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A staff member removes the Iranian flag from the stage after a group picture with foreign ministers and representatives of the P5+1 and Iran during the Iran nuclear talks in Vienna, Austria, 14 July 2015. REUTERS/Carlos Barria
Report 173 / Middle East & North Africa

Implementing the Iran Nuclear Deal: A Status Report

The one-year-old Iran nuclear deal has succeeded in its goal of blocking nuclear proliferation and opening the door to Iranian economic recovery. But it remains in jeopardy unless both Washington and Tehran defend and extend the spirit as well as the letter of the accord.

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Executive Summary

One year since its “implementation day”, 16 January 2016, the July 2015 nuclear agreement between Iran and the five permanent members of the UN Security Council plus Germany (the P5+1) – the Joint Comprehensive Plan of Action (JCPOA) – is both a success and in jeopardy. It has delivered so far on its narrow objective: effectively and verifiably blocking all potential pathways for Iran to race toward nuclear weapons, while opening the door to the country’s international rehabilitation and economic recovery. But in its transactional nature lies the accord’s vulnerability: it has not begun to transform the enmity between Iran and the U.S., leaving it exposed to an unstable political environment. If Iran still deems the deal in its national interest, it should not only adhere to its letter and spirit, but also move away from regional zero-sum pursuits. The Trump administration will face a starker choice. It could scuttle the deal, deliberately or by neglect; it should seek to make it stronger for all by a better-for-better bargain.

Over the past year, internal polarisation in Tehran and Washington about the accord’s merits often overshadowed what really matters: that it is working and delivering concrete results. It has put Iran’s nuclear program under the most stringent inspection mechanism ever implemented, while lengthening the breakout time to produce weapons-grade uranium from a few weeks to more than a year. Since January 2016, the International Atomic Energy Agency (IAEA) has verified six times that Iran has fulfilled its JCPOA obligations. The relaxation of U.S., European Union (EU) and UN nuclear-related sanctions has allowed Iran to regain oil market share, recover billions in frozen assets and attract foreign direct investment, turning its once shrinking economy into the region’s fastest growing.

Yet, implementation, as with any complex technical agreement, has not been flawless. Iran committed several technical violations, none, alone or together, material. Paradoxically, they proved the accord’s efficacy: the IAEA quickly detected each and Iran remedied it. There have been more serious problems with sanctions relief. Iran still lacks normal international banking ties, as major financial institutions remain circumspect, hampering its reintegration into the global economy and dashing inflated public expectations of rapid economic recovery.

The most consequential political wildcard remains the U.S. Congress, where hostility toward Iran runs deep, and new sanctions are being considered.

This is because of concerns over Iran’s regional resurgence and ballistic-missile tests, but the accord could not have been negotiated successfully if those issues had been on the table. Today they constitute the primary threat to its successful implementation. This, in turn, is because the JCPOA’s transformational potential has not yet materialised in the face of powerful stakeholders who moved to ensure it was a ceiling on, not a foundation for, détente between Iran, its neighbours and the U.S. The conundrum is that without addressing the broader political antagonism that pits Iran against its neighbours and the West, the JCPOA at best will remain fragile and its implementation halting, but without full implementation, resolving the underlying political antagonism may prove impossible. 

The most troubling uncertainty is the new U.S. administration’s approach. During the campaign, Donald Trump condemned the JCPOA as “the worst deal ever negotiated”. As president, he can repudiate it or refrain from the steps necessary to sustain it. But killing the accord or allowing it to die when Iran is in compliance would lead the other signatories – representing a near international consensus – to blame Washington squarely and likely destroy the broad coalition critical for sanctions enforcement that provided leverage for negotiating the accord in the first place.

Alternatively, Trump could rigorously police implementation while pushing back firmly against Iran’s regional policies, which have helped further inflame Middle Eastern conflicts, frightened U.S. allies and angered the U.S. political establishment. But scrupulous enforcement cuts both ways: lacklustre U.S. implementation would adversely affect Iran’s ability to reap the benefits the U.S. has committed to deliver under the deal. The risk of an overly militarised response to Iran’s regional manoeuvres is that the JCPOA could become collateral damage in a destructive tit-for-tat.

Trump could also try renegotiation to strengthen some of the deal’s nuclear provisions or add non-nuclear ones. But this, as viewed by many in his entourage, would require new non-nuclear sanctions to augment coercive pressure and/or a military threat to induce Iran to return to the table. Iran would almost certainly demand more relief for more concessions, not accept less for more.

Iran has options for responding to attempts to undermine the deal. It could play victim, blame Washington and hope to erode sanctions by trying to drive a wedge between the U.S. and its partners. But this would require restraint in the face of U.S. JCPOA violations or provocations. Or it could ramp up its nuclear program and reduce IAEA access or target U.S. assets in theatres across Iraq and Syria, any of which risks a U.S. (or Israeli) military response. Even a softer, calibrated response would reignite the nuclear standoff and complicate future negotiations.

Trump is the first U.S. president in more than two decades who enters office not needing to worry about Iran crossing the threshold to nuclear weaponisation undetected.

All these scenarios are troubling. Yet, there is another way: a good-faith, consensual, mutually beneficial effort to renegotiate aspects of the accord might achieve a better-for-better arrangement and a more stable outcome. A Republican president backed by a Republican-controlled Congress would have more credibility in offering incentives to Iran than President Barack Obama ever did.

Improving the JCPOA while enforcing it would require a quiet dialogue in which both sides recognised one another’s security concerns and core interests and communicated their nuclear and regional red lines. One outcome might be an addendum strengthening some JCPOA nuclear provisions or adding non-nuclear ones in return for rolling back the U.S. primary embargo. If that is not attainable, the U.S. might focus on non-Iran-specific arrangements, including regionalising or even universalising some of the JCPOA’s restrictions or transparency measures.

On a practical level, Washington should keep communication channels with Tehran open and give its treasury department more resources to unwind sanctions. Iran should strictly adhere to the JCPOA and stop using nuclear or regional brinksmanship as leverage. Other P5+1 members should discourage it from overreacting to a possible change in U.S. tone and approach but also clearly tell Washington that if it unjustifiably walks away from the accord, it will do so alone.

Trump is the first U.S. president in more than two decades who enters office not needing to worry about Iran crossing the threshold to nuclear weaponisation undetected. If he tries to adjust the JCPOA unilaterally through coercion, the accord may not survive, reigniting the nuclear crisis and compounding regional instability. But he also has a chance to succeed on all fronts: a functioning and more stable accord, a framework for managing differences with Iran and perhaps even less bloodshed in the Middle East.

Washington/Brussels, 16 January 2017

I. Introduction

The prolonged process that led to the 14 July 2015 Joint Comprehensive Plan of Action (JCPOA) was tortuous. It took more than a decade of diplomatic fits and starts and a perilous sanctions-vs-centrifuges race for Iran and the P5+1/E3+3 (the UN Security Council’s five permanent members plus Germany) to agree to a core compromise that Crisis Group had advocated from the outset and contributed to: acceptance of a limited and tightly monitored uranium enrichment program on Iran’s soil in return for reintegration into the global economy.[fn]See Crisis Group Middle East Reports N°s 18, Dealing with Iran’s Nuclear Program, 27 October 2003; 51, Iran: Is There a Way Out of the Nuclear Impasse?, 23 February 2006; 116, In Heavy Waters: Iran’s Nuclear Program, the Risk of War and Lessons from Turkey, 23 February 2012; 152, Iran and the P5+1: Solving the Nuclear Rubik’s Cube, 9 May 2014; and Briefings N°s 34, The P5+1, Iran and the Perils of Nuclear Brinkmanship, 15 June 2012; 40, Iran and the P5+1: Getting to “Yes”, 27 August 2014; and 43, Iran Nuclear Talks: The Fog Recedes, 10 December 2014.Hide Footnote

More than two years of gruelling multilateral diplomacy culminated in a meticulously parsed 159-page accord that received unanimous Security Council endorsement on 20 July 2015.[fn]UN Security Council Resolution 2231, 20 July 2015.Hide Footnote The agreement then went through a trial by fire in the U.S. Congress and the Iranian parliament. Once it emerged unscathed, it entered into force on 18 October 2015 – designated as Adoption Day per the JCPOA’s calendar. This triggered the start of Iran’s rollback of its nuclear program and cooperation in resolving the International Atomic Energy Agency’s (IAEA) longstanding questions 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. The quick progress surprised most observers and dismayed accord critics. Its Iranian detractors were concerned that President Hassan Rouhani’s eagerness for sanctions relief had led him to hasten rolling back the nuclear infrastructure, irreversibly damaging it and depriving Tehran of leverage to ensure that the West delivered its end of the bargain.[fn]The just under three-month time span between Adoption and Implementation Days was significantly less than the P5+1’s six-to-nine month estimates. Crisis Group interviews, U.S. and European officials, New York, September 2015. A letter to Rouhani by parliamentarians charging that the pace of centrifuge deactivation exceeded the supreme leader’s directive (which conditioned implementation on the IAEA settling allegations on Iran’s past nuclear activities) caused the government to temporarily stop the process. “Iran stops dismantling nuclear centrifuges under pressure from hardliners”, Reuters, 10 November 2015. The government justified the rush, implicitly confirming the accusation, by reiterating the $100 million daily cost of sanctions’ continuation for Iran. “ضرر تاخیر اجرای برجام” [“Damage of the JCPOA’s delayed implementation”], ISNA.ir, 21 September 2015. The February 2016 parliamentary election was also part of the calculus. Crisis Group Middle East Report N°166, Iran After the Nuclear Deal, 15 December 2015.Hide Footnote U.S. opponents were deeply dissatisfied with how the IAEA closed the file on allegations of the program’s past military dimensions, saying the JCPOA Joint Commission (the seven negotiating parties, coordinated by the EU) had made exemptions allowing Iran to skirt some obligations.[fn]See “Final Assessment on Past and Present Outstanding Issues regarding Iran’s Nuclear Program”, IAEA, GOV/2015/68, 2 December 2015, and the related Board of Governors resolution, GOV/2015/72, 15 December 2015. Leaks about the Joint Commission’s confidential decisions gave credence to these suspicions. David Albright and Andrea Stricker, “JCPOA Exemptions Revealed”, Institute for Science and International Security, 1 September 2016. The decisions exempted liquid, solid and sludge wastes, particularly those in pipes of Isfahan’s Enriched UO2 Powder Plant (EUPP), and irradiated uranium enriched to below 3.67 per cent, from the 300kg threshold the JCPOA set; near-20 per cent enriched uranium in unrecoverable “lab contaminant”; and nineteen “hot cells” (radiation containment chambers for handling radioactive material) that are larger than the deal permitted. “Decision of the Joint Commission”, EU External Action Service, 6 and 16 January, and 18 December 2016.Hide Footnote

The criticism missed the bigger picture. Speeding implementation accelerated the core trade-off that motivated the deal: unshackling Iran’s economy from sanctions while closing all potential pathways for weaponising its nuclear know-how. The decisions to grant exemptions, known as memorialisations, are standard for implementing a technically complex agreement; none impinged on the constraints that render nuclear weaponisation virtually impossible.[fn]For instance, plutonium produced in hot cells is neither sufficient nor usable for nuclear weapons without a reprocessing facility Iran lacks and is banned from constructing. The same applies to weaponising waste contaminated with low-enriched uranium needing further processing to highly-enriched uranium prohibited under the JCPOA. Julian Borger, “Obama administration denies secret loopholes in Iran nuclear agreement”, The Guardian, 1 September 2016.Hide Footnote Their confidential nature – likewise hardly exceptional in the non-proliferation field – was the result of the procedural requirement that all eight Joint Commission members approve publication of internal documents. Several refused: some out of concern for a political backlash over details of what critics on both sides viewed as additional concessions, and others not wishing to politicise the IAEA’s work.[fn]A senior U.S. official said, “the U.S. and the EU are for more transparency, but our hands are tied as Iran, Russia and China oppose publication of memorialisations”. Crisis Group interview, Washington, 13 September 2016. The documents are at https://eeas.europa.eu/headquarters/headquarters-homepage/2281/iran-and-eu_en. Tim Mak, “Trump team wants you to see the Iran nuke documents Obama’s kept from view”, The Daily Beast, 5 December 2016.Hide Footnote

Events have shown it was naïve to believe the JCPOA was secure and could be sustained routinely from that point. It remained as fragile as forces against it were formidable; implementing its technical requirements was taxing, especially where its language left room for diverging interpretations and disagreement; and restructuring a multi-dimensional sanctions regime that reached deep into global commerce proved a herculean challenge. This report analyses the one-year record of implementation, draws lessons and offers suggestions for improving and sustaining an accord that remains a net positive for non-proliferation.

II. So Far, so Good?

Controversy and concerns over issues outside the nuclear accord, mainly Iran’s growing regional posture and ballistic-missile tests, have often overshadowed that the JCPOA’s two key components – restricting and rigorously monitoring Iran’s nuclear program and sanctions relief – are working and delivering concrete results. The accord could not have been reached if those issues had been on the table, but today they are the primary threat to its successful implementation.

A. Nuclear Commitments

Since January 2016, the IAEA has verified on six separate occasions that Iran is fulfilling its JCPOA obligations.[fn]See “Verification and Monitoring in the Islamic Republic of Iran in light of United Nations Security Council Resolution 2231 (2015)”, GOV/INF/2016/1, 16 January 2016; GOV/2016/8, 26 February 2016; GOV/2016/23, 27 May 2016; GOV/2016/46, 8 September 2016; GOV/2016/55, 9 November 2016; and GOV/2017/1, 16 January 2017.Hide Footnote The agency has had no problem reaching sites to which Iran had previously blocked access; is using live, online enrichment monitoring systems; and is surveilling the nuclear fuel chain in real time. Noting that Iran’s is the most monitored nuclear program in the world, an IAEA inspector said, “one thing is indisputable; post-JCPOA we have more rigorous inspection of a program that has become much smaller”.[fn]According to IAEA officials, every month between six and sixteen UN nuclear inspectors are on the ground in Iran. Crisis Group interviews, Vienna, November 2016. The IAEA’s human resources dedicated to Iran increased by 120 per cent, while days on the ground grew by 100 per cent and surveillance images received per day increased by 90 per cent. IAEA fact sheet available at www.iaea.org/sites/default/files/jcpoa-iaea-and-iran-infographic.pdf.Hide Footnote That said, implementation has not been without imperfections, but these are attributable largely to the predictable difficulties such a technically complex effort faces in a highly charged political environment.

There have been numerous objections to the IAEA’s positive reports, but none amounts to proof of a violation of the deal.[fn]A former U.S. nuclear negotiator referred to these objections as “technical quibbles”. Crisis Group interview, New York, 27 September 2016.Hide Footnote One has to do not with what they contain but what they omit: details on Iran’s low-enriched uranium stockpiles and advanced-centrifuge research. The IAEA, however, has no mandate for publicly reporting on these issues. (The P5+1, however, receive a detailed, confidential report that covers these issues.) An agency official explained: “Before the JCPOA, six UN Security Council resolutions required the agency to provide that much detail, but these have been overridden by a new resolution that has no such requirement, and there is no basis for breaching confidentiality”.[fn]Crisis Group interview, IAEA official, Vienna, November 2016. Critics contend that lack of data made it impossible to determine Iran’s compliance independently. David Albright, Serena Kelleher-Vergantini, and Andrea Stricker, “IAEA’s First Post-Implementation Day Report: Key Information Missing”, Institute for Science and International Security, 26 February 2016. Iranians see the generalised format as a stepping stone towards normalising their nuclear program. Crisis Group interview, Iranian official, Vienna, November 2016.Hide Footnote

There were also several technical infringements. Iran’s heavy-water production exceeded the JCPOA’s 130-metric-ton cap twice – by 0.9 and 0.1 tons in February and November 2016 respectively. Iranian officials, trumpeting their country’s change of stature from pariah to nuclear materials supplier, contend that overproduction resulted from improved efficiency and did not violate the JCPOA, since it neither sets a rigid threshold – it estimates Iran’s needs at around 130 tons – nor a timetable for exporting the excess for sale.[fn]An Iranian official boasted of the high quality of Iran’s heavy water and its ability to take over 70 per cent of the international market. Crisis Group interview, Vienna, November 2016. The JCPOA’s language is quite vague; paragraph 14, Annex I, “estimates” Iran’s heavy-water needs to be 130 metric tons and requires all excess material to “be made available for export to the international market … and delivered to the international buyer for 15 years”Hide Footnote U.S. officials, however, say they saw it as a signal by Iran that it could retaliate against what it perceived as U.S. Treasury foot dragging on sanctions relief. Europeans agreed, but blamed Washington for encouraging the behaviour by being first to purchase Iran’s excess heavy water. In Jerusalem, this and other infringements were seen as attempts to test the deal’s boundaries.[fn]A European official said, “the U.S. committed the original sin by buying 32 tons of Iran’s heavy water at the price of $8.6 million, whetting their appetite”. Crisis Group interview, Brussels, November 2016. A senior U.S. official said, “we sought to destigmatise the issue so that others would buy as well”. Crisis Group interview, Washington, 13 September 2016. Iran also sold heavy water to Russia. “Iran sold 70 tons of heavy water to Russia, US”, Tass, 27 September 2016. An Israeli diplomat said, “the Iranians are testing the boundaries and will continue to do so. It’s a decision to defy”. Crisis Group interview, 4 January 2017.Hide Footnote

Paradoxically, these infringements are a testament to the agreement’s efficacy: in each case, excess heavy water was shipped to Oman within days, despite not posing a proliferation threat since Iran no longer has a functional heavy-water reactor. One should expect further episodes of this nature – not necessarily because of nefarious intent in Tehran or spurious accusations from Washington, but because the JCPOA’s language is not always clear. There are also ambiguities, for instance, around the definition of recoverable low-enriched uranium and procurement of material for manufacturing rotors used in advanced centrifuges. In the past year, these caused tension and lengthy negotiations among the parties.[fn]The issue of what should or not be counted toward Iran’s 300-kg low-enriched uranium has been contentious because, as an IAEA official put it, “unlike ‘inventory’ that includes everything, the word ‘stockpile’ used in the JCPOA needs definition of what is and is not counted”. Crisis Group interview, Vienna, November 2016. Iran’s demand to procure a large amount of carbon fibre used to manufacture centrifuges was equally contentious. The P5+1 indicated it preferred Iran do so in smaller instalments. Crisis Group interview, European officials, London, December 2016. “EU demands Iran disclose details of nuclear parts making”, Associated Press, 16 September 2016. Supreme Leader Ayatollah Ali Khamenei forbade Iranian negotiators from yielding on either issue. Khamenei.ir, 15 June 2016.Hide Footnote

Likewise, other aspects of the agreement, for instance foreign cooperation to advance Iran’s nuclear technology, have been more drawn out than Tehran had hoped. Yet here, too, there is no violation. Transformation of the bunkered Fordow enrichment plant into an international physics centre with Russian help, where 358 centrifuges will produce stable medical isotopes, has been slow; so has modernisation of the heavy-water reactor in Arak, a project China and the U.S. co-chair.[fn]Crisis Group interviews, Iranian and European officials, New York, September 2016.Hide Footnote While Iranian scientists have regained access to the IAEA’s nuclear safety and security workshops, nuclear cooperation with other countries has lagged, except for nuclear fusion with France, particle accelerators with Spain and Italy and nuclear safety with the EU.[fn]Nuclear cooperation, as outlined in JCPOA Annex III, is a key component of the accord. Richard Stone, “Iranian Sun”, Science, vol. 353, no. 6304 (2016), pp. 1083-1087. Iran has reached agreements with other countries, but they have yet to bear fruit. “Iran, Switzerland sign agreement on nuclear safety”, Press TV, 28 September 2016; “Iran, Czech Republic sign nuclear cooperation document”, Tehran Times, 14 December 2016.Hide Footnote

The JCPOA’s procurement channel for Iran to access dual-use material and equipment was activated in January 2016. The channel is unprecedented, complementing existing export control arrangements while largely delegating the UN Security Council’s authority to the Joint Commission’s procurement working group. In its first six months, it received only one application, but in the second half of 2016, after Iran established its internal procedural framework for end-use certification, it received and processed nearly a dozen.[fn]Barbara Slavin, “Channel to monitor Iranian procurement awaits real test”, Al-Monitor, 14 July 2016. States seeking to export dual-use items to Iran submit proposals to the Security Council, which forwards them to the Joint Commission’s procurement working group (all seven negotiating parties, coordinated by the EU) for review; the latter provides recommendations to the Security Council within twenty working days (up to 45 in case of disagreements), which has five days to reject the Commission’s verdict or it is deemed approved. An Iranian official noted: “After years of encouraging murkiness to skirt sanctions, it took time to put procedures in place for transparency”. Crisis Group interview, Vienna, November 2016. A German intelligence report on Tehran’s procurement gave ammunition to critics, though the activities occurred in 2015 and pre-dated JCPOA implementation. “Germany says Iran kept trying to get nuclear equipment after deal”, The Wall Street Journal, 8 July 2016. U.S. and European officials said they had no information on continued procurement efforts outside permitted channels in 2016. Crisis Group interviews, Washington, Berlin, London, August-December 2016.Hide Footnote

The biggest threat to smooth implementation and to the procurement channel in particular is the continuation of Iran’s ballistic missile program – a particularly sensitive issue that the JCPOA does not address. Iran deems missile research and development a sovereign right and legitimate form of defence, but the P5+1’s Western members do not. Security Council Resolution 2231, which endorsed the JCPOA, “calls upon” Iran not to undertake until 2023 any activity related to ballistic missiles “designed to be capable of delivering nuclear weapons”. However, the language is non-binding, and lack of an internationally-agreed definition of nuclear-capable missiles invites diverging views on the Iranian program.[fn]See paragraph 3 of Security Council Resolution 2231‘s Annex B. Louis Charbonneau, “U.S. vows to push for U.N. action on Iran despite Russian opposition”, Reuters, 14 March 2016. “Iran statement following UNSC Resolution 2231 endorsing JCPOA”, foreign ministry, 20 July 2015. According to the Missile Technology Control Regime (MTCR), missiles able to carry a 500kg payload at least 300km could carry weapons of mass destruction.Hide Footnote

B. Sanctions Relief Commitments

A vast array of U.S., EU and UN nuclear-related sanctions on Iran were relaxed on Implementation Day. In the ensuing months, the impact on Iran’s economic performance become increasingly tangible: oil production and exports returned to pre-sanction levels of 3.85 million barrels per day, of which around two million are exported; the country absorbed more than $11 billion of foreign direct investment – the highest annual level in nearly two decades; trade with the EU increased by 42 per cent; Iran regained access to $55 billion of previously frozen assets; inflation dropped from a peak of 45 per cent in 2013 to less than 8 per cent in December 2016; Iranian companies signed contracts worth $150 billion with major European, Asian and even U.S. firms. The International Monetary Fund (IMF) forecasts that the economy will grow 4.5 per cent during the 2016-2017 fiscal period, up from 0.5 per cent the previous year.[fn]Annex II, JCPOA; U.S. Executive Order 13716, 16 January 2016; Council Decision (CFSP) 2015/1863, 18 October 2015; Council Regulation (EU) 2015/1861, 18 October 2015; and UNSC Resolution 2231. “Iran oil exports hit pre-sanctions high on run-up in condensate shipments”, Reuters, 3 October 2016; “میزان سرمایه‌گذاری خارجی اعلام شد” [“Amount of foreign investment was announced”], ISNA.ir, 3 December 2016; “Inflation rate drops to 7.2% in Iran”, Tehran Times, 23 December 2016; Crisis Group interviews, Iranian entrepreneurs, Frankfurt, 16 November 2017. Regional Economic Outlook: Middle East and Central Asia”, IMF, October 2016.

Still, sanctions relief has yet to reach its potential. Perhaps most important, Iran still lacks normal international banking relations. While some second and third-tier international banks have resumed providing financial services, first-tier banks have not.[fn]Crisis Group interview, New York, September 2016. “Iran’s Supreme Leader says U.S. lifted sanctions only on paper”, Reuters, 27 April 2016; “Iran’s President Rouhani slams US ‘lack of compliance’ with nuclear deal”, CNN, 22 September 2016.Hide Footnote This has hampered reintegration into the global economy, which, along with low oil prices, has dashed highly-inflated public expectations of a rapid recovery. Each side has blamed the other. Iranian Foreign Minister Javad Zarif complained:

[The U.S. Treasury] goes out and tells people that “it’s OK to do business with Iran, but”… and then there are five pages of ifs and buts. So at the end of the day, the banks say, “we’ll take the safe road” … As far as the U.S. government is concerned … it took [it] seven months to issue licenses for seventeen out of the 118 planes Airbus plans to sell [to Iran].[fn]“A Conversation with Javad Zarif”, event at Council on Foreign Relations, New York, 23 September 2016. A senior U.S. official explained that preparing the licenses – given the technology’s complexity and legal requirements of ensuring they do not violate lingering UN restrictions on Iran – took a long time, as did Iran’s negotiations with Boeing and Airbus. Crisis Group interview, Washington, September 2016.Hide Footnote

This, as another senior Iranian official put it, is not a material breach of the deal, but “at best procrastination, at worst deliberate harassment” and has deepened mistrust. He added: “The JCPOA is moderately healthy, but Iranian confidence in dealing with the U.S. has been bruised and is ailing and failing”.[fn]“A Conversation with Javad Zarif”, event at Council on Foreign Relations, New York, 23 September 2016. A senior U.S. official explained that preparing the licenses – given the technology’s complexity and legal requirements of ensuring they do not violate lingering UN restrictions on Iran – took a long time, as did Iran’s negotiations with Boeing and Airbus. Crisis Group interview, Washington, September 2016.Hide Footnote

U.S. officials point to the unprecedented complexity of untangling the sanctions and to their extensive efforts, from publishing hundreds of pages of guidelines, to dozens of multi-agency trips to explain sanctions relief to Iran’s trading partners, to U.S. Secretary of State John Kerry’s efforts, including personally encouraging European banks to engage Iran.[fn]Crisis Group interviews, U.S. officials, Washington, September-December 2016. “Kerry: Businesses using US sanctions as excuse to avoid Iran”, Associated Press, 10 May 2016. For a critical take on Kerry’s initiative, see Stuart Levy, “Kerry’s peculiar message about Iran for European banks”, The Wall Street Journal, 12 May 2016. A senior Iranian official said, “the reality is that a junior officer at the U.S. Treasury Department could erect more obstacles for legitimate business with Iran than Kerry can remove”. Crisis Group interview, New York, 24 September 2016.Hide Footnote A senior U.S. official said:

Never before has the U.S. had to repeal its sanctions and demonstrate results in a short period of time. And, of course, unanticipated complexities abounded. Who would have thought converting billions of Iran’s unfrozen oil revenue from an uncommon currency like the Omani rial to euros would be so complicated without disrupting their economy and access to the U.S. dollar?[fn]Crisis Group interview, Washington, September 2016.Hide Footnote

The Europeans blame both sides. An EU official said:

U.S. Treasury officials are often as uncompromising as Iranians are unrealistic. The JCPOA isn’t a trade and investment agreement. Our commitment was to repeal sanctions and provide clarity, not to make commercial decisions for private-sector actors.[fn]Crisis Group interview, EU officials, Brussels, 15 November 2016.Hide Footnote

Finger-pointing notwithstanding, both sides have tried to resolve the remaining obstacles by frequent communication and consultation.[fn]Crisis Group interviews, Iranian, European, U.S. officials, New York, September 2016. The Joint Commission has met once at the ministerial level and six times at the deputy level.Hide Footnote Yet, reality is more nuanced than either likes to admit; the causes of sluggish relief are manifold.

The primary U.S. embargo, which since the 1980s has broadly prohibited U.S. persons from engaging in transactions with Iran, is still in force with a few exceptions, such as for civilian aviation, food and humanitarian goods, Iranian caviar, pistachios and carpets; so are secondary U.S. sanctions related to Iran’s regional policies, ballistic missiles program and human rights record.[fn]For more background, see Crisis Group Middle East Report N°138, Spider Web: The Making and Unmaking of Iran Sanctions, 25 February 2013. One of the most arduous elements of U.S. primary sanctions has proven to be their requirement that multinational companies wall off their U.S. staff and board members from business with Iran. Crisis Group interviews, European entrepreneurs, Zürich, Frankfurt, London, September-November 2016. “BP ring-fences CEO Dudley from Iran decision-making”, Reuters, 21 November 2016.Hide Footnote Moreover, 32 U.S. states and the District of Columbia maintain their own sanctions against Iran that target contracting, public trust and insurance divestment and banking.[fn]These have not been affected by the JCPOA, since as an executive agreement – unlike a ratified treaty – it is not binding for U.S states. Eli Lake, “Obama administration urges states to lift sanctions on Iran”, Bloomberg, 18 April 2016.Hide Footnote There are also sanctions of individuals and entities: of the 600 sanctioned pre-JCPOA, more than 200, including ones with links to the economically omnipresent Islamic Revolutionary Guard Corps, remain blacklisted by the treasury department’s Office of Foreign Assets Control (OFAC).

Navigating this complex web of residual sanctions within Iran’s opaque economy is difficult. Due diligence is costly and cumbersome, and its standard is ill-defined, adversely affecting businesses’ risk-reward calculus of trying to comply while operating within the Iranian economy’s opaque ownership structure. The costs are not theoretical: since 2004, the U.S. has levied more than $15 billion in fines for violations.[fn]Businesses often find OFAC guidelines legalistic and vague. In October 2016, it issued one noting that business dealing with an entity not blacklisted but “minority owned, or controlled in whole or in part” by a blacklisted Iranian “is not necessarily sanctionable for a non-U.S. person”. See M.10 in “Frequently asked questions relating to the lifting of certain U.S. sanctions under the JCPOA”, U.S. treasury department, 12 October 2016. John Smith, OFAC’s acting director, said, “we will not be playing ‘gotcha’ for companies that conducted the appropriate due diligence, collected the documentation, but unwittingly found themselves dealing with a Revolutionary Guards front company”. Atlantic Council, Washington, 16 June 2016.Hide Footnote  

One of the most challenging sanctions bans access to the U.S. financial system. There have been various work-around attempts: OFAC clarifications (as abstruse as the restriction is severe); Iran’s efforts to circumvent by denominating its trade in other currencies; symbolically significant deals like Boeing’s sale of 80 civilian aircrafts – the largest Iran-U.S. contract in 37 years that both sides hoped would have a snowball effect. None did much to resolve the problem.[fn]A senior U.S. official said, “no one wants to be the first to take a leap of faith, but many are keen to be the second or third big bank to return to Iran”. Crisis Group interview, Washington, September 2016. Both Boeing and Airbus agreements, however, are financed by a consortium of large financial institutions and denominated in euros. Crisis Group interviews, European officials, Berlin, London, November 2016. “Boeing-Iran deal for $16.6 Billion of jets is first since 1979”, Bloomberg, 11 December 2016. “Total to finance Iran project with euros to avoid U.S. sanctions”, The Wall Street Journal, 8 November 2016. Republican opposition prevented the Obama administration from easing this restriction during and after the negotiations. “Rubio, Kirk introduce bill to block Iran’s access to US money”, The Hill, 6 April 2016. In October, OFAC explained that non-U.S. financial institutions may process dollar transactions provided they “do not involve, directly or indirectly, the U.S. financial system”. This implies banks can only use dollars at hand, ruling out financing for large development and infrastructure projects.Hide Footnote

No less chilling for investment – particularly since Donald Trump won the U.S. presidential election — is the threat of reimposition of sanctions suspended under the JCPOA. Unilateral U.S. sanctions can be resumed by executive order; a snapback mechanism embedded in the accord can reinstate UN sanctions if one party contends that Iran has reneged on its commitments. These would not be reapplied retroactively, but the eventuality increases the risk and potential reputational costs of doing business with Iran.[fn]Per JCPOA paragraphs 36-37, any agreement participant can complain to the Joint Commission, which has fifteen days to resolve the issue; an unresolved issue is referred to the foreign ministers, who have another fifteen days. The Joint Commission then has another five days to resolve the issue. If, after this 35-day process, the complaining party is still unsatisfied, it can refer the issue as significant non-performance to the Security Council, which within 30 days must vote on a resolution to continue suspension of sanctions – a resolution the complaining party can veto (except Germany, not a permanent Council member), thus snapping back the sanctions. European officials complained OFAC remains inflexible on extending the standard 180-day grace period for foreign firms to wind down business in Iran in case of snapback. A U.S. official said, “whoever needs more time has to explain it to OFAC, and it will consider it”. Crisis Group interviews, Berlin, Washington, November-December 2016.Hide Footnote

The Iranian government, for its part, failed to pave the institutional ground adequately for the economic opening, while raising unrealistic expectations about the deal’s potential payoff in order to build support for it. With rampant corruption, lack of transparency, poor infrastructure and a cumbersome legal and regulatory environment, Iran remains a difficult place to do business.[fn]Iran is 130th of 168 countries in Transparency International‘s corruption perceptions index, 120th of 190 in the World Bank‘s 2016 ease of doing business index, and 76th of 138 in the World Economic Forum‘s Global Competitiveness Report 2016–17. In its first quarterly report to parliament on JCPOA implementation, Iran’s foreign ministry admitted to these problems impeding trade. “گزارش وزارت امور خارجه به مجلس درباره اجرای برجام” [“Foreign Ministry’s report to the Parliament”], MFA.ir, Fars News, 17 April 2016. A European oil executive said, “many developing countries are plagued with similar problems, but in the case of Iran perception is worse than reality”. Crisis Group interview, London, August 2016.Hide Footnote The banking sector, saddled with many non-performing loans, is considered high-risk by the international Financial Action Task Force (FATF), which sets anti-money laundering and counter-terrorist financing standards for financial institutions worldwide.[fn]FATF has suspended countermeasures against Iran until June 2017 to allow time to update financial regulations, comply with modern banking standards and address strategic deficiencies. FATF Public Statement, 24 June 2016. An Iranian Central Bank official complained that “the West isolated Iranian banks for a decade and now asks why we aren’t up to date. If they can’t take our hand, they should at least unchain our feet”. Crisis Group interview, Washington, October 2016. Cooperation with FATF became highly politicised inside Iran, as JCPOA opponents saw it as yet another concession to the West. Saheb Sadeghi, “Financial watchdog worries Iranian hard-liners”, Al-Monitor, 28 September 2016.Hide Footnote

Volatile politics in Washington and Tehran add to business unease. The election of Trump, a vocal JCPOA critic, and doubts, given the sluggish economic recovery and death of his mentor, former President Akbar Hashemi Rafsanjani, about Rouhani’s ability to obtain a second mandate in Iran’s May 2017 presidential poll deepen uncertainties. Infighting in Tehran over economic priorities and vested interests has complicated and slowed economic reform.[fn]The quarrel over a new contract for oil-sector investments, the Iran Petroleum Contract (IPC), is a case in point. It was delayed more than two years, until the first was awarded to state-affiliated entrenched interests. Yeganeh Torbati, “Iran signs key oil contract with Khamenei-linked firm”, Reuters, 4 October 2016; “Shell signs provisional oil and gas deal with Iran”, Financial Times, 7 December 2016.Hide Footnote The most consequential political wildcard remains the U.S. Congress, which continues to try to impose new sanctions.[fn]In 2016, Congress considered more than two dozen bills that could potentially undermine the accord. Among the first bills introduced in the 115th Congress, sworn in on 3 January 2017, were two on Iran: to authorise the president to use military force against it; and to levy sanctions against its missile program. Per JCPOA paragraph 26, “the U.S. Administration, acting consistent with the respective roles of the President and the Congress, will refrain from re-introducing or re-imposing the sanctions specified in Annex II that it has ceased applying under this JCPOA, without prejudice to the dispute resolution process provided for under this JCPOA … and will refrain from imposing new nuclear-related sanctions”.Hide Footnote Tehran’s response has been what a senior Iranian official called a “zero-tolerance policy” toward any new measures.

Tensions reached their height with the ten-year renewal of the Iran Sanctions Act (ISA), the bedrock of U.S. sanctions architecture, in November. Iran deemed it a “gross violation” of the JCPOA; the Obama administration viewed it as unnecessary, since re-imposing sanctions in case of violations does not require the ISA to be in force, but Congress acted with an overwhelming majority. President Obama allowed the legislation to take effect without his signature on 15 December, though his rare procedural protest did not win him points in Tehran.[fn]The administration blocked efforts to add poison pills. The renewal passed 99-0 in the Senate and 419-1 in the House of Representatives. This was the first time in 27 years that a bill was enacted without the president’s signature. Carole Morello, “Iran sanctions extended, but without Obama’s signature”, The Washington Post, 15 December 2015. As during the 2014-2015 negotiations, when the parties could not agree on the ISA extension, they agreed to mitigate the issue once it arose. Crisis Group interviews, Iranian and U.S. officials, Vienna, June 2015.Hide Footnote Rouhani in response ordered planning for design and construction of a nuclear propeller for marine transportation. That was carefully calibrated to satisfy domestic politics and signal discontent to Washington, while remaining within the bounds of the accord, which permits such research if it remains on the drawing board.[fn]“Blasting U.S. nuke-deal ‘violations’, Iran vows new nuclear project”, Associated Press, 13 December 2016. An official from Iran’s atomic energy organisation said that developing nuclear propellers would take years and is uneconomic. Quoted in “برگزاری کمیسون برجام 21 دی” [“Joint Commission will meet on 10 January”], ISNA.ir, 20 December 2016.Hide Footnote

Posturing aside, the ISA extension leaves the status quo unaltered as long as the president continues to waive the provisions the JCPOA suspended. Still, a series of tit-for-tats could lead to mutual escalation that spirals out of control.[fn]Addressing Zarif’s complaint about the ISA’s extension, the Joint Commission concluded that it does not affect Iran’s ability to benefit from sanctions relief as long as the suspension of relevant provisions continues. “Press release on behalf of the Joint Commission of the JCPOA”, EU External Action Service, 10 January 2017.Hide Footnote

C. Transactional, not Transformational

JCPOA ambiguities and technical implementation hitches in both the nuclear and sanctions realms become outsized political storms because the deal has done little to alleviate Iran-U.S. animosity. To ensure success, the parties negotiated it as a narrow arms-control accord not to usher in broader détente or collaboration in areas of shared concern, though some had hoped (or feared) that it would.

In both Tehran and Washington, powerful stakeholders moved to ensure the nuclear deal was a ceiling on, not a foundation for, rapprochement. Iranian provocations have included ballistic-missile tests, harassment of U.S. Navy ships in the Persian Gulf, alleged arms shipments to Huthi rebels in Yemen, arrest of dual Iranian-American nationals and hostile rhetoric toward the U.S. and its allies.[fn]A conservative Iranian parliamentarian explained: “If you were in the shoes of Ayatollah Khamenei and listened to U.S. officials boasting about how sanctions brought Iran to the table, would you move to make more compromises? No. You first demonstrate that you did not compromise from a position of weakness”. Crisis Group interview, Tehran, May 2016. “Reports: Iran fires missile marked with ‘Israel should be wiped’”, USA Today, 8 March 2016; “Iran’s Khamenei says U.S., ‘evil’ Britain can’t be trusted”, Reuters, 3 June 2016; “Americans sentenced to 10 years in Iranian prison”, CNN, 18 October 2016; “U.S. Navy says it seized weapons from Iran likely bound for Houthis in Yemen”, Reuters, 4 April 2016. Paragraph 5, Annex B, Security Council Resolution 2231, extended the conventional-arms embargo on Iran until 2020. The U.S. Navy contends it had 35 dangerous encounters with Iranian Revolutionary Guards patrol boats in 2016, compared to 23 in 2015. Whether the naval tangles in the Gulf were in Iranian or international waters is disputed. Dan Lamothe, “Navy destroyer opens fire after ‘harassing’ behaviour by Iranian patrol boats”, The Washington Post, 9 January 2017.Hide Footnote

Congress has evinced its own hostility and seems determined to derail any détente, as well as the JCPOA itself, through its own provocations. It lifted the U.S. visa exemption for citizens of 38 countries who had visited Iran (or Syria, Iraq and Sudan) since 2011, a move Iran deemed contrary to the JCPOA’s spirit, as it affected its tourism and business ties with Europe. Congress also manoeuvred the administration into sanctioning eleven Iranians and entities involved in ballistic-missile launches just a day after Implementation Day.[fn]“Iran warns Obama over visa waiver restrictions”, The Hill, 21 December 2015. The provision was attached to the $1.1 trillion federal spending bill at the last minute, making veto impossible. Crisis Group interview, U.S. official, Washington December 2015. “Treasury sanctions those involved in ballistic missile procurement for Iran”, Treasury Department, 17 January 2016.Hide Footnote A Supreme Court decision to compensate U.S. victims of overseas attacks with $2 billion of the Iranian central bank’s impounded assets further enraged the Iranian leadership.[fn]Rick Gladstone, “Iran threatens lawsuit in Hague court Over U.S. ruling on $2 billion”, The New York Times, 25 April 2106.Hide Footnote

This highlights a significant conundrum: not addressing broader disagreements makes the JCPOA fragile and implementation problematic, but without full implementation, resolving underlying antagonism is impossible. The dilemma is nowhere felt as strongly as in the linkage between nuclear and non-nuclear issues, which already complicates sanctions relief; the accord’s U.S. opponents are bound to play on this distinction, penalising Iran’s regional and domestic policies, which the JCPOA does not bar, to undermine the JCPOA itself.[fn]Indira Lakshmanan, “Inside the plan to undo the Iran nuclear deal”, Politico, 15 July 2016.Hide Footnote

Without improvements in Iran’s relations with the U.S. and its neighbours, the accord could eventually collapse even if it endures in the short term. A danger point could come when in 2023-2024, per the JCPOA calendar, Iran starts expanding its nuclear capacity in parallel to the U.S. permanently winding down its nuclear-related sanctions.[fn]In October 2023, per paragraphs 21.1-21.3 of JCPOA Annex V, the U.S. administration will seek appropriate legislative action to terminate statutory nuclear-related sanctions (eg, ISA). Six months later, per paragraph 63, Annex I, and Iran’s research and development plan, Iran will be permitted to test up to 30 IR-6s and 30 IR-8s (five to fifteen times more powerful than its existing IR-1 centrifuges) and produce up to 200 machines per year of each type for the next six and a half years. George Jahn, “Iran nuclear constraints to ease in about a decade, secret document reveals”, Associated Press, 18 July 2016. While caps on the uranium stockpile and enrichment level will continue until 2030, the ramping up of nuclear capability is bound to unsettle sceptics.Hide Footnote The immediate challenge, however, is the Trump presidency.

III. If it Ain’t Broke, Don’t Fix it

The most troubling uncertainty about the JCPOA’s future is the new U.S. administration’s approach. During the campaign, Trump condemned the accord as fundamentally flawed, calling it “horrible”. But it is not clear how he will act. His appointees have voiced conflicting views. Though they share antipathy toward Iran and the JCPOA, his national security adviser designate, Lt. General (ret.) Michael Flynn, has said he believes “regime change in Tehran is the best way to stop the Iranian nuclear weapons program”; his CIA director designate, Mike Pompeo, looks forward to “rolling back this disastrous deal”; while his candidate for secretary of state, Rex Tillerson, has promised a “full review”, and his defence secretary designate, former four-star General James Mattis, said that “there is no going back” on the accord.[fn]“Michael Flynn’s Testimony on Iran”, Joint House Foreign Affairs and Arms Services Subcommittees, U.S. Congress, 10 June 2015; “Mike Pompeo’s Iran file”, The Wall Street Journal, 21 November 2016; Rex Tillerson confirmation hearing, Senate Foreign Relations Committee, 11 January 2017; Ilan Goldenberg, “How James Mattis could stop Trump from ripping up the Iran Nuclear Deal”, Fortune, 17 December 2016.Hide Footnote

Washington’s P5+1 partners, who are highly satisfied with the agreement’s implementation so far, have weighed in forcefully in its support. EU foreign policy chief Federica Mogherini suggested a unilateral U.S. effort to scuttle the deal could put it on the opposite side of the EU, as well as Russia, which has warned that the accord’s demise would be “unforgivable”. China has said the deal should not be affected by “changes in the domestic situations” of countries involved.[fn]Mogherini said, “case by case, you will find issues where I wouldn’t be surprised to see the Europeans and the Russians on the same side — Iran deal, Middle East peace process, possibly the role of the U.N”, quoted in Laurence Norman and Julian E. Barnes, “Top EU diplomat, says bloc is Ppepared for Trump”, The Wall Street Journal, 14 December 2016; “Council conclusions on Iran”, European Council, 14 November 2016; “Russia says loss of Iran nuclear deal would be unforgivable”, Interfax, 15 December 2016. “China warns Trump: Iran nuclear deal must stand”, Agence France-Presse, 5 December 2016.Hide Footnote

Even some regional critics appear loath to see it scrapped. Saudi Prince Turki al-Faisal, a former senior official, warned that doing so “willy-nilly, as it were, will have ramifications”.[fn]“Senior Saudi prince says Trump shouldn’t scrap Iran deal”, Reuters, 11 November 2016. The Saudis sent a delegation to advise the Trump team shortly after his election to keep and strictly enforce the JCPOA. Crisis Group interview, European diplomat, Abu Dhabi, December 2016.Hide Footnote Prime Minister Benjamin Netanyahu of Israel, perhaps the deal’s most vocal opponent, still appears keen on scuttling it, but Israel’s military and security establishment favour its preservation. An Israeli intelligence official said that even in the Trump era, “various parts of the Israeli government deem the JCPOA as a done deal and want to focus on its rigorous implementation”.[fn]Crisis Group interview, Jerusalem, November 2016. “Netanyahu aims to discuss ‘various ways’ to undo Iran deal with Trump”, The Guardian, 12 December 2016; Graham Allison, “Is Iran still Israel’s top threat?”, Atlantic, 8 March 2016; “Israel’s Policies After the Iran Deal”, The Iran Primer, U.S. Institute of Peace, 19 September 2016. An Israeli diplomat in Europe said its official position is the deal should be kept but rigorously enforced. Crisis Group interview, 5 January 2017.Hide Footnote

While it is too soon to judge the next U.S. administration, its opposition to the JCPOA appears to stem less from the implementation record than its narrow focus: it is a non-proliferation deal that temporarily restricts an adversary’s nuclear program but has legitimised it and empowered the country to pursue what many view as a push for regional domination. Trump has several options:

  • Repudiate the deal or refrain from taking the affirmative steps necessary to sustain it, eg, renewing the waivers every 120 or 180 days that suspend nuclear-related U.S. sanctions.[fn]The Obama administration aimed to issue final waivers on or slightly before inauguration day (20 January 2017), so the incoming Trump administration would have at least around four months for a considered decision. Crisis Group interview, U.S. official, Washington, 9 December 2016. This also postpones the matter until after Iran’s 19 May presidential election.Hide Footnote He could snap back the unilateral U.S. sanctions with a stroke of the pen or even unilaterally reimpose UN sanctions, notwithstanding the JCPOA’s dispute resolution mechanism, likely opposition in the P5+1 and absence of a legitimate basis for redesignating Iran a threat to international peace after closure of the dossier on its nuclear program’s past military dimensions.

But abrogating the accord when Iran complies with it, even some Republican critics have warned, would lead the international community to squarely blame the U.S., thus eroding, if not completely unravelling, the broad coalition critical for enforcing sanctions that provided leverage for negotiating the accord in the first place.[fn]Republican Senator Bob Corker, chairman of the Senate Foreign Relations Committee and a prominent critic of the deal, said, “we gave up ... all of our leverage on the front end when we gave away the moneys that were stashed in various countries around the world, and so now the leverage is with them. I think the beginning point is for us to cause them to strictly adhere [to the deal] … we have to keep the Europeans and others with us in this process”. Quoted in Nahal Toosi, “Iran deal critics to Trump: Please don’t rip it up”, Politico, 16 November 2016.Hide Footnote This would likely put the U.S. in a weaker position to renegotiate the deal or reshape Iran’s regional and domestic policies. Brazen unilateralism also could weaken both the centrality of the U.S. financial system to the global economy, if other states organise to work around it, and the effectiveness of sanctions as a tool of its statecraft, if U.S. adversaries conclude Washington habitually shifts the goalposts for their lifting.

  • Rigorously police the deal and in parallel push back firmly against Iran’s regional policies. This could take two forms. Trump could seek to maintain the deal so long as Iranian compliance remains scrupulous in letter and spirit. If he pursues this path, he would need in parallel to ensure U.S. compliance; the deal’s upkeep requires Washington’s constant good-faith, pro-active management: granting licenses in a timely fashion to allow legitimate business with Iran, issuing guidelines to clarify sanctions relief ambiguities, providing assistance in modernising Iran’s Arak heavy-water reactor and shielding the accord from external pressures, particularly attempts by Congress to obstruct implementation.[fn]Congress tried repeatedly, for example, to block the sale of civilian aircraft to Iran contrary to Paragraph 5.1.1 of the JCPOA’s Annex II. “U.S. House votes to stop sales of Boeing jetliners to Iran”, Bloomberg, 17 November 2016.Hide Footnote Alternatively, the administration could carefully police Iran’s compliance while neglecting its own commitments, eg, by giving Congress a free hand to impose more sanctions or delay granting OFAC licenses, in the hope of provoking Iran to abrogate the deal, thereby avoiding some global blame and loss of leverage.

Regardless of whether the U.S. implements the pact in good faith or not, the risk of an overly militarised, unilateral approach toward Iran’s regional manoeuvres and/or provocations is that the JCPOA could become collateral damage in a tit-for-tat spiral. If the new administration hopes to kill the deal by a thousand cuts, it would need to be sustained long enough for those cuts to be inflicted. However, tactical decisions – such as interdicting illegal arms shipments or targeting Revolutionary Guards commanders and Iranian proxies in Iraq or Syria – could invite Iranian retaliation with rapid consequences. A U.S. official fretted: “Do you think the deal could survive a confrontation between Iranian and U.S. navies or the detention of U.S. sailors in the Persian Gulf? I’m not so sure”.[fn]Crisis Group interview, Washington, 14 December 2016.Hide Footnote

  • Renegotiate the deal to strengthen some of the nuclear-related provisions or add non-nuclear ones. Most sceptics seem to prefer this option, which in their view requires new non-nuclear sanctions to incrementally augment coercive pressure and/or a credible military threat to induce Iran to return to the negotiating table.[fn]Trump wrote: “A Trump presidency will force the Iranians back to the bargaining table to make a much better deal”. Donald Trump, “Amateur hour with the Iran nuclear deal”, USA Today, 8 September 2015. Joseph Lieberman and Mark D. Wallace, “How Trump should renegotiate the Iran deal”, The Washington Post, 6 December 2016; Dennis Ross and David Petraeus, “How to put some teeth into the nuclear deal with Iran”, The Washington Post, 25 August 2015; Michael Makovsky, “Five ways for Trump to put Tehran on notice”, The Wall Street Journal, 3 January 2017.Hide Footnote The challenge of devising new sanctions that are consistent with U.S. commitments under the JCPOA notwithstanding, this approach could harm Iran’s economy, as a prominent sanctions advocate put it, if simply “by increasing uncertainty in the marketplace”, prompting Tehran to take retaliatory measures of its own.[fn]“Trump team looks at new non-nuclear sanctions on Iran”, Financial Times, 2 December 2016. Identifying non-nuclear sanctions will not be easy, as nuclear-related sanctions targeted all the economy’s key sectors, and reimposition under a new guise would violate the JCPOA. The U.S. should, per JCPOA paragraph 29, “refrain from any policy specifically intended to directly and adversely affect the normalisation of trade and economic relations with Iran”, and according to Paragraph 33, “agree on steps to ensure Iran’s access in areas of trade, technology, finance and energy”. In his directive approving the JCPOA, Ayatollah Khamenei wrote: “Throughout the [accord’s] eight-year term, imposition of any sanctions at any level, under any pretext will be violation of the JCPOA”. Khamenei.ir, 21 October 2015.Hide Footnote

A senior Iranian official said Ayatollah Khamenei may have opened the door to this by criticising his negotiators for overlooking important details related to sanctions relief by negotiating in haste.[fn]Crisis Group interview, Berlin, November 2016. “دیدار فرماندهان نیروی دریایی ارتش با رهبر انقلاب” [“Supreme Leader meeting army, navy commanders”], Khamenei.ir, 27 November 2016.Hide Footnote But this criticism does not augur well for securing additional Iranian concessions: even if Iran were to agree to renegotiate, it would almost certainly demand more relief in exchange for more concessions, not accept less for more, especially given its discontent with sanctions relief under the JCPOA. The prospect of an Iranian leader acceding, even under duress, to terms significantly more favourable to the U.S. strains credulity and ignores the lessons of the decade-long nuclear standoff and the realities of Iranian politics.

Iran, whose leaders appear highly invested in the JCPOA for now, has several options to respond to an attempt to undermine the agreement:

  • Play the victim and shift blame to Washington in the hope of driving a wedge between the U.S. and its partners and eroding, if not neutralising, sanctions.[fn]Hamid Aboutalebi, Rouhani’s chief foreign policy adviser, tweeted: “If the JCPOA is a multilateral commitment, its breach by one party cannot be retaliated by another party’s breach. Any violation is an act against all signatories … who should move in unison to isolate the violator”. Tweet by Hamid Aboutalebi, @DrAboutalebi, chief foreign policy adviser, 7:11am, 2 December 2016.Hide Footnote A U.S. official pointed out: “The Iranians are good at this. They even played victim when the highly controversial [Mahmoud] Ahmadinejad was president, and Iran was a nuclear pariah”.[fn]Crisis Group interview, Washington, 14 December 2016. The same is true regarding Iranian reactions to ramped-up regional pressure: if Tehran reacts aggressively to U.S. provocations and precipitates the deal’s collapse, it likely will sacrifice the victim card.Hide Footnote Isolating Washington would require restraint in reacting to real or perceived U.S. violations of the JCPOA.[fn]An EU official said, “If Iran revives its nuclear activities or even tinkers around the JCPOA’s edges, we will be between a rock and a hard place”. Crisis Group interview, Brussels, 14 November 2016.Hide Footnote If abiding by the deal and playing victim seem to reinforce Iran’s position globally, those who advocate doing so might be strengthened internally.
     
  • Resuscitate the nuclear program. The Iranian parliament has mandated the government to ratchet up uranium enrichment and reduce cooperation with UN inspectors should the U.S. renege on the accord.[fn]The law instructs the government to halt voluntary cooperation with the IAEA and rapidly expand the nuclear program so that “within two years the country’s uranium enrichment capacity increases to 190,000 SWU [Separation Work Units, amounting to ten times Iran’s pre-JCPOA capacity]”. “Law on the Proportional and Reciprocal Measures of … Iran in Implementing the JCPOA”, Library of Congress, 15 October 2015. Decisions on Iran’s appropriate response, however, are in practice taken not by parliament but by the Committee for Supervision of the JCPOA’s implementation, headed by Rouhani and including Foreign Minister Zarif, Ali Larijani, speaker of the parliament and former nuclear negotiator, Hossein Dehghan, defence minister, Ali Shamkhani, secretary of the supreme national security council, Ali Akbar Salehi, head of Iran’s atomic energy organisation, Saeed Jalili, former nuclear negotiator, and Ali Akbar Velayati, the supreme leader’s chief foreign policy adviser.Hide Footnote The leadership has also put itself in a rhetorical corner by pledging to revive the nuclear program should the other side renege.[fn]Ayatollah Khamenei said, “the Islamic Republic won’t be the first to violate the nuclear deal … But if the threat from the American presidential candidates to tear up the deal becomes operational, then the Islamic Republic will set it on fire”, Khamenei.ir, 14 June 2016.Hide Footnote If it does so with more advanced centrifuges, it could restore its uranium enrichment capacity rapidly, which might prompt a nuclear-arms race in the region and/or in the extreme provide the rationale some regime-change advocates have been looking for to justify a U.S. or Israeli military strike.[fn]An IAEA official said that Iran could reach a “highly problematic” enrichment capacity within six months. Crisis Group interview, Vienna, November 2016.Hide Footnote To prevent this, Tehran might escalate gradually, creeping past some limits. This would conform to its previous strategy; but even a softer, calibrated response would reignite the nuclear standoff and complicate future talks.
     
  • Retaliate regionally. Proximity of U.S. to Iranian forces in several theatres across Iraq and Syria could provide another option for retaliation: increasing force protection costs for the U.S.[fn]Crisis Group interviews, U.S. officials, Washington, December 2016.Hide Footnote Rising tensions could also push Iran to double down on means of deterrence it considers essential to its national security: its ballistic missile program and what it calls its “forward defence policy” of empowering regional partners in Baghdad, Damascus and Beirut. This would undoubtedly provide ammunition for those in Washington who seek to bring more pressure to bear against Tehran, triggering escalation.

The above scenarios – individually or in combination – are troubling, especially as the JCPOA is delivering results. Any attempt by the Trump administration to undercut the deal in the hope of “fixing” it is likely to backfire. A senior Obama official said, “the paradox is that if he tries to strengthen the deal to 120 per cent of what it is, he might end up eroding it to 60 per cent”.[fn]Crisis Group interview, Washington, 14 December 2016.Hide Footnote Moreover, by destabilising the JCPOA, the new administration could usher in what it says it seeks to prevent: greater Iranian assertiveness, more regional instability and lower odds of resolving the conflicts in Syria, Iraq and Yemen – places where Iran is part of the problem and thus ought to be part of the solution.

IV. Sustaining and Improving the JCPOA

Like any negotiated outcome, the JCPOA is imperfect. Its implementation, too, has not been immaculate. Yet, the biggest threat to it is not procedural but political: the first major transfer of power in one of the countries that negotiated it has introduced a destabilising level of uncertainty. If the Trump administration decides to preserve the JCPOA while strictly enforcing and rigorously monitoring its implementation, it should do all that is necessary for its upkeep: from abiding by the letter and spirit of U.S. obligations – including ensuring that Iran is able to reap the economic dividends the deal entitles it to – to fencing it off, to the extent possible, from other disagreements with Tehran.[fn]Per JCPOA paragraph 26, the U.S. “will make best efforts in good faith to sustain this JCPOA and to prevent interference with the realisation of the full benefit by Iran of the sanctions lifting specified in Annex II”.Hide Footnote

Preserving the status quo does not exclude good-faith attempts to improve it. Renegotiating aspects, assuming the effort is consensual and mutually beneficial, might achieve a better and more stable outcome. A Republican president backed by a Republican-controlled Congress would have more credibility in offering incentives to Iran than Obama ever did. But if the U.S. seeks Iran’s capitulation through either economic pressure – which is unlikely to reach the intensity, scope and breadth of the sanctions that contributed to the existing outcome – or, even more dangerously, threat or use of military force, the result could be an explosive downward spiral.

Improving the JCPOA, even as implementation continues, would require a quiet Tehran-Washington dialogue in which both sides recognise one another’s security concerns and core interests, and communicate their red lines concerning both the nuclear and regional files. A possible outcome to such bilateral discussions could be an addendum to the JCPOA either strengthening some nuclear provisions (eg, longer timeframes for restrictions or more intrusive inspections) or adding non-nuclear ones (eg, curtailment of Iran’s ballistic missiles program or support for Levant militant groups) in return for rolling back the U.S. primary embargo.

If a better-for-better agreement is not attainable, the Trump administration could focus on non-Iran-specific arrangements, including creating a regional consortium for uranium enrichment or plutonium reprocessing or an international nuclear fuel bank that would remove need for a domestic enrichment program in Iran once the JCPOA sunsets. Alternatively, it could lead efforts to turn some JCPOA restrictions or transparency measures (eg, the ban on enrichment beyond 3.5 per cent and plutonium reprocessing, and continuous live-stream surveillance of key elements of the nuclear fuel chain) into common practice either at regional – as a first step toward a zone free of weapons of mass destruction in the Middle East – or global level.[fn]If the U.S. excludes Israel from such voluntary constraints, it would be a non-starter. Israel has reportedly relied on plutonium for its nuclear weapons capability but might also have a small uranium enrichment program. For more on such creative initiatives, see Alexander Glaser, Zia Mian, Hossein Mousavian, and Frank von Hippel, “Building on the Iran Deal: Steps Toward a Middle Eastern Nuclear-Weapon-Free Zone”, Arms Control Today, December 2015; Lord Hannay of Chiswick and Thomas Pickering, “Trumping Proliferation: From a one-off deal to a global standard”, European Leadership Network, 6 December 2016.Hide Footnote Curbing Iran’s missile program could also be achieved through international export control arrangements or requiring adherence of all states in the region to restrictions on range and payload.

On a more practical level, to avoid misunderstandings, the Trump administration should preserve the communication channels at the State Department, especially at the level of the office of lead coordinator for JCPOA implementation (currently Ambassador Stephen Mull), and also at the Energy Department, which have played an integral role in resolving technical issues in cooperation with the IAEA and the Atomic Energy Organisation of Iran. There is also need to create a new channel between OFAC and Iran’s Central Bank and Finance Ministry.[fn]OFAC has met several times with Iranian economic officials bilaterally and trilaterally (when a third country faced problems transferring Iranian unfrozen funds), but these meetings have been infrequent. There is also contact between the two sides through the Joint Commission, but at the diplomatic level, not that of experts who grapple daily with the technical and legal problems of normalising Iran’s banking relations.Hide Footnote While the Joint Commission’s 10 January meeting has clarified most JCPOA ambiguities that had been troubling implementation, especially in areas where the accord’s language lacks sufficient specificity, new technical hitches and interpretation differences will surely arise.[fn]Crisis Group email correspondence, European officials, 10 January 2017.Hide Footnote Resolving them will require effective communication and familiarity with the accord’s complex challenges. The IAEA is bound by its mandate from the Security Council and confidentiality agreements with its member states, but the Joint Commission should be more transparent, especially where its decisions have a significant impact on the accord’s implementation.

Iran should strictly adhere to its JCPOA commitments and move away from using brinksmanship as leverage.[fn]In addition to delaying the transfer of centrifuge infrastructure in Fordow to storage in the Natanz facility until shortly before the 16 January 2017 deadline, Iran kept its heavy-water stockpile close to the 130-ton threshold, and its low-enriched uranium stockpile just under the 300kg cap. Crisis Group interviews, U.S. and European officials, Brussels, London and Vienna, November 2016. Asked about the calculus behind this, an Iranian official retorted: “Because 299kg is under 300kg. We committed to remain under 300kg, not to keep a large distance from it”. Crisis Group interview, November 2016. Yet, as an EU official said, “implementing a long-duration agreement is difficult when you are always on the brink of surpassing the threshold, even if inadvertently”. Crisis Group interview, Brussels, 15 November 2016.Hide Footnote Exceeding the limits the accord sets, as an ex-U.S. nuclear negotiator put it, could be “technically insignificant in terms of advancing Iran’s nuclear capabilities, but … create a narrative that JCPOA opponents are all too eager to pounce upon”.[fn]Richard Nephew, “The Mirage of Renegotiating the Iran Deal”, Center for Global Energy Policy, Columbia University, 18 November 2016.Hide Footnote Tehran should also avoid deliberately provocative actions, eg, skirmishes with U.S. naval ships in the Gulf, and take other constructive steps, such as signing the Hague Code of Conduct against Ballistic Missile Proliferation (HCOC).[fn]By signing the HCOC, Iran would join the treaty’s 138 parties. HCOC provisions include commitments to provide pre-launch notifications for ballistic missiles and launch vehicles for satellites, as well as submission of an annual declaration of related policies.Hide Footnote It would be better served by focussing on structural and regulatory economic reforms needed for full realisation of sanction relief’s potential. These include continued progress on recapitalising and rendering its banking system more transparent and implementing the action plan to address its anti-money laundering and anti-terror financing deficiencies.

In return for meaningful advances on these issues, the U.S. Treasury should rescind Iran’s designation under the USA Patriot Act as a zone of primary money-laundering concern, continue a forward-leaning position to instil confidence in Iran’s market and issue licences for facilitating legitimate business. The administration should give OFAC more resources, as its staff has been stretched by a much increased workload.[fn]According to a report by the U.S. treasury department, the average time for processing licenses in 2015 increased from 71 to 88 business days, a statistic that significantly understates the problems, since half of the submissions remained unprocessed. See, “2nd, 3rd and 4th Quarter FY2015 Reports for Licensing Activities Undertaken Pursuant to the Trade Sanctions Reform and Export Enhancement Act of 2000”, Treasury Department, 15 September 2016.Hide Footnote An OFAC commitment to monthly progress reports and a target for reduced processing times as staff grows could aid efficiency.

But the problem is also institutional inertia: traditionally a source of pressure on the private and public sectors to curb business with target countries, today OFAC is charged with opening the taps.[fn]A senior U.S. official said, “we definitely implemented the letter of the JCPOA, but OFAC is not in the spirit business”. Crisis Group interview, Washington, December 2016.Hide Footnote Creating a sub-division or separate entity to unwind sanctions might be more effective and signal other countries, such as North Korea with whom similar negotiations might soon be necessary, that the dividends of relief in return for policy shifts are real.

Ultimately, the nuclear agreement – even if ostensibly firewalled from surrounding conflicts – will be sustainable only if accompanied by détente in U.S.-Iran ties and progress on de-escalating and resolving the region’s conflicts. If either side opts for escalation in the region, the other inevitably would sooner or later do the same, eventually imperilling the JCPOA. By contrast, mutual efforts to ease regional tensions, such as helping to preserve the Syria ceasefire and using influence to help bring the Yemen war under control, would be a constructive approach that could help strengthen the nuclear deal.

Other P5+1 members should go beyond expressing strong support for the JCPOA and discourage Iran from overreacting to a possible change in U.S. tone and approach.[fn]See Crisis Group Statement, “President Trump and the Art of the Iran Deal”, 23 November 2016; “EU warns Trump not to destroy Iran nuclear deal”, Financial Times, 21 December 2016.Hide Footnote The EU could revive its “Blocking Statute” forbidding compliance with U.S. extraterritorial sanctions that lack Joint Commission consent.[fn]Such legislation would provide political reassurance to European companies interested in re-entering the Iranian market by extending non-recognition of U.S. judgments and administrative determinations that give effect to U.S. sanctions, and by establishing a “clawback” clause for recovery of damages incurred for alleged sanctions violations. Council Regulation (EC), no. 2271/96, “Protecting against the effects of the extra-territorial application of legislation adopted by a third country …”, 22 November 1996. The legislation was designed to resist U.S. extraterritorial sanctions against Iran and Cuba. It effectively deterred Washington from enforcing those sanctions for more than a decade.Hide Footnote Establishing this pre-emptive measure without prejudice to the Trump administration’s commitment to the JCPOA would send a strong signal that if Washington walks away from the deal, it will do so alone, while demonstrating to Iran that the 28 EU member states will defend the agreement. The EU also could do more to help reduce tensions in the region, serving as an interlocutor between the U.S. and Iran and sounding out ideas with all sides in the various regional conflicts in which Iran is involved.

China, France, Germany, Russia and the UK should formally announce that new unilateral U.S. sanctions deemed unjustified by the majority of the Joint Commission and that interfere with Iran’s full realisation of the benefits of sanctions relief under the JCPOA would be cause to initiate disputes against the U.S. at the World Trade Organisation (WTO) and other international courts and institutions.[fn]In the late 1990s, the EU successfully challenged U.S. sanctions with a similar approach. Quentin Genard, “European Union responses to extraterritorial claims by the United States”, EU Non-Proliferation Consortium, Non-proliferation Paper no. 36, January 2014.Hide Footnote Simultaneously, they should continue to support Iran’s WTO candidacy.

More countries could provide export credit lines to reassure companies interested in trade with Iran.[fn]“Italy extends $5bn credit line and export guarantees to Iran”, Financial Times, 12 April 2016; “Norway offers €1bn in credit to Iran”, Press TV, 17 August 2016.Hide Footnote Eventually, and if banking problems continue, there might be need for a public body to do due diligence, akin to the role of the European Bank for Reconstruction and Development (EBRD) in Eastern Europe after dissolution of the Soviet Union and elsewhere today. More nuclear cooperation is also necessary to strengthen the connective tissue between Iran’s nuclear program and those of other countries, providing an insurance policy that it will remain solely civilian.

V. Conclusion

A year in, the JCPOA is working but fragile, mostly because the political environment that created the nuclear standoff has not changed. Segregating nuclear negotiations from other regional disagreements was logical – as complex as the nuclear issue was, regional politics are even more so, and there are many more stakeholders than the P5+1 – given Iran’s imminent achievement of breakout capacity. Still, the accord’s fate depends on making progress on other fronts, which in itself is contingent on preventing the JCPOA’s demise under a new, highly sceptical U.S. administration.

The same calculus that brought Iran and the P5+1 to compromise after thirteen years of standoff and two years of negotiations still holds: the alternatives to this accord – a sanctions-vs.-centrifuges race that could culminate in Iran obtaining the bomb or being bombed – would be much worse. Its unravelling now would have unfathomable consequences for the region, non-proliferation and multilateral diplomacy. To imagine a stronger pact can be built on its ruins is a chimera, as destroying it – even if gradually – would also destroy the hint of trust that led the parties to compromise, but if preserved, it is possible to build on it.

Trump is the first U.S. president in more than two decades who does not need to worry, on his first day in office, about Iran crossing the nuclear threshold to weaponisation without detection. If he tries to adjust the JCPOA by coercive pressure, he could, deliberately or inadvertently, deeply erode it, which could reignite the nuclear crisis and compound regional instability. But if, drawing on his business acumen, he opts to offer Iran a better-for-better deal, he has a unique chance to strengthen the accord for all, while helping reduce U.S.-Iran tensions. The consequences of a wrong choice could come to dominate his presidency.

Washington/Brussels, 16 January 2017

Appendix A: Map of Iran

Map of Iran United Nations. Department of Peacekeeping Operations. Cartographic Section.
A Shiite Muslim cleric recites a prayer as members of Iraq's Hashed al-Shaabi (Popular Mobilisation units) paramilitary force surround the coffin of their comrade Kazem Mohsen during his funeral procession. Haidar HAMDANI / AFP

Iraq: Evading the Gathering Storm

Should U.S.-Iranian tensions escalate to a shooting war, Iraq would likely be the first battleground. Washington and Tehran should stop trying to drag Baghdad into their fight. The Iraqi government should redouble its efforts to remain neutral and safeguard the country’s post-ISIS recovery.

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What’s new? In June, several rockets landed near U.S. installations in Iraq, and in July-August, explosions shook weapons storage facilities and a convoy of Iraqi paramilitary groups tied to Iran. These incidents helped push U.S.-Iranian tensions to the edge of confrontation, underscoring the danger of the situation in Iraq and the Gulf.

Why does it matter? While the U.S. and Iran have so far avoided clashing directly, they are pushing the Iraqi government to take sides. Iraqi leaders are working hard to maintain the country’s neutrality. But growing external pressures and internal polarisation threaten the government’s survival.

What should be done? The U.S. and Iran should refrain from drawing Iraq into their rivalry, as doing so would undermine the tenuous stability Iraq has achieved in the immediate post-ISIS era. With the aid of international actors, Iraq should persevere in its diplomatic and domestic political efforts to remain neutral.

I. Overview

The rockets that fell close to U.S. assets in Iraq in mid-June and the explosions that struck the assets of Iraqi paramilitary groups with ties to Iran in July and August are ominous signals. They are clear warnings of how badly escalation between the U.S. and Iran could destabilise Iraq and the region as a whole. Even short of hostilities, Washington’s “maximum pressure” campaign against Tehran could wind up placing as much stress – and inflicting as much harm – on its nominal ally Iraq as it does on its enemy Iran. For Iraq, the timing hardly could be worse. It is still recovering from the havoc wreaked by the Islamic State (ISIS) and the costly battle to defeat the jihadists; its institutions and security forces remain brittle; and its government, elected a little over a year ago, hangs on to a slim, precarious parliamentary majority. Washington and Tehran should keep Baghdad out of their confrontation: the costs to both of renewed instability in Iraq would exceed any benefits to either. Attempts to compel the Iraqi government to choose sides would likely fail and lead to chaos instead.

The Iraqi leadership is working hard to insulate the country from regional turmoil. It is stepping up diplomatic engagement with Iran, the U.S. and its immediate neighbours, as well as shoring up domestic consensus behind the objective of remaining neutral. These efforts are important but may be insufficient to protect Iraq from the spiralling U.S.-Iranian rivalry. If relations between the U.S. and Iran continue to deteriorate, let alone if the two countries come to blows, the struggle is likely to deepen political polarisation between Iraqis supporting and opposing Iran. Even under current conditions, internal tensions may precipitate a descent into political disarray.

Both the U.S. and Iran are likely to lose from a feud in Iraq. Contrary to the Trump administration’s expectations, its “maximum pressure” campaign is not countering Iran’s extensive influence in Iraq, which Tehran exercises in myriad ways. As part of its pressure, Washington would like Iraq to cut back its purchases of natural gas and electricity from Iran and forge closer links to U.S.-allied Arab states. But these U.S.-directed efforts are likely to lead Iran to intensify its own pressure on Baghdad, seeking to impede the Iraqi government’s efforts to strengthen its institutions, diversify its energy supply and broaden its foreign relations. Should tensions between Washington and Tehran continue to grow, U.S. personnel in Iraq could become more vulnerable to attack by pro-Iranian militias. A resulting security vacuum could enable an ISIS comeback.

Tehran, too, should have an interest in shielding Iraq from its standoff with Washington. Stability in its neighbour carries both economic and security benefits: it allows Iran to blunt the impact of U.S. sanctions by preserving ties to the Iraqi economy, and it lessens risks of an ISIS resurgence that inevitably would threaten Iran.

Others, too, can help immunise Iraq from harm, beginning with the Iraqi government itself. Steps it could take include making clear to the Trump administration which U.S. expectations it is in a position to satisfy and which it is not; bolstering efforts to bring the Iran-linked paramilitary groups under central government control; and intensifying outreach to regional states – notably Saudi Arabia, the United Arab Emirates (UAE) and Jordan – to counterbalance Iran’s role without exacerbating risks of armed confrontation on Iraqi soil. For its part, Europe, which has an important stake in consolidating the achievements of the anti-ISIS campaign and avoiding more turbulence in the area, should work with Baghdad in seeking to de-escalate U.S.-Iranian tensions and preventing them from dragging Iraq, and the wider region, into a dangerous spiral.

II. From Escalation to Indirect Confrontation

U.S.-Iranian relations have been in a state of crisis for roughly four decades. But the Trump administration’s May 2018 withdrawal from the Iran nuclear deal (the Joint Comprehensive Plan of Action, JPCOA) and its November 2018 reimposition of U.S. economic sanctions on Iran have opened what could be one of the most perilous chapters yet. In mid-2019, following Washington’s decision in May to ratchet up sanctions, a cascading series of incidents have raised the prospect of a shooting war that could engulf the Middle East.[fn]See Crisis Group Middle East Report N°205, Averting the Middle East’s 1914 Moment, 1 August 2019.Hide Footnote

For reasons of geography and history, Iraq finds itself squarely in the path of the gathering storm.

For reasons of geography and history, Iraq finds itself squarely in the path of the gathering storm. In the wake of the 2003 U.S. invasion to topple the regime of Saddam Hussein, and the subsequent battle against ISIS, it is the Middle Eastern country with the largest U.S. embassy and the highest number of U.S. troops (over 5,000).[fn]On the number of U.S. troops in Iraq, see “Pentagon official assures Iraqis of limited US military role”, Associated Press, 12 February 2019. U.S. troops have been stationed at several bases in Iraq, notably Ain al-Asad in Anbar, Qayyara in Ninewa, Altun Kupri in Kirkuk, Balad in Salah al-Din and Camp Victory and Camp Taji near Baghdad, since Mosul fell to ISIS in 2014. They are also posted at bases in Atrush, Harir, Halabja and near Sinjar in the Kurdish region. See Omar Sattar, “Draft law to pull foreign troops out of Iraq inching towards Parliament”, Al-Monitor, 29 January 2019.Hide Footnote Iran, for its part, has used the post-2003 vacuum to invest heavily in Iraq’s political system, economy and security apparatus. During the four-year struggle to defeat ISIS (2014-2018), the two neighbours became intertwined to an unprecedented degree. Iran’s allied Iraqi Shiite militias formed the core of the Hashd al-Shaabi (Popular Mobilisation), the amalgam of paramilitary forces (also encompassing Shiite and non-Shiite fighters without direct ties to Iran) that answered Grand Ayatollah Ali al-Sistani’s call to fight ISIS.[fn]See Popular Mobilisation Law (Law 40), 26 November 2016. An Iraqi analyst close to the Hashd described its evolution: “Factions with ties to the Iranians already existed in Iraq before the [June 2014] fatwa from Grand Ayatollah Ali al-Sistani. Members of these factions are now lawmakers in parliament”. Crisis Group interview, Baghdad, 26 May 2019.Hide Footnote But Iran also cultivated political ties well outside the ranks of its Shiite Islamist allies, exploiting internal Kurdish and Sunni divisions.[fn]For instance, it was an Iranian official who brokered deals between Shiite groups aligned with former Prime Minister Nouri al-Maliki and the Kurdistan Democratic Party about the budget and the Hashd’s presence in the disputed territories. See Crisis Group Middle East Report N°199, After Iraqi Kurdistan’s Thwarted Independence Bid, 27 March 2019, chapter III.Hide Footnote And cross-border trade between Iraq and Iran flourished.[fn]Iraqi imports from Iran make up 14 per cent of the country’s total imports. In 2017, Iran completed a gas pipeline project in Diyala. See “Iran’s gas imports to Iraq to reach 50 mcd”, Financial Tribune, 11 February 2018.Hide Footnote

The defeat of ISIS, and the inauguration of President Donald Trump, have ended what had been a tacit U.S.-Iranian détente in Iraq and ushered in a period of escalating rivalry.

In the aftermath of the May 2018 Iraqi parliamentary elections, this rivalry roiled Baghdad’s already factious politics, with Washington and Tehran each trying to exert influence through its preferred actors. Their tug of war over government formation lasted thirteen months and produced a list of broadly acceptable, but inherently weak office holders lacking strong support even within the political parties to which they belong. The list included Prime Minister Adel Abdul-Mahdi and President Barham Salih, two respected but somewhat isolated politicians who took up their posts in October.[fn]Crisis Group Report, After Iraqi Kurdistan’s Thwarted Independence Bid, op. cit., chapter III.Hide Footnote The posts of interior, defence and justice ministers remained unfilled for another eight months, in large part as a result of continued Iranian-U.S. sparring.[fn]See “Iraqi parliament votes in defense, interior, justice ministers”, Reuters, 24 June 2019. See also Maria Fantappie and Ali Vaez, “Don’t Let Iraq Fall Victim to Iraq-U.S. Rivalry”, Foreign Policy, 30 April 2019; and Ali Vaez, “The Risks of Maximising Pressure on Iran”, Crisis Group Commentary, 24 April 2019.Hide Footnote Today, with most senior officials sitting outside the largest parliamentary blocs, the government remains vulnerable to a no-confidence vote among the deputies.

A key factor keeping the Abdul-Mahdi government wobbly is U.S. policy toward Iran. The moment Washington reactivated some of the previously suspended sanctions on Iran in November 2018, it called on the Iraqi government to cease payments to Tehran for natural gas and electricity and to diversify its energy imports, including through contracts with U.S. companies.[fn]U.S. sanctions do not expressly prohibit Iraq from importing electricity and gas from Iran, but they do so in effect, because they prevent Iraq from paying for these imports in U.S. dollars, the only currency Baghdad has been able to use thus far. Iraq imports around 1,400 megawatts of electricity from Iran, as well as 28 million cubic metres (988 million cubic feet) of natural gas for power stations. Together, these imports supply about a third of the country’s power. According to the electricity minister, Iraq needs three years to make itself independent of Iranian imports. The ministry is now focused on improving Iraq’s power generation capacity and electrical grid through contracts with U.S. and European companies. It is also exploring energy imports from Jordan, Turkey and Egypt. See “Q&A: Electricity Minister Luay al-Khateeb”, Iraq Oil Report, 15 January 2019. See also “U.S. pushes Iraq to wean itself off Iranian energy”, The Wall Street Journal, 23 November 2018; and “Trump pushes Iraq to stop buying energy from Iran”, The New York Times, 11 February 2019.Hide Footnote Baghdad asked Washington for time to pursue alternatives, fearing Iranian retaliation as well as electricity shortages.[fn]See “Iraq seeks exemption from U.S. sanctions on Iraq”, Reuters, 11 December 2018.Hide Footnote The Trump administration responded by issuing temporary waivers, the first one for 45 days. It then renewed the waivers for 90 days in December 2018 and March 2019, and for 120 days the following June. The respite has allowed Baghdad to continue importing gas and electricity from Iran, but the U.S. has continued to press Baghdad on other files, such as the energy infrastructure contracts it wants Iraq to sign with U.S. companies.[fn]See “Iraq receives new U.S. waiver for energy imports”, Iraq Oil Report, 14 June 2019.Hide Footnote A U.S. official in Baghdad explained:

Our sanctions are on Iran and not on Iraq. We expect the government to develop infrastructure that will allow energy imports from Kuwait, Saudi Arabia and Jordan, just as it has developed [similar infrastructure] with Iran in Diyala [province]. The government knows it has to take these steps, because it fears we won’t renew the waivers.[fn]Crisis Group interview, Baghdad, 19 January 2019.Hide Footnote

Another U.S. demand is that the Abdul-Mahdi government rein in the Iran-linked militias among the Hashd.[fn]A senior U.S. official said: “We want our strategic partnership with the Iraqi government to translate into strategic outcomes. The government has to be quicker in signing contracts and reining in militias. If they cannot even deliver on this, how can they call us allies?” Crisis Group interview, Washington, 18 July 2019.Hide Footnote Since the defeat of ISIS, the Hashd have assumed quasi-state dimensions in several areas formerly under the jihadists’ rule and inserted themselves into national politics as well. No unit has disarmed. In 2016, the government formally integrated the Hashd into the security forces, but it has yet to assert effective control over more than a few of them.[fn]See Crisis Group Middle East Report N°188, Iraq’s Paramilitary Groups: The Challenge of Rebuilding a Functioning State, 20 July 2018.Hide Footnote

In response to Washington’s “maximum pressure” campaign, and its complementary demands upon Baghdad, Tehran stirred up anti-American sentiment in the Iraqi parliament. On 19 January, lawmakers close to Iran presented a bill (still under review) calling, among other things, for the withdrawal of U.S. troops from Iraq.[fn]In November 2008, three years before the U.S. withdrew its troops from Iraq, Washington and Baghdad signed a Strategic Framework Agreement, stating their intent to cooperate in defence and security matters (Section III). In June-August 2014, after ISIS took over large areas of Iraqi territory and threatened Baghdad and Erbil, Washington sent troops to Iraq as an emergency measure, operating under the Agreement’s terms. Following a 2015 UN Security Council request to UN member states to fight ISIS, the U.S. and 78 other countries sent additional troops in advisory and training roles as part of the International Coalition to Combat ISIS. The legal status of U.S. troops remains a bone of contention, as Iraqi lawmakers claim that their combat activities exceed the Agreement’s terms limiting them to an advisory role. See Sattar, “Draft law to pull foreign troops out of Iraq inching towards Parliament”, op. cit.Hide Footnote They demanded as well that the prime minister report on the number of U.S. troops and assets present on Iraqi soil.[fn]A proponent of the draft law from the Fatah bloc said, “We are not against the presence of foreign trainers and advisers in the country, but why are they placing their forces in border areas between Iraq and Syria? Trump and American troops, which are circulating freely on Iraqi soil, are not respecting Iraqi sovereignty”. Crisis Group interview, Basra, 30 May 2019. Mowaffak al-Rubaie, a former national security adviser, said, “Iran has soft power in Iraq that the U.S. lacks. They can use their influence in parliament to withdraw confidence from the government. The draft law on the foreign military presence in Iraq is a way to twist the U.S.’s arm and apply ‘limited pressure’ on the U.S.”. Crisis Group interview, Baghdad, 29 January 2019. In the words of a Fatah bloc lawmaker, “We are still waiting for the government to report to parliament on the number of foreign troops present in Iraq and the location of their bases”. Crisis Group interview, Baghdad, 29 May 2019.Hide Footnote These deputies belong to the Fatah bloc, which came in second in the 2018 elections, and counts several Hashd commanders among its members.

Testy rhetorical exchanges ensued. In a televised interview, President Donald Trump stated that U.S. soldiers would need to stay in Iraq “to watch Iran”.[fn]“Trump wants the U.S. military in Iraq ‘to watch Iran’”, Reuters, 3 February 2019. Trump’s remarks contradicted messaging from other U.S. officials, who have emphasised that U.S. troops are in Iraq solely to support the government in defeating ISIS.Hide Footnote Two months later, on 7 April, Iran’s supreme leader, Ali Khamenei, called on Iraqi leaders to make sure that the U.S. military leaves “as soon as possible”.[fn]“Khamenei asks Baghdad to make sure U.S. military leaves Iraq ‘as soon as possible’”, Radio Farda, 7 April 2019.Hide Footnote Meanwhile, a procession of senior U.S. and Iranian officials came to Iraq to press their respective cases, including Trump himself in an unannounced visit in December 2018 and, four months later, President Hassan Rouhani of Iran.[fn]“Remarks by President Trump to Troops at Al Asad Air Base”, White House Briefing, 26 December 2018; and “Iran’s Rouhani in Iraq for historic visit to offset U.S. sanctions”, Washington Post, 11 March 2019. Unlike Trump, who left the country without meeting Iraqi leaders, Rouhani met a number of politicians during his three-day visit. He was also received by Grand Ayatollah Ali Sistani, the highest religious authority for most Shiites. Other relevant visits include those by U.S. Secretary of State Pompeo in January and May 2019, and Iran’s Foreign Minister Jawad Zarif, in the same months.Hide Footnote

It is highly doubtful that Israel would hit Iraqi targets without at least securing Washington’s acquiescence, given the considerable U.S. presence and stakes there.

Since early May, competition has morphed into indirect confrontation. On 8 May, U.S. Secretary of State Mike Pompeo warned Iraqi officials of U.S. retaliation in case of an attack on U.S. assets, and a week later, the State Department withdrew non-emergency personnel from the embassy in Baghdad claiming impending security threats.[fn]See “U.S. orders ‘non-emergency’ government employees to leave Iraq”, Washington Post, 15 May 2019.Hide Footnote In June, a series of rockets landed close to U.S. installations in Baghdad, Basra and Mosul.[fn]Incidents included a rocket landing near the U.S. embassy in Baghdad (19 May); a rocket landing near Camp Taji, a base north of Baghdad hosting U.S. military personnel (17 June); and one projectile striking close to the headquarters of U.S. and other oil firms in Basra, and another near an Iraqi facility hosting U.S. military advisers in Mosul (both on 19 June).Hide Footnote These attacks remain unclaimed and caused no fatalities, but they briefly raised the spectre of all-out military confrontation.[fn]The U.S. did not accuse Iran of having sponsored the June attacks, but Secretary of State Mike Pompeo mentioned rocket attacks on 19 May in a series of incidents he blamed on Iran and its surrogates. U.S. State Department, “Secretary of State Michael R. Pompeo Remarks to Press”, Washington, 13 June 2019.Hide Footnote Simultaneous incidents in the Gulf brought tensions to a peak.[fn]On 17 June, Pompeo accused Iran of two attacks on oil tankers in the Gulf of Oman (14 June) and a string of earlier ones, including a drone attack on oil installations in Saudi Arabia (14 May). The following day, Iran threatened to downgrade its JPCOA commitments. See Crisis Group, “Iran Briefing Note #1”, 20 June 2019; and “Iran Briefing Note #2”, 27 June 2019. Moreover, on 27 June, U.S. officials concluded that the 14 May drone attack on Saudi Arabian oil installations originated from Iraq despite being claimed by Yemen’s Huthi movement. The Iraqi prime minister denied these allegations. See “U.S.: Saudi pipeline attacks originated in Iraq”, The Wall Street Journal, 28 June 2019.Hide Footnote On 20 June, Iran shot down a U.S. drone over the Strait of Hormuz that, Tehran claimed, had entered Iranian airspace. Trump prepared a retaliatory strike on Iran before calling it off at the last minute.[fn]See Crisis Group Report, Averting the Middle East’s 1914 Moment, op. cit.Hide Footnote

These incidents and Iranian breaches of the JPCOA in July were followed by four separate explosions at weapons storage facilities and a raid on a convoy belonging to the Hashd in July and August. Media speculation, indirectly confirmed by Israeli government officials, attributed the explosions to Israeli bombing, which Hashd leaders accused the U.S. of enabling.[fn]The incidents included airstrikes on Hashd weapons depots at Amerli base in Salah al-Din province (19 July) and Camp Ashraf in Diyala province (28 July), as well as explosions at a weapons storage facility in Baghdad (12 August) at Balad military base, north of Baghdad (19 August) and a raid on their assets on the Iraq-Syria border (25 August). In July, Arab media claimed that Israel had twice struck Iran-linked targets in Iraq. While U.S. officials denied involvement and Israel made no official claim of responsibility, Israeli Prime Minister Benjamin Netanyahu hinted on 22 August that Israel might have been involved in the attacks, while two unnamed U.S. officials claimed that Israel was behind the attacks. See “Israel expands its targets against Iran in Iraq, Syria”, Al-Sharq al-Awsat, 30 July 2019; “Netanyahu hints at Israeli involvement in Iraq blasts”, Reuters, 22 August 2019; and “Israeli airstrike hits weapons depot in Iraq”, The New York Times, 22 August 2019. According to an Israeli official, Netanyahu considers a confrontation with Iran to be a distinct possibility and thinks that Iran is preparing for one. Such an imminent clash would make it imperative for Israel to destroy shipments of precision-guided missiles in Syria and Iraq. Crisis Group telephone interview, 31 July 2019.Hide Footnote While the U.S. denied involvement in the attacks on the Hashd weapons depots, it did not denounce them. It is highly doubtful that Israel would hit Iraqi targets without at least securing Washington’s acquiescence, given the considerable U.S. presence and stakes there.[fn]A U.S. official said, “If you are Israel and you see your enemy [Iran] transferring missiles across Iraq and Syria you would want to prevent that. It’s a natural national security concern”. Crisis Group interview, Washington, 18 July 2019. A senior Iraqi diplomat said, “Previous U.S. administration warned Israel that striking in Iraq would inflame the Gulf. This administration seems very casual about it”. Crisis Group interview, Geneva, 19 August 2019.Hide Footnote

Washington has certainly doubled down on its pressure campaign in other ways. The U.S. Treasury Department blacklisted the Iraqi paramilitary group Harakat al-Nujaba because of its links to Iran’s Islamic Revolutionary Guard Corps. It also sanctioned individual Hashd leaders suspected of having ties to Iran or committing acts of violence against Christians and other religious minorities.[fn]See U.S. Treasury Department, “Treasury sanctions persons associated with serious human rights abuse and corrupt actions”, press release, 18 July 2019. Among the targeted individuals are Shabak and Christian commanders of Hashd units suspected of ties to Iran and human rights violations against their co-religionists. A senior Iraqi official said, “Lobbies on behalf of religious minorities are particularly active in Washington in showing that Baghdad is doing nothing to protect them and they have the ear of the [U.S.] vice president to pressure the U.S. administration to take punitive action. But sanctions against Hashd commanders risk strengthening these leaders’ local legitimacy, especially if they have defended their co-religionists against ISIS, and will reinforce their reliance on Iran”. Crisis Group telephone interview, 25 July 2019.Hide Footnote Iraqi officials said the Trump administration, in private conversations, also threatened to withhold financial, economic and military support from Iraq if the government fails to sign energy-related contracts and rein in Iran-backed paramilitary groups.[fn]Crisis Group interview, senior Iraqi official, Baghdad, 29 May 2019.Hide Footnote A U.S. official in Baghdad said, “We have pressure points on the Iraqis. We can withhold U.S. currency from the Central Bank or blacklist groups for their affiliation with Iran’s Revolutionary Guard Corps”.[fn]Crisis Group interview, Baghdad, 19 January 2019.Hide Footnote As if in reply, a Hashd commander issued this warning: “Blacklisting Harakat al-Nujaba has only increased their popularity. … Once you list them among your enemies, they become one”.[fn]Crisis Group interview, Basra, 29 May 2019.Hide Footnote

III. A Fragile Neutrality

Washington’s “maximum pressure” campaign on Iran and Tehran’s response are putting severe strain on the Iraqi government, a partner to both.[fn]A senior UN Assistance Mission for Iraq official said, “The U.S. are over-asking the [Iraqi] prime minister to deliver on their maximum pressure policy. The Iranians respond by keeping the government weak. The outcome is that the Iraqi government is under pressure, not just the Iranians”. Crisis Group interview, Baghdad, 27 May 2019.Hide Footnote An Iraqi lawmaker said:

Neither the U.S. nor Iran wants war. Yet the U.S. expects Baghdad to stand against Iran, and Iran expects Baghdad to stand against the U.S. Now parliament could put pressure on the government by threatening to withdraw confidence [if it dislikes government policy on balancing between the two], while Iran could easily influence some of the militias to provoke security incidents [in retaliation for U.S. actions in Iraq]. The government is under extreme pressure both internally and externally.[fn]Crisis Group interview, Baghdad, 28 May 2019.Hide Footnote

Amid the countervailing pressures, senior government leaders – the prime minister, president and speaker of parliament – have shown both determination and dexterity in asserting Iraq’s neutrality. They have found support among an Iraqi public equally concerned about a potential escalation.[fn]As tensions peaked in late May 2019, Hanaa Edwar, a civil society leader, said, “We, together with other civil society activists, have organised demonstrations in [Baghdad’s] Tahrir Square to denounce any side that would start a conflict in Iraq”. Crisis Group interview, Baghdad, 29 May 2019.Hide Footnote In an interview with Crisis Group, President Barham Salih stated:

Our policy will remain “Iraq first” and away from a U.S.-Iran confrontation. There are countries neighbouring Iraq, including Iran, that have a vested interest in keeping Iraq stable and not part of this conflict. I am working with our neighbours’ foreign ministers and also seeking the support of the UN and EU to develop a framework of regional cooperation based on our shared interest to avoid another conflict.[fn]Crisis Group interview, Baghdad, 28 May 2019. Ayatollah Sistani echoed the need for “securing Iraq-Iran ties while improving Iraq’s relations with its neighbors based on mutual interests, non-interference and respect of sovereignty” during his meeting with Rouhani in March 2019. See “Iraq’s top Shiite cleric tells Rouhani ties must respect Iraq’s sovereignty”, Reuters, 13 March 2019.Hide Footnote

Likewise, Iraqi leaders are working hard to forge a consensus on their country’s neutrality across the domestic political spectrum. On the president’s initiative, the heads of the main political groups, including Fatah, convened and agreed that a conflict between the U.S. and Iran would negatively affect Iraq. They stated in a confidential document that they would refuse to turn Iraq into “an arena for competing players to settle scores”.[fn]President Salih said, “We convened key Iraqi leaders, including Maliki, Qais al-Khazali [leader of Asaeb Ahl al-Haq, one of the most influential Hashd groups], Hadi al-Ameri [leader of the Badr organisation and founder of the Fatah coalition] and a senior Sadrist, and agreed on a confidential document that clarifies the status of the foreign military presence in Iraq and reaffirms Iraqi leaders’ commitment to maintaining a neutral position in the U.S.-Iran confrontation and diversifying our foreign relations”. Crisis Group interview, Baghdad, 28 May 2019.Hide Footnote

Responding to critics, Prime Minister Abdul-Mahdi said the U.S. troop presence is legal because the government had requested it to support the fight against ISIS. In the same spirit, he said Baghdad would not allow Washington to send additional troops without granting its permission in response to a formal request.[fn]See “U.S. troops in Iraq were invited, PM Abdul Mahdi tells critics”, Rudaw, 20 February 2019.Hide Footnote On 18 June, following the rocket incidents, he issued a statement prohibiting foreign troops deployed for advisory or training purposes from using Iraqi soil to launch attacks against Iraq’s neighbours and forbidding any party to acquire weapons or carry out security operations without the government’s consent.[fn]See Ali Mamouri, “Iran already turning Iraq into a battleground against U.S.”, Al-Monitor, 19 June 2019.Hide Footnote He addressed the question of the Hashd’s status by issuing a decree reaffirming the government’s authority over paramilitary groups and denouncing any activities conducted outside his command.[fn]Full text of decree available at “Iraqi PM decrees full integration of PMF into Iraqi forces”, Rudaw, 1 July 2017.Hide Footnote Finally, following the airstrikes on Hashd armories, he issued a statement banning unauthorised flights in the country’s airspace and called for an investigation into the Baghdad explosions.[fn]See “Iraq takes security measures following mysterious blasts”, Associated Press, 15 August 2019.Hide Footnote

Should the U.S.-Iran standoff intensify or, worse, turn violent, it would have an immediate impact on Iraq’s domestic politics and shake the delicate equilibrium its leaders are striving to maintain.

Baghdad also is seeking a way out of its energy quandary. While it continues to pay Iran for gas and electricity imports, it is in the process of signing contracts with Jordan and Saudi Arabia, as well as with European and U.S. energy companies.[fn]Crisis Group interview, Baghdad, 28 October 2018. See also “GE and Siemens sign agreements for Iraq power deals”, Financial Times, 28 October 2018; “Iraq close to signing $53 billion deal with Exxon, Petrochina”, Reuters, 7 May 2019; “Iraq, Jordan agree deal over trade of oil and goods”, Reuters, 3 February 2019; and “Iraq close to pipeline deal with BP and ENI, rather than Exxon”, Reuters, 8 August 2019.Hide Footnote Still, as Fuad Hussein, Iraq’s finance minister, made clear, the government cannot afford to stop doing business with Iran:

Cutting gas imports from Iran will harm the government’s stability. The problem is political more than technical. We could import gas and electricity from other countries in the medium term, but if Iraq undermines its relationship with Iran, parliament is likely to withdraw its confidence in the government.[fn]Crisis Group interview, Baghdad, 15 January 2019.Hide Footnote

The government has started discussing the establishment of a “special-purpose vehicle” (loosely modelled on the European equivalent) that would allow it to pay for energy imports from Iran in Iraqi dinars instead of U.S. dollars, to be deposited in an Iraq-based bank account from which Iran could then draw exclusively to buy humanitarian goods in Iraq – thereby refraining from violating U.S. sanctions.[fn]“Iraq sets up ‘loophole’ to buy Iran’s power despite U.S. sanctions”, Agence France Presse, 2 July 2019.Hide Footnote

The president, prime minister and speaker of parliament have stepped up their diplomatic engagement as well. They have reached out to Iraq’s neighbours – Saudi Arabia, the UAE, Turkey, Iran, Jordan, Egypt and Kuwait – in an attempt to diversify ties and proposed a regional conference to build consensus on the perils of a U.S.-Iran confrontation.[fn]Crisis Group interview, Barham Salih, president of Iraq, 28 May 2019. Prime Minister Abdul-Mahdi visited Jordan and Egypt (March 2019), Saudi Arabia (April) and Kuwait (June). President Salih visited Saudi Arabia (November 2018), Turkey (May 2019) and Iran (June). Speaker of Parliament Mohamed al-Halbousi visited the U.S. (May 2019), Iran and the UAE (both in June).Hide Footnote Moreover, while not offering to mediate between the U.S. and Iran, fearing that doing so would only increase pressures on the government, they have served as an informal channel to pass messages between the two.[fn]An adviser to the president said, “Iraq is not mediating between the U.S. and Iran. The president is only passing messages. Trying to mediate would mean becoming part of that conflict. Instead, we [the presidency] are working to gather the foreign ministers of our neighbours and agree on a regional framework for cooperation. If we succeed in staying neutral, this will already have a mitigating effect on the confrontation”. Crisis Group interview, Baghdad, 28 May 2019.Hide Footnote

These efforts notwithstanding, the Iraqi leadership’s commitment to neutrality may not suffice to insulate the country from external perils.[fn]A member of the Daawa party, a leading Shiite Islamist group to which three prime ministers belonged between 2005 and 2018, said, “The government is indecisive. If it no more than states its neutrality without actively creating relations that allow it to be neutral, it will become even more vulnerable to pressure from the U.S. and Iran”. Crisis Group interview, Baghdad, 27 May 2019.Hide Footnote Should the U.S.-Iran standoff intensify or, worse, turn violent, it would have an immediate impact on Iraq’s domestic politics and shake the delicate equilibrium its leaders are striving to maintain.

IV. Pressure Points

Iraq faces several risks from the current crisis. Most ominously, an escalation to direct U.S.-Iranian confrontation could encourage paramilitary groups with ties to Iran to begin targeting U.S. assets on Iraqi soil.[fn]Among other risks, Iran suspects that the U.S., Saudi Arabia and/or Bahrain might incite attacks on Iran by Iranian Kurdish groups such as the Kurdistan Democratic Party of Iran and the leftist Komala. Both have offices and military bases in Iraqi Kurdistan. Crisis Group interview, senior Iranian official, 17 July 2019. That said, Iran ought to be able to deter these groups, because their bases are located in areas dominated by the Patriotic Union of Kurdistan, an organisation over which Iran wields considerable influence.Hide Footnote The most likely triggers for such action are continued (Israeli or other) strikes against Iranian assets in Iraq, a U.S. attack on Iranian assets and a U.S. decision not to renew Iraq’s gas and electricity import waivers. Separately, strong domestic discontent could emerge over other issues, for example, inadequate public services, that could push legislators to threaten a no-confidence vote in the Abdul-Mahdi government. Any of these eventualities could force the government to throw in its lot with the Fatah bloc, which, in turn, would pressure it to take Iran’s side in the U.S.-Iranian confrontation. The government’s only alternative to alliance with Fatah would be dissolution.

There is little doubt that political parties and paramilitary groups with longstanding ties to Tehran will choose Iran’s side if a conflict breaks out, especially if they believe that the U.S. provoked it. Faleh al-Khazali, a Fatah lawmaker, said:

For now, parties are united in opposing a confrontation between the Americans and Iran. But if the Americans launch an attack, there will be a response, and ordinary Iraqis will be the first to mobilise against the Americans.[fn]Crisis Group interview, Basra, 30 May 2019. A Daawa party member with close ties to Maliki said, “If the Americans start a war with Iran, we [Maliki’s faction of the Daawa party] will choose Iran’s side. The Hashd will operate outside the government’s purview. We may have an open-door policy with Saudi Arabia at the moment, but if there is going to be war, there won’t be a safe corner in the Gulf”. Crisis Group interview, Baghdad, 1 June 2019.Hide Footnote

Since the end of Iraq’s sectarian war (2005-2007), Iran and its allied groups have been careful not to provoke open hostilities with the U.S. on Iraqi soil, aware that attacks on U.S. personnel could lead to all-out war and that whoever starts the fighting would bear responsibility in Iraqi public opinion.[fn]A civil society activist said, “Everyone is afraid to be part of a war; even those who hate Iran are against it. I’ll bet the side that starts the war will be the one to lose it [in the public eye]”. Crisis Group interview, Baghdad, 28 May 2019.Hide Footnote But this restraint is unlikely to survive continued escalation – whether in the form of renewed attacks on Iraqi paramilitary groups’ weapons depots or a U.S. strike on either Iranian or Iraqi soil. At that point, one should expect to see Tehran mobilise Iraqi paramilitary groups in retaliation.

On 21 August, Abu Mahdi al-Muhandis, deputy head of the Hashd, issued a statement holding the U.S. responsible for the strikes on weapons storehouses, alleging that Washington had “introduced Israeli drones into Iraq”. He warned of a Hashd response should another attack occur.[fn]The Muhandis statement reads: “We have available to us precise and confirmed information that the Americans introduced Israeli drones [into Iraq] via Azerbaijan”. “Official Statement of the Deputy Chairman of the Popular Mobilisation Units Commission”, al-Hashd website, 21 August 2019 (Arabic). Following the statement, a U.S. official said, “If my general concern level on an average day regarding violence that could harm U.S. personnel deployed in Iraq is a three out of ten, I am at eight or nine right now”. Crisis Group telephone interview, 22 August 2019.Hide Footnote On 25 August, the Hashd also accused Israel of targeting one of their convoys via U.S.-controlled airspace on Iraq’s border with Syria.[fn]The statement reads: “This naked aggression came despite the presence of aerial cover in the area from American aircraft in addition to a large surveillance balloon near the location of the incident”. “Popular Mobilisation Units Issue a Statement on the Targeting of al-Hashd in Anbar”, al-Hashd website, 25 August 2019 (Arabic).Hide Footnote The next day, the Pentagon, perhaps fearing retaliation, issued a statement denying U.S. involvement in the August attacks, saying “statements to the contrary are false, misleading and inflammatory”.[fn]Statement on Recent Attacks in Iraq”, U.S. Department of Defense, 26 August 2019.Hide Footnote

The Abdul-Mahdi government would be unable to stop the Hashd from striking back as it saw fit. The prime minister’s control over the Hashd remains weak. Despite his efforts to reaffirm his command, several groups continue to operate in parallel to those factions that have formally integrated into the security forces. These units are even outside the purview of the overarching Popular Mobilisation Commission.[fn]As an Iraqi analyst close to the Hashd put it, “Factions refrain from taking action, because they don’t want to get into trouble. But if anything starts, they are ready to join. Every Hashd group has fighters outside its regular contingent, waiting for orders”. Crisis Group interview, Baghdad, 28 May 2019. A Sunni Hashd member said, “In case of conflict, paramilitary commanders are going to mobilise the Sunni Hashd in Anbar, where the largest U.S. military base [Ain al-Assad] is located. In late May, [National Security Adviser] Faleh al-Fayyadh [responsible for disbursing Hashd salaries] issued an order telling Sunni Hashd leaders in Anbar not to cooperate with or receive training and weapons from American forces”. Crisis Group interview, Baghdad, 28 May 2019.Hide Footnote A Hashd commander said:

Iran does not want a war, but if there is going to be one, it will resort to all its allies in Iraq: not just fighters under the Popular Mobilisation Commission but also those operating outside of it.[fn]Crisis Group interview, Baghdad, 26 May 2019.Hide Footnote

The prime minister’s 1 July 2019 decree on the integration of Hashd groups offers the government additional legal means of demanding accountability for activities carried out outside its purview and distinguishing between Hashd factions willing to operate under the Iraqi security forces’ umbrella and prime minister’s command and those that are not. Yet the government’s ability to bring to heel this network of military figures with strong ties to the Fatah bloc remains limited. Lack of cooperation among Iraq’s disparate intelligence agencies complicates any effort to investigate security incidents.[fn]A senior Iraqi diplomat said, “Iraq’s senior leaders remain dependent on U.S. intelligence to track down incidents and threats against U.S. personnel and assets. This is a major liability of Iraq’s intelligence system. A U.S. intelligence report attributing responsibility to Iraqi paramilitaries for security incidents will place the government in a difficult position”. Crisis Group phone interview, 26 May 2019.Hide Footnote Trying to prosecute culprits for these attacks could also endanger the government’s parliamentary majority.[fn]An adviser to President Salih said, “We suggested that the prime minister investigate the rocket attack near the American embassy. If he were to do so, however, people in parliament would find a way to retaliate. What we can do is to denounce these attacks and draw a sharp line between factions that want to respect the law and those that don’t”. Crisis Group interview, Baghdad, 28 May 2019.Hide Footnote Further strikes against Hashd installations would also put the militias in a position to act as defenders of Iraqi sovereignty against foreign attacks.[fn]In his statement, Muhandis denounced “the Trump administration’s violation of sovereignty” and referred to the prime minister’s decree legalising the Hashd as a component of Iraq’s security forces before warning that the group would retaliate in the event of future attacks. On 22 August, the prime minister, president and speaker of parliament issued a joint rebuttal of Muhandis’ statement. They reaffirmed that the prime minister is responsible for issuing statements on security incidents and called on all security agencies, including the Hashd, to respect his prerogative. “Iraq will not be part of a proxy war”, Rudaw, 22 August 2019. On 26 August, the prime minister, president and speaker of parliament, together with Faleh al-Fayyadh, received Hashd representatives to praise their role in fighting ISIS and to reaffirm the importance of a unified national position to protect Iraq from violations of its sovereignty. See “The Three Presidencies Hold a Meeting with the Leadership of the Hashd al-Shaabi”, Iraqi Presidency, press release, 26 August 2019.Hide Footnote

A more likely and no less dangerous scenario is that an Iran confronted with debilitating economic pressures – which would grow stronger should the U.S. decide not to renew sanctions waivers for Iraq – could at some point retaliate by targeting U.S. interests. Iran may calculate that it would be better to risk a confrontation with the U.S. than to risk an internal crisis due to economic collapse. And if Iran were to hit back at the U.S., it would likely do so in Iraq, where it can count on the paramilitary groups and political allies in parliament to challenge the U.S. military presence.[fn]

Even a legislatively forced U.S. withdrawal would have serious consequences as it could jeopardise the fight against ISIS, whose threat may have lessened but has not been eliminated; its remaining fighters are holed up in rugged terrain in central and western Iraq. Continued cooperation between the Iraqi military and U.S.-led Coalition forces is essential to ensure that jihadist cells in rural areas cannot launch operations reaching major towns.[fn]ISIS currently operates in remote areas such as the Hamrin mountain range in Kirkuk and the depths of the Anbar and Jazeera (Ninewa) deserts. Iraqi government control over these areas has been tenuous for decades, including under the previous regime; traditional security forces cannot easily patrol there. An Iraqi security official said U.S. surveillance and intelligence are important to policing these areas: “It’s one of the reasons for the end of ISIS. [Those foreign forces’] exit would be very dangerous. So if there isn’t international cooperation against it, it will be hard to deal with it”. Crisis Group interview, Kirkuk, March 2019. A diplomat from a Coalition member state argued that the Iraqi military is now better trained and prepared than in the past, but “where they aren’t ready is in airpower and ISR [intelligence, surveillance and reconnaissance]. Iraq doesn’t need ground forces. It needs airpower”. Crisis Group interview, Baghdad, February 2019.Hide Footnote

Even absent a direct U.S.-Iran confrontation, Iran or its domestic allies could leverage popular discontent to corner the government. Street protests against the government’s failings in service delivery peaked in 2018 during the searing summer heat.[fn]See Crisis Group Middle East Briefing N°61, How to Cope with Iraq’s Summer Brushfire, 31 July 2018. In June 2019, protests started up again in Basra and other southern provinces as temperatures rose. Mustafa Saadoun, “Basra protests build in Iraq as substandard services persist”, Al-Monitor, 29 June 2019.Hide Footnote A new round of protests this year could induce parliamentary blocs that still support the government to abandon it, increasing the prime minister’s reliance on the Fatah bloc and emboldening the elements closer to Iran to press the government to either confront the U.S. or face a no-confidence vote.[fn]The Sadrist bloc, the largest in parliament, has insisted that the government act on its reform program. On 18 June, Muqtada al-Sadr, its leader, threatened it would “change its stance” if the government failed to deliver on reforms and complete government formation. (Government formation was completed six days later.) A Sadrist lawmaker characterised the current circumstances as follows: “We are in a situation of stagnation rather than stability, and the government’s performance is below expectations”. Crisis Group interview, Baghdad, 27 May 2019. On 16 June, the National Wisdom Movement (Hikma), a coalition led by Ammar al-Hakim that holds nineteen seats in the 329-seat parliament, ended its support for the government and shifted to the opposition in protest against the government’s poor performance. While the government can still count on the two largest political blocs, it would fall if the Sadrists (54 seats) were to join the opposition. A government minister said, “This prime minister does not have a party behind him and the government could fall at any time. If the prime minister resigns, it would take a long time for Shiite blocs to reach agreement on a new prime minister, considering how divided they are”. Crisis Group interview, Baghdad, 26 May 2019.Hide Footnote

A government minister said, “Iran is amassing support in parliament to question the legitimacy of the American troop presence in Iraq. This would be a disaster. The Sadrists, in a position to claim ownership of the Iraqi national struggle against foreign interference, would support such legislative action. Many Shiite politicians seem to have a hard time understanding that Iraq can be stable only in a situation of a balanced Iran-U.S. relationship”. Crisis Group interview, Baghdad, 27 May 2019.Hide Footnote

V. Reducing the Risk of Confrontation

The cost of renewed conflict in Iraq would be enormous, not least in light of the significant investments both Iran and the U.S. have made in the country since 2003. To avoid this outcome, Washington will need to address the growing contradictions between its various policy objectives: countering Iran at virtually any cost; securing its post-2003 gains in Iraq through a continued military presence; and preventing an ISIS resurgence. Any escalation by Washington – more belligerent anti-Iranian rhetoric or intensified pressure on the Iraqi government to comply with sanctions on Iran, let alone U.S. (or Israeli) military action against Iran or its Iraqi allies – could prompt Tehran to activate its allies and target U.S. assets and personnel.

The Trump administration likewise will need to narrow the gap between what it demands of Baghdad and what Baghdad can effectively deliver. The U.S. administration’s anti-Iranian fixation and the pressure it exerts to get Iraq to comply with its sanctions are having a host of unintended effects. They are harming U.S.-Iraqi relations; emboldening Iranian allies in Baghdad; and complicating Baghdad’s attempts to achieve what Washington claims it wants: warmer relations between Iraq and its Arab neighbours. A more effective U.S. policy would tone down the anti-Iranian rhetoric; continue to issue sanctions waivers for reasons both economic (given Iraq’s dependence on Iran) and political (given the sensitivities of Iran and its Iraqi allies); and focus on a longer-term strategy of helping Baghdad balance Iran’s influence by backing its efforts to strengthen political and economic ties with U.S. partners, such as Jordan, Saudi Arabia, the UAE, Kuwait and Qatar.

A stable Iraq will be in a better position to help Tehran absorb the impact of U.S. sanctions.

Iran, too, ought to see merit in avoiding actions that destabilise its neighbour. A stable Iraq will be in a better position to help Tehran absorb the impact of U.S. sanctions; as its oil sales diminish, Iran increasingly will rely on non-oil trade, with Iraq in particular. It is unclear how far the Trump administration will go in pressing Iraq to cut those economic ties, but Iran has every reason not to force the issue. Directly or indirectly targeting the U.S. in Iraq almost certainly would lead the administration to double down on its current approach and give those in Washington intent on increasing pressure on Baghdad a justification for doing so. Accordingly, Iran should clearly communicate to its Iraqi allies that they ought to refrain from provocative behaviour.

Iran also should have an interest in the success of the counter-ISIS campaign, including through the ongoing U.S./Coalition role, given the threat the organisation presented to Iran and to Shiites in Iraq. In the absence of a credible replacement for the technical capabilities the U.S. and its international partners bring to the fight, a move to expel American forces could end up harming both Iraq’s and Iran’s security.

As for Iraq’s leaders, they should continue to consolidate their country’s neutrality in the U.S.-Iranian standoff. The government faces difficult months, born of the potential combination of street protests, parliamentary disputes and regional confrontation. It should tell parliament and the public that Iraq cannot bear the political or economic costs of being embroiled in U.S.-Iranian battles.

The Iraqi government also should clearly spell out to the Trump administration and the U.S. Congress – perhaps via a high-level delegation visit to Washington – the measures it cannot take vis-à-vis Iran without risking domestic political or military backlash; the conditions under which it can remain neutral; and possibly a roadmap of steps it could take over the next six months in response to U.S. demands.[fn]As a senior Iraqi diplomat put it, “The prime minister understands the gravity of the situation and American expectations. But there are only a limited number of things he can do. It is in our interest as well to sign contracts that increase oil production and diversify our energy sources. But when it comes to security issues such as reining in militias, it requires a power base in parliament that this government simply does not have”. Crisis Group interview, Washington, 25 July 2019.Hide Footnote These steps could include strengthening economic and political ties to Arab neighbours and signing energy as well as trade deals with non-Iranian companies. Taking these measures would signal Iraq’s determination both to ensure its independence and to fortify its economy with diversification. Iraq’s message should be that it cannot remain neutral in the U.S.-Iran showdown unless Washington dials down its escalatory approach and refrains from compelling Iraq to take sides through its sanctions policy.

The Iraqi government also would be well advised to enlist the support of other members of the anti-ISIS coalition, highlighting the risks of an unstable Iraq. The EU’s July 2019 statement in support of Baghdad strengthening relations with its neighbours through an Iraq-proposed regional conference is a positive development in this direction at a critical time, as it could reduce the impact of U.S.-Iran tensions on Iraq.[fn]“EU supports Iraq-proposed conference on US-Iran tensions”, Associated Press, 13 July 2019. See also “Remarks by High-Representative/Vice President Federica Mogherini at joint press event with Foreign Minister of Iraq”, Baghdad, 17 July 2019.Hide Footnote For outside actors, de-escalating the U.S.-Iran confrontation is a tall order. But supporting an Iraqi government committed to neutrality in that rivalry is an intermediate step that could mitigate risks of all-out war and chaos in the region while preserving Iraq’s recovery.

VI. Conclusion

Thus far, the Iraqi government has proven successful in distancing itself from the looming confrontation between its two powerful backers, the U.S. and Iran. But its efforts may fall short if Washington and Tehran remain on their current collision course.

Both the U.S. and Iran should wish to avoid dragging Iraq into their fight. Doing so would jeopardise U.S. assets in the country. It would harm Iran’s trade at the same time that U.S. sanctions begin to bite harder. And neither the U.S. nor Iran wants to give ISIS a new lease on life.

For both the U.S. and Iran, and for the other countries that contributed to defeating ISIS, the Iraqi leadership’s commitment to the country’s neutrality is an opportunity to seize, especially considering how devastating a new cycle of instability would be for a country struggling to emerge from the last one.

Baghdad/Brussels, 29 August 2019