off the ground. A senior European diplomat said the E3 had a “strong expectation” that Iran would pass several Financial Action Task Force regulations that would theoretically limit Iran’s ability to support proxies forces such as Hezbollah. And according to Chief Justice of Iran Sadegh Larijani, the E3 has linked the mechanism’s operationalization to negotiations on Iran’s missile arsenal. While the former proposition enjoys limited Iranian support, the latter has been widely rejected by Iranian officials and clerics across the political spectrum. Larijani, a powerful regime figure, has flatly rejected both, declaring that “Iran will never accept [the EU’s] strange and humiliating conditions of joining the FATF and negotiations on its missile program.”

This episode points to a broader trend: Despite the EU’s determination to compartmentalize its policies toward Tehran’s nuclear and non-nuclear activity, growing friction between Europe and Iran could make that diplomatic balancing act difficult to maintain. Tehran’s destabilizing role in the Middle East, unlawful imprisonment of European citizens, and missile tests has long drawn Europe’s ire. In early January, revelations that Tehran had attempted to assassinate several Iranian dissidents on European soil prompted the EU to sanction the Iranian officials allegedly responsible—the bloc’s first such sanctions since signing the JCPOA and a palpable, if largely symbolic, shift in its relations with Tehran. Tensions have since escalated further, with European diplomats threatening additional sanctions over Iran’s missile tests and Tehran vowing to “reconsider relations with Europe” and abrogate the nuclear deal if sanctioned.

While the EU will not soon discard its dual-pronged policy on Iran, these mounting tensions could further inflame Iranian resentment of Europe’s lackluster response to U.S. sanctions, leading Tehran to employ more refractory diplomacy and push the boundaries on its nuclear program. This behavior could in turn impel Europe’s more hawkish capitals to take a tougher approach toward the Islamic Republic, creating a vicious cycle that ultimately undermines the European efforts to keep Iran in the JCPOA.

Enter the Trump administration. Seeking to galvanize international support for its “maximum pressure” strategy, the administration has organized an upcoming summit in Warsaw, Poland, with over 70 countries set to attend. Since the event’s announcement, EU foreign policy chief Federica Mogherini and U.S. Secretary of State Mike Pompeo have been locked in parallel diplomatic battles—the former seeking to keep Europe’s political consensus from unravelling, the latter trying to pull at the threads. As of right now, Mogherini stands to come out on top. But public opinion can change quickly. If Iran continues “shooting itself in the foot,” as one prominent German diplomat put it, then Pompeo may find more of his European counterparts willing to get tough on Tehran.

Finally, and most likely, Tehran’s attitudes toward Europe and the JCPOA may change along with its economic fortunes, which look set to worsen in the coming months. Panama will reportedly soon remove from its shipping registry some 60 Iran-linked vessels, further pressuring Iran’s oil exports. Likewise, Iran’s probable failure to meet the aforementioned FATF standards could trigger international countermeasures that limit or even ban transactions with Iran. Most significantly, the Trump administration still has plenty of room to make its sanctions tougher, for example by cancelling surprisingly generous sanctions waivers it granted in November to eight of Iran’s biggest oil customers.

These waivers expire in May, and the administration has promised to be stingy in handing out any extensions. If oil producers such as Saudi Arabia can compensate for the loss of Iranian supply—which they should be to, given their collective spare capacity and the current slack in the oil market—then the U.S. will likely tighten the noose even further. All the while, recent improvements in the technology used to track tankers on the high seas will make large-scale sanctions-evasion exceedingly difficult. In short, warns Ellie Geranmayeh, a senior fellow at the European Council on Foreign Relations, a strategy of restraint “may not be the position Iran is in six months from now.” Doubly so if Trump’s electoral prospects markedly improve.

Regardless of who or what drives the final nail in the JCPOA’s coffin, the fact remains that the deal may soon be dead. Ultimately, however, whether Tehran abrogates the deal or otherwise escalates against the West will be less important than how Washington responds should Tehran do so. If “maximum pressure” is to succeed in opening a pathway to renewed negotiations and a better deal, the U.S. must be prepared to deter and, if necessary, defeat potential Iranian escalation. But is the administration—particularly the ever-mercurial President Trump, whose aversion to foreign engagements is well known—prepared to put its money where its mouth is? One need look no further than Trump’s recent decision to withdraw from Syria to see that the answer to this question is far from certain.

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