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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.
Saudi Crown Prince Mohammad bin Salman al-Saud (R) meets with Leader of the Sadrist movement Muqtada al-Sadr (L) in Jeddah, Saudi Arabia on 30 July 2017. Bandar Algaloud / Saudi Royal Council / Handout / Anadolu Agency

Saudi Arabia: Back to Baghdad

Saudi Arabia has been forging links to Iraq since reopening its Baghdad embassy in 2016. Its adversary Iran has strong Iraqi ties. If Riyadh avoids antagonising Tehran, invests wisely and quiets anti-Shiite rhetoric, Iraq can be a bridge between the rival powers - not a battleground.

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What’s new? After a quarter-century of estrangement, Saudi Arabia has re-opened diplomatic relations with Iraq in an attempt to counter strong Iranian influence. The kingdom seeks a role in post-ISIS reconstruction and has set about forging new political alliances.

Why does it matter? The Saudi approach to Iraq could offer a sustainable model of patient, long-term engagement. A new approach in Iraq may persuade Riyadh that leveraging its economic and cultural capital – rather than military force and zero-sum politics – will better serve its strategic interests and reduce growing tensions in the region.

What should be done? In projecting its influence in Iraq, Riyadh should resist the temptation to transform the country into the latest battleground in a cold war with Tehran. All of Iraq’s bilateral partners should see the country’s stability as their vital interest and work constructively to achieve it.

Executive Summary

Saudi Arabia is re-engaging with Iraq after nearly a quarter-century of broken ties. The rapprochement began in 2016, sharply accelerated in mid-2017 and stands to move even faster after Iraq’s general elections in May 2018, particularly if politicians open to reconnecting with Saudi Arabia succeed in forming a government. Riyadh’s strategy is to ride a wave of Iraqi national pride, reinvest economically and build relationships across ethnic and confessional lines. If its objective is to roll back Iran’s influence in Iraq, however, it will find that many Iraqis – even those who are critical of Iran’s overweening influence – view that as a red line, a way of turning their country back into an arena of regional combat. If it moves too fast and favours infusions of cash over carefully calibrated and targeted economic assistance, it will fuel rather than curb rampant corruption. And it will need to silence sectarian rhetoric to reach out across Iraq’s ethnic and religious spectrum.

Iraqis from various political, confessional and social groups say they welcome the apparent course change. In part, their enthusiasm stems from necessity. The new relationship comes amid a rare international consensus that the calm in Iraq must be consolidated, lest the country regress into violent conflict. The Islamic State (ISIS) has been purged from most Iraqi territory, national pride is swelling and investor confidence is up. Yet if the government and its partners cannot produce a tangible peace dividend, secure liberated areas, and end a cycle of sectarian and ethnic retribution, those gains could easily be reversed. Western partners have already started walking back their financial commitments, hoping their Gulf allies will fill the gap.

Saudi political and economic re-entry can capitalise on and reinforce domestic trends in Iraq, namely growing anti-Iran sentiment and an appetite for balanced regional relations.

Saudi Arabia’s renewed engagement with Iraq has advantages compared to its actions elsewhere in the region. Iraq provides an opportunity for Saudi officials to apply lessons learned from less successful interventions in Syria and Yemen. In Iraq, Saudi Arabia can play to its strengths, building political support and influence through economic incentives, while avoiding direct or proxy military action. Saudi political and economic re-entry can capitalise on and reinforce domestic trends in Iraq, namely growing anti-Iran sentiment and an appetite for balanced regional relations.

Counter-intuitively, the fact that Riyadh is starting from a low base could be a blessing in disguise. Both sides must do the hard work of rebuilding trust, creating a network of contacts and courting public opinion. The kingdom’s financial might gives it leverage, but not enough to have things its way. Riyadh will need strategic patience in order to build the influence it seeks.

Riyadh can contribute to Iraq’s stabilisation, but the relationship will have to navigate a minefield of obstacles. The first is the most fundamental: Saudi Arabia’s renewed interest in engaging with Iraq overtly derives from a desire to counter Iranian influence. Yet Iraqis want and need to prevent their country from becoming yet another theatre for Saudi-Iranian hostilities. Calibrating the speed of engagement also will be a challenge. Iraqis want to see immediate, tangible gains from Saudi Arabia’s return. But if Riyadh tries to do too much, too soon, it could become mired in bureaucracy and corruption – or even provoke an Iranian reaction. Both Saudi Arabia and Iraq will need to break old habits, such as working exclusively via political patronage and allowing inflammatory sectarian rhetoric from clerics and media commentators.

If the risks of engagement are great, the folly of not engaging would be greater still. As Saudi policymakers readily admit, leaving post-2003 Iraq without strong Arab partners kept the country dependent on Iranian security assistance, energy support, trade and political funding, and made its security institutions vulnerable to Iranian penetration. Such lopsided influence helped marginalise Sunni Arabs and set the stage for ISIS’s rise.

Seeking to undo the damage, Saudi Arabia can now help strengthen the Iraqi state so that Baghdad can play the role to which many Iraqis say it aspires: a bridge between warring neighbours, rather than a battleground. The following steps could help:

  • Saudi Arabia should prioritise economic engagement with Iraq, producing immediate, tangible gains and fostering long-term projects. Efforts should focus on reconstruction, job creation and trade, with an eye toward balancing investment across the country.
     
  • Riyadh should consider steps toward publicly recognising Shiite religious practice as a school of Islam, including by: moving to accept the legitimacy of Shiite theology and jurisprudence, quieting anti-Shiite rhetoric from Saudi Arabia-based clerics, issuing statements and undertaking actions dignifying Shiite rituals, curbing persistent discrimination against the Shiites in the kingdom, promoting broader religious tolerance within Saudi Arabia and encouraging its Sunni clerical establishment to engage informally with Shiite clerics in Najaf.
     
  • The Iraqi government should prioritise reconstruction and reconciliation among Iraqi parties and communities by passing legislation and regulations that will facilitate donor and investor interest, stepping up anti-corruption efforts, ensuring equal services and aid across the country, and promoting a non-sectarian and non-ethnic ethos among its security forces.
     
  • Iran should encourage and support the calibrated integration of autonomous security actors into Iraq’s national security institutions. Saudi Arabia and Gulf allies should understand that this process will necessarily be arduous – and must proceed delicately if it is to succeed. Tehran should encourage Iraq’s efforts to diversify its regional alliances.
     
  • Riyadh and Tehran should look for common ground to gradually build a base of cooperation, or at a minimum coexistence, in Iraq. This effort could include promoting shared interests such as a stronger Iraqi economy, the country’s territorial integrity, security sector reform and mitigation of the destabilising effects of climate change in the region.

Riyadh/Baghdad/Brussels, 22 May 2018

I. Introduction

The Kingdom of Saudi Arabia cut ties with Iraq in 1990 after Saddam Hussein’s regime ordered the invasion of Kuwait. While Riyadh gave tacit approval of the U.S. invasion of Iraq in 2003, it was reluctant to engage with the new political order after Saddam’s fall and as Iranian influence grew.[fn]Wealthy individuals in Saudi Arabia and other Gulf states funded Sunni Arab insurgents as well. See “The Iraq Study Group Report”, U.S. Institute of Peace, 6 December 2006; Sharon Otterman, “Saudi Arabia: Withdrawal of U.S. Forces”, Council on Foreign Relations, 7 February 2005.Hide Footnote Relations deteriorated further under Prime Minister Nouri al-Maliki (2006-2014), whom Saudi Arabia, as well as the United Arab Emirates (UAE), saw as an impossible partner inclined toward Iran.[fn]Crisis Group interviews, Gulf official, February 2018; senior Iraqi security official, Baghdad, March 2018; former Iraqi diplomat, February 2018.Hide Footnote Believing that by invading Iraq the U.S. had “handed the country to Iran, as if on a golden platter”, as a senior Saudi official put it, Saudi Arabia sought to attain alternative forms of influence by funding Sunni Arab organisations and politicians.[fn]Crisis Group interview, Riyadh, January 2018. See also “Saudis’ role in Iraq frustrates U.S. officials”, The New York Times, 27 July 2007.Hide Footnote

The George W. Bush administration pushed Saudi Arabia to re-establish ties with Iraq and discouraged the kingdom from supporting non-state groups. A minor breakthrough came in 2006 when Iraq’s national security adviser and the Saudi intelligence chief, Prince Muqrin bin Abdulaziz al-Saud, opened a hotline between the two of them, but it ceased to function several years later when the responsible Iraqi personnel left office.[fn]Crisis Group interview, former Iraqi security official, Baghdad, March 2018.Hide Footnote

Saudi officials viewed Iranian policy in the region as rooted in exploiting and exacerbating instability through sectarian divisions.

Real progress came only after Islamic State (ISIS) took vast swathes of Iraqi territory in 2014 and a new prime minister, Haider al-Abadi, showed firm commitment to rolling back the group. Abadi carved out an image as a nationalist and convinced Riyadh he was “not Iran’s man”.[fn]Crisis Group interviews, Gulf diplomat, Riyadh, January 2018; UN official, phone, February 2018.Hide Footnote In response, Saudi Arabia reopened its Baghdad embassy in December 2016. Engagement has intensified since, with visits by Abadi to Riyadh in June and October 2017 and at least three such trips by the Iraqi interior minister, Qasem al-Araji.[fn]Crisis Group interview, Iraqi official, Baghdad, March 2018. See also, “Iraqi PM arrives in Riyadh for talks on reconstruction and Iran”, The National, 21 October 2017; “Saudi crown prince, Iraqi interior minister discuss common issues, counterterrorism”, Arab News, 20 July 2017.Hide Footnote

The rationale for Riyadh’s rapprochement with Baghdad begins with a broader Saudi reassessment of foreign policy vis-à-vis its regional rival, Iran. When King Salman bin Abdulaziz al-Saud ascended to the throne in 2015, the Arab uprisings had overturned the regional status quo and shaken Saudi leaders’ trust in the U.S., even as long-time decision-makers (including two consecutive crown princes, Sultan bin Abdulaziz and Nayef bin Abdulaziz) passed away.[fn]Crisis Group interview, Saudi diplomat, Riyadh, January 2018. See also Deborah Amos, “Arab leaders feel U.S. abandoned Egypt’s Mubarak”, National Public Radio, 9 February 2011.Hide Footnote Saudi attempts to bolster certain political and armed opposition groups in Syria largely failed, while Iran gained ground. A Saudi diplomat said:

We had a little dive into supporting groups in Syria, and [discovered] we’re just not good at it. … Iran outmanoeuvred us everywhere. When you play with someone who has no red lines, you will always lose. We’re very bad at this. [We realised we have to play] another game.[fn]Crisis Group interview, Saudi diplomat, Riyadh, January 2018. Another senior Saudi official noted that Saudi influence in Lebanon peaked in the early 2000s, when that country’s economy was thriving, partly as a result of Riyadh’s support. Crisis Group interview, Riyadh, January 2018.Hide Footnote

Tehran’s influence expanded in Iraq, Lebanon, Yemen and Bahrain. Right under the Saudis’ eyes, the pre-2011 geopolitical status quo was gone.

King Salman and his son, Deputy Crown Prince Mohammed bin Salman (MbS), assessed that Saudi Arabia’s regional policy toward Iran was too reactive – and failing. They set about formulating a new, more assertive approach, the implementation of which appears to have accelerated since MbS was elevated to crown prince in June 2017.[fn]A Saudi academic and former official said, “MbS has decided that we will go after Iran wherever they are, even in sub-Saharan Africa. This is why you see a dramatic change in relations”. Crisis Group discussion, May 2018.Hide Footnote A senior Saudi security official said in early 2018, “[Kingdom of Saudi Arabia] is trying now to correct this position. We are on the front line today to push Iran to its borders”.[fn]Crisis Group interview, senior Saudi official, Riyadh, January 2018.Hide Footnote

Saudi leaders undertook the strategic equivalent of triage: they decided which theatres could still be saved from Iranian domination and focused on those. A Riyadh-based diplomat said, “there is a sense that with Syria and Lebanon, it’s too late, but in Yemen, Iraq and Jordan there is scope to keep Iran out”.[fn]Crisis Group interviews, Western diplomat, Riyadh, January 2018; senior Saudi official, Riyadh, January 2018; Saudi diplomat, Riyadh, January 2018. Officials in the Trump administration were undertaking a similar assessment. Dexter Filkins, “A Saudi prince’s quest to remake the Middle East”, New Yorker, 9 April 2018.Hide Footnote In this context, a new U.S. administration, under President Donald Trump, again encouraged Saudi Arabia to engage with Iraq, as a counterweight to Iranian influence.[fn]Crisis Group interview, U.S. defence official, phone, April 2018.Hide Footnote

Saudi officials viewed Iranian policy in the region as rooted in exploiting and exacerbating instability through sectarian divisions. Riyadh conceptualised its engagement with Iraq as a demonstration that Saudi Arabia seeks the opposite: to strengthen the state around patriotic ideals of Iraqi-ness. In taking this approach, Riyadh sought to “expose” Iranian intentions as malicious and sectarian. A senior Saudi policymaker described it this way:

Iran’s goal is to create chaos and destabilise the country …. Saudi Arabia in response pursues a strategy of reason. We try to strengthen these states and encourage patriotism among their citizens. … We are trying to put away the sectarian conflict … to expose the Iranian intervention.[fn]Crisis Group interview, senior Saudi official, Riyadh, January 2018.Hide Footnote

Some Iraqis warn that this Saudi perception of Iran’s policy toward their country is simplistic or even unfair, particularly after Tehran’s investment in rolling back ISIS after 2014. Tehran has built alliances across Iraq’s sects, regions, and economic and political sectors over the last fifteen years, with an eye toward building a long-term regional ally.[fn]Crisis Group interviews, senior diplomat, Iraq department, Ministry of Foreign Affairs, Tehran, March 2018; U.S. defence official, phone, April 2018. See also Crisis Group Middle East Report N°184, Iran’s Priorities in a Turbulent Middle East, 13 April 2018.Hide Footnote An Iraqi academic explained:

The Iranians treat [the region] as a game of chess. The Saudis are rash actors. The Iranians never [make rash decisions]. There is one Iranian vision. Iran has had the same goal since 1979: to protect themselves. They never trust the Arabs and never trust the U.S., so they are creating a buffer around themselves.[fn]Crisis Group interview, Iraqi academic close to the government, Baghdad, March 2018.Hide Footnote

II. The Saudi Vision

As it tries to regain a foothold in Iraq, Riyadh hopes to push back against Iranian influence, though policymakers say they realise it will not fully succeed in doing so. From minimal influence today, they ambitiously say, they would like to see the balance tilt to 70 per cent Saudi sway, 30 per cent Iranian.[fn]Crisis Group interview, senior Saudi official, Riyadh, March 2018.Hide Footnote To achieve this aim, the kingdom is pursuing four tactical avenues: outreach to mainly Shiite political elites, strengthening of economic ties, cross-confessional religious engagement and spread of social good-will.

A. Political Outreach

Saudi Arabia’s political approach capitalises on an Iraqi sense of national pride that has emerged from having first survived ISIS and then having fought to defeat it.[fn]Crisis Group interview, Iraqi academic close to Najaf’s religious leadership, February 2018.Hide Footnote Saudi policymakers decided to focus on Iraq’s Shiites first, because they dominate the government and represent the greatest area of tensions in the relationship.[fn]Crisis Group interview, senior Saudi official, Riyadh, January 2018.Hide Footnote Riyadh’s approach prioritises individual relationships over institutional engagement, as the initial outreach to the prime minister and interior minister illustrates.[fn]While high-level personal relationships continue to drive the direction of the budding ties, the two countries are also establishing ministerial-level engagement through the Saudi-Iraqi Coordination Council, established in October 2017.Hide Footnote

The most pivotal relationship is with Abadi. Since his election in 2014, U.S. and UN officials have sought to persuade Riyadh that Abadi was not an Iranian proxy.[fn]Crisis Group interviews, U.S. defence official, phone, April 2018; UN official, phone, February 2018.Hide Footnote Saudi Arabia was impressed with the new prime minister’s determination to fight ISIS, particularly in comparison to Maliki, whose army one Saudi official said had been “defeated by 70 [ISIS] pickup trucks”.[fn]Crisis Group interview, senior Saudi official, Riyadh, January 2018.Hide Footnote Ultimately, it was Abadi who personally convinced the Saudi leadership that he would not bow to Iran.[fn]Crisis Group interviews, senior Saudi official, Riyadh, January 2018; Gulf diplomat, Riyadh, January 2018; UN official, phone, February 2018; and Gulf official, February 2018.Hide Footnote

Saudi Arabia, together with the UAE and Bahrain, believes Abadi is the best-placed candidate to lead Iraq.

Abadi has worked assiduously to prove himself independent of Tehran, including in security policy, an area the Gulf views as being wholly compromised by Iran.[fn]An instance in early 2018 demonstrates that Abadi has navigated a balance between deference to Iran’s political influence and his desire to remain untethered to any foreign power, whether Tehran or Washington, according to Iranian and Western diplomatic accounts. In January, the Iranian Qods force commander, Qasem Soleimani, helped broker an electoral coalition between the PMUs and Abadi. According to Western sources, the PMUs had expected to have equal control over political decision-making, but Abadi insisted that he should have the last word on policy. Amid mismatched expectations, the coalition split within 24 hours. Crisis Group interviews, Tehran, Baghdad and by phone, February, March and April 2018.Hide Footnote Critically for Saudi Arabia, as well as for the UAE, Bahrain and Qatar, Abadi has tried to start bringing the mostly Shiite Hashd al-Shaabi (Popular Mobilisation Units, PMUs) under state control.[fn]Ahmed Rasheed, “Iraq’s Abadi in high-stakes plan to rein in Iranian-backed militias”, Reuters, 4 January 2018. The PMUs were established following a June 2014 fatwa from Grand Ayatollah Ali al-Sistani in Najaf, urging young men of all sects to fight ISIS out of patriotic spirit. Renad Mansour and Faleh A. Jabar, “The Popular Mobilization Forces and Iraq’s future”, Carnegie Middle East Center, 28 April 2017. The Maliki government seized the opportunity to expand pre-existing Shiite militias. Some brigades are aligned with – and many were trained and equipped by – Iran; others have committed atrocities against Sunnis. See for example, “Iraq: Possible War Crimes by Shiite Militia”, Human Rights Watch, 31 January 2016.Hide Footnote Though the PMUs are a diverse force, and not all units are allied with Tehran, policymakers in each of these Gulf states have described them as an Iranian front and their entrenchment as a roadblock in the way of closer ties.[fn]Crisis Group interviews, Gulf diplomat, Riyadh, January 2018; Gulf official, February 2018; Bahrain government spokesperson, March 2018.Hide Footnote Abadi has said he aims to reduce the number of PMU fighters while bringing their heavy weapons under state control.[fn]Ahmed Rasheed, “Iraq’s Abadi in high-stakes plan to rein in Iranian-backed militias”, Reuters, 4 January 2018.Hide Footnote

Saudi Arabia, together with the UAE and Bahrain, believes Abadi is the best-placed candidate to lead Iraq.[fn]The UAE remains more cautious about Abadi, considering him the “best bad option” and likely still ultimately aligned with Iran. Crisis Group interviews, Gulf officials, February and April 2018; Bahraini government spokesperson, email correspondence, March 2018; former Iraqi diplomat, phone, February 2018.Hide Footnote Several officials stressed the importance of Abadi maintaining the premiership after the 12 May elections and said their engagement was predicated on the assumption that he will.[fn]Crisis Group interviews, senior Saudi official, Riyadh, January 2018; Gulf diplomat, Riyadh, January and February 2018.Hide Footnote Gulf support for Abadi was evident in an Iraq reconstruction donors’ conference hosted by Kuwait in February 2018. Gulf countries solicited a banner-headline dollar figure, offering Abadi pre-election evidence that he (and perhaps only he) can unlock Gulf funding for reconstruction.[fn]Crisis Group interview, Gulf diplomat, Riyadh, January 2018.Hide Footnote

Riyadh also has built a strong working relationship with Iraq’s interior minister, Qasem al-Araji, an ambitious politician who is closer than Abadi to Tehran. Araji is a member of the Badr Organisation, one of the primary vehicles for Iranian influence in the security sector.[fn]See for example, Guido Steinberg, “The Badr Organization: Iran’s Most Important Instrument in Iraq”, German Institute for International and Security Affairs, 26 July 2017.Hide Footnote Iraqi officials and diplomats have varying views of why Saudi Arabia has prioritised ties with Araji. Some believe it is expediency. As a senior Iraqi security official said, a good relationship with the minister “will make most things move easily” for Riyadh.[fn]Crisis Group interview, senior Iraqi security official, Baghdad, March 2018.Hide Footnote The Interior Ministry would also be in a unique position to offer Saudi Arabia reassurances that its interests and investments will not be targeted by Iranian-allied PMUs.[fn]Since taking office, Araji has surprised some observers with his willingness to work with Abadi to move the PMUs under state control. A U.S. defence official said, “he has been trying to support Abadi’s approach to bring the PMUs under [the prime minister’s authority]. A lot of that is because Araji, when he became integrated into the official government process, saw that a group was operating outside his purview”. Crisis Group interview, phone, April 2018.Hide Footnote Others see an attempt to “flip” Araji – a man known to have aspirations to the premiership – away from his erstwhile patrons in Tehran.[fn]The logic of this argument is as follows: within his own party, Araji would have powerful competition for a run at the premiership; he would be outranked by Badr Organisation chief Hadi al-Ameri. By switching to Saudi patronage, he might be able to subvert this hierarchy and improve his chances at moving up politically. Crisis Group interviews, Iraqi official, Baghdad, March 2018; Western diplomat, Baghdad, March 2018.Hide Footnote Regardless of the calculations, the relationship appears mutually coveted.[fn]Crisis Group interview, Iraqi official, Baghdad, March 2018. Araji visited Saudi Arabia at least three times in the second half of 2017 and met MbS on at least one occasion. “Iraq’s interior minister meets with Saudi crown prince”, The National, 19 July 2017.Hide Footnote Araji, for example, has sought to add nuance to Riyadh’s understanding of the PMUs.[fn]Crisis Group interview, Iraqi official, Baghdad, March 2018.Hide Footnote

Beyond outreach to Iraqi Shiite government officials, Saudi Arabia and some other Gulf states, as well as Turkey, have extended support to individual politicians and parties, including some of the top vote-winning coalitions among non-Shiite-led blocs in the May 2018 elections.[fn]Crisis Group interviews, senior Iraqi security official, Baghdad, March 2018; former Iraqi security official, Baghdad, March 2018; UN official, phone, February 2018; Western diplomat, Baghdad, March 2018. Turkey is one of Iraq’s largest economic partners and has also maintained close relationships with and support for some Sunni Arab politicians. Qatar supports some Iraqi political figures, including by hosting exiles and providing coverage in Qatari-owned and aligned media outlets. The political rift between Qatar and Turkey, on one side, and Saudi Arabia and the UAE, on the other, is reflected in their patronage distribution in Iraq: Qatar and Turkey support Sunnis inclined toward Islamism, while Saudi Arabia and the UAE generally reach out to secular-leaning nationalists. These actions contribute to the splintering of Sunni Arab political alliances.Hide Footnote These overtures have included direct patronage, favourable media coverage and diplomatic visibility.[fn]Electoral coalitions whose members have reportedly received support from Gulf states and/or Turkey include Iraq’s Decision and Wataniya. Crisis Group interviews, Gulf official, April 2018; UN official, phone, February 2018; Western official, Baghdad, March 2018.Hide Footnote

B. Confessional Engagement

As part of its re-evaluation of Iraq, Riyadh is betting on the idea that the vast majority of Iraqi Shiites place their ethnic identity above their confessional one.[fn]Crisis Group interviews, Iraqi MP, Baghdad, March 2018; adviser to the National Wisdom Movement of Ammar al-Hakim, Baghdad, March 2018; Saudi diplomat, Riyadh, February 2018; Saudi academic close to government, Riyadh, February 2018.Hide Footnote Most follow the quietist religious school prevalent in Najaf, rather than the Iranian regime’s velayat-e faqih doctrine, which Saudi leaders view as deeply threatening.[fn]Practitioners of Shiism claim allegiance to a “religious reference” or marja – a grand ayatollah, whose rulings on Islamic law and practice they seek to follow in their lives. Najaf’s Grand Ayatollah Ali al-Sistani is the most widely revered marja among Arab Shiites. Ayatollah Ali Khamenei, Iran’s supreme leader, is an adherent of the velayat-e faqih doctrine formulated by Grand Ayatollah Ruhollah Khomeini and incorporated into Iran’s 1979 constitution. Velayat-e faqih imagines a theocratic Islamic republic ultimately governed by the marja in accordance with Islamic law. The clerics’ direct role in politics in Iran since 1979 starkly contrasts with Najaf’s quietist approach of keeping religion out of politics. Khamenei has strongly promoted Qom (rather than Najaf) as the pre-eminent place of Shiite religious learning. The institution on which the marja’s authority rests is called the marjaiya; the cluster of Shiite seminaries that provide the theological and juridical underpinnings for the marjaiya is called the hawza.Hide Footnote Riyadh’s engagement seeks to emphasise the Arab/Iraqi component of Shiite identity and to elevate the religious importance of Najaf vis-à-vis the Iranian city of Qom.[fn]Crisis Group interviews, Saudi diplomat, Riyadh, February 2018; Iraqi MP, Baghdad, March 2018; Saudi academic close to the government, Riyadh, February 2018. See also Erika Solomon, “Sunni Saudi Arabia courts an ally in Iraq’s Shia”, Financial Times, 2 April 2018. A former Saudi official said, “we would prefer an Arab base for the marjaiya, rather than Iran”. Crisis Group interview, May 2018.Hide Footnote

Riyadh is likely to welcome [Moqtada al-Sadr's] electoral success as a sign that Iraqis find appeal and salience in his non-sectarian rallying call.

Saudi engagement with Iraq accelerated after a July 2017 visit to the kingdom, and subsequently to Abu Dhabi, by Shiite cleric and politician Moqtada al-Sadr, whose coalition won a plurality of parliamentary seats in the May 2018 elections.[fn]Fanar Haddad, “Why a controversial Iraqi Shiite cleric visited Saudi Arabia”, Washington Post, 10 August 2017.Hide Footnote Both a religious figure and a political activist who has pushed his non-sectarian credentials, Sadr crystallised Riyadh’s strategy of promoting Arab identity as a unifying tool.[fn]Crisis Group interview, Gulf official, February 2018.Hide Footnote He told Saudi leaders he wanted Iraq to have more balanced regional relationships, including with the Gulf states, as well as with Turkey and Iran. Sadr offered the Saudis a set of concrete policy options, reportedly including: making sizeable economic investments, “showing up” at Baghdad events, engaging Iraqi tribal leaders and acknowledging Shiism as a valid doctrine among other schools of Islam. Sadr also asked Riyadh to open a consulate in Najaf to facilitate both pilgrimage to Najaf by Shiites from Saudi Arabia and travel to Mecca and Medina for the hajj and umra by Iraqi Shiites.[fn]Crisis Group interviews, Sadrist MP, Baghdad, March and April 2018.Hide Footnote The kingdom sent Iraq’s Foreign Affairs Ministry a formal request to open a consulate just days after the visit.[fn]“Saudi Arabia to open consulate in Najaf”, Baghdad Post, 14 August 2017.Hide Footnote Riyadh is likely to welcome the cleric’s electoral success as a sign that Iraqis find appeal and salience in his non-sectarian rallying call.

If Sadr is at the centre of Saudi religious engagement, other prominent religious families also are in Riyadh’s sights. Saudi Arabia has invited Ammar al-Hakim, leader of the National Wisdom Movement, to visit.[fn]Crisis Group interview, adviser to the National Wisdom Movement, Baghdad, March 2018.Hide Footnote Hakim, an Arab nationalist, a former leader of the Islamic Supreme Council of Iraq (from which he split) and a loose political ally of Abadi and Sadr, hails (like Sadr) from a prominent clerical family in Najaf.[fn]Crisis Group Middle East Report N°70, snShiite Politics in Iraq: The Role of the Supreme Council, 15 November 2007.Hide Footnote His second cousin, Grand Ayatollah Mohammad Saeed al-Hakim, is the second most senior cleric in Najaf after Sistani. Like the Sadrists, the National Wisdom Movement sees Saudi engagement as a way to rebalance Iraq’s regional relationships.[fn]Crisis Group interviews, adviser to the National Wisdom Movement, Baghdad, March and April 2018.Hide Footnote Saudi Arabia also appears to be experimenting with allowing some of its Sunni clerical establishment to speak informally with Shiite scholars in Najaf.[fn]Crisis Group interview, Shiite cleric, Najaf, March 2018.Hide Footnote

Outreach to Najaf aligns with a Saudi domestic priority to rein in the more intolerant – and overtly sectarian – elements within the kingdom’s own Sunni clergy. As it embarks on a massive economic and social reform initiative, the leadership in Riyadh has publicly described the most austere reading of Islam among those clergy as an obstacle to its ability to govern a modern state.[fn]MbS said: “I believe in the last three years, Saudi Arabia did more than in the last 30 years. And that’s because it’s aligned with our interest as Saudis to be competitive in livability and cultural and social [stet]. And Islam it’s open. It’s not like what the extremists are trying to represent Islam after ’79”. Interviewed in Time, 5 April 2018. See also Margherita Stancati, “Mohammed bin Salman’s next Saudi challenge: Curtailing ultraconservative Islam”, Wall Street Journal, 10 January 2018.Hide Footnote To that end, King Salman and MbS have made several symbolic gestures of greater tolerance for religious diversity, including meetings with Egypt’s Coptic pope, top Vatican officials, Jewish rabbis in New York and Saudi Arabia’s Shiite cleric Hassan al-Saffar.[fn]“Why the Saudi crown prince’s first official meeting with Jewish leaders is such a big deal”, Haaretz, 29 March 2018; “Saudi king meets with top Vatican cardinal for inter-religious dialogue”, Al-Arabiya, 18 April 2018; Saudi journalist Ahmed al-Omran on Twitter, 14 April 2018, https://bit.ly/2rT1QXw. Also notable were visits by Muslim World League Secretary General Mohammed al-Issa to the Vatican and synagogues in Europe in 2017. While the kingdom has engaged in inter-religious dialogue before, including through the King Abdullah bin Abdulaziz International Centre for Interreligious and Intercultural Dialogue, past Saudi leaders have largely avoided participating directly, leaving that task to the clerics.Hide Footnote This outreach, while suggestive of greater openness, is so far superficial and will need to extend into policy if it is to end or lessen discrimination against Saudi Arabia’s own Shiite population.

Saudi Arabia, the UAE and Bahrain also have a security interest in a moderate Najaf, which most Shiites in the Gulf look to as a reference point. Sistani has on multiple occasions decried the treatment of Shiite populations in the Gulf, particularly in Bahrain, which expelled the cleric’s envoy in 2014.[fn]“UN rights monitor criticises Bahrain over Shiite expulsion”, Agence France Presse, 24 April 2014.Hide Footnote But in contrast to some Tehran-allied Shiite clerics, Sistani has insisted on non-violence, even amid the 2011 Arab uprisings. For this reason, the Bahraini leadership, which violently quashed its 2011 protests with Saudi support, views Sistani as a critical counterweight to Iran, which cheered on the demonstrations.[fn]Crisis Group email correspondence, Bahraini government spokesperson, March 2018.Hide Footnote

The Wadi-us-Salaam cemetery sits just meters from Najaf's shrines. Recently, the burial ground has received casualties from the anti-ISIS campaign. CRISISGROUP/Elizabeth Dickinson

C. The Economics of Change

Saudi Arabia is finally playing things the right way. They realised that the way to tackle Iran’s influence is through trade.

Saudi Arabia’s most powerful tool for re-engagement with Iraq is its ability to deploy funds, companies and resources. How it uses this tool could make or break the relationship. An Iraqi investor said, “Saudi Arabia is finally playing things the right way. They realised that the way to tackle Iran’s influence is through trade”.[fn]Crisis Group interview, Iraqi investor, phone, February 2018. Many critics of Saudi Arabia in Iraq still encourage Saudi economic investment, according to a former security official: “If their outreach is economic, we welcome it – as long as they don’t politicise it”. Crisis Group interview, Baghdad, March 2018.Hide Footnote

Economic engagement is the one area where Saudi Arabia believes it could have an advantage over Iran. Its consumer products are of higher quality, its firms have stronger infrastructure and investment expertise, and its wallet is thicker. Saudi Arabia’s economic approach to Iraq thus far leverages those strengths.[fn]Crisis Group interviews, senior Saudi official, Riyadh, March 2018; Iraqi investor, phone, February 2018. In October 2017, following Abadi’s visit to Riyadh, the two countries launched a joint coordinating committee to facilitate negotiations on economic, political and other issues.Hide Footnote

Consumer goods are a particular preoccupation for Riyadh. The vast majority of agricultural and other staples in Iraq come from Turkey and Iran, providing both countries with quotidian visibility as well as foreign revenue.[fn]Data on Iraq’s trade partners is inconsistent across sources. Turkey is Iraq’s largest source of imports, with $11.9 billion in goods entering the country in 2014, according to the 2016 yearbook of the International Monetary Fund’s Direction of Trade Statistics (online). Saudi Arabia’s imports are absent from this data, but UN and other trade registers track imports in 2014 and 2015 at below $0.5 billion; the World Bank, World Integrated Trade Solutions database (online), and UN Statistical Division, Commodity Trade database (online). Iranian imports into Iraq are largely missing from international trade databases, but the Tehran Chamber of Commerce reports exports of $6.42 billion between March 2017 and March 2018. See https://bit.ly/2KAJked.Hide Footnote Saudi Arabia would like to replace these products with its own; in August 2017, it opened its Arar border crossing with Iraq to facilitate trade, and it is reportedly considering opening another transit point.[fn]Crisis Group interviews, senior Saudi official, Riyadh, March 2018; Iraqi investor, phone, February 2018. Saudi Arabian businesses were encouraged by their reception at the October 2017 Baghdad International Fair that they would be able to reach Iraqi consumers. By both Saudi and Iraqi accounts, the Saudi booth saw significantly more visitors than the Iranian display. Crisis Group interviews, Saudi academic close to government, Riyadh, February 2018; officials at al-Nahrain Center for Strategic Studies, Baghdad, March 2018.Hide Footnote Riyadh is also seeking lower Iraqi tariffs for Saudi Arabian goods.[fn]Crisis Group interview, Western diplomat, Baghdad, March 2018. See also “Iraq and Saudi Arabia discuss ways to develop economic and trade relations between the two countries”, Iraq’s Economic Center, 11 February 2018. Hide Footnote

The kingdom additionally appears interested in cross-border road development, petrochemicals, agriculture and infrastructure.[fn]The Saudi Basic Industries Corporation, SABIC, announced in December 2017 that it will reopen its Iraq office in order to facilitate investment in the petrochemicals sector. See “Saudi’s SABIC to open office in Iraq as relations improve”, Reuters, 5 December 2017.Hide Footnote For now, however, few concrete projects or investment details have emerged.[fn]Iraq and Saudi Arabia have signed at least eighteen energy-related memoranda of understanding, but the details have not been disclosed. “Saudi energy minister witnesses signing 18 MoUs in Iraq”, Saudi Press Agency, 5 December 2017.Hide Footnote Both public and private investors are leery of Iraq’s prevalent corruption and red tape. Private companies are concerned that they will not be paid on time, their assets may be seized or reallocated at politicians’ whims, and their operations may suffer from enduring insecurity.[fn]Dubai-based property developer Emaar has expressed interest in a $10 billion real estate development project in Baghdad known as al-Rashid City, but the deal is on hold amid security concerns. Crisis Group interviews, Gulf official, April 2018; Western oil sector consultant, phone, February 2018. See also “Iraq set to sign deal with Emaar, Eagle Hills for huge Baghdad scheme”, Zawya, 7 March 2018.Hide Footnote In addition to these concerns, a lack of skilled labour and a lengthy contract review process are deterring investors in the oil sector.[fn]A Western oil sector official said, “Iraq’s pitch to the oil sector is, ‘high risk, high reward’. But for us, it’s been high risk and marginal reward. Around the world, Iraqi oil terms are in the bottom quartile of all contracts”. Crisis Group interview, phone, February 2018. See also Robin Mills and Mohammed Walji, “Muddy Waters: Iraq’s Water Injection Needs”, Iraq Energy Institute, 19 January 2018.Hide Footnote

Strategies to mitigate these concerns include negotiating with the prime minister’s office directly rather than seeking approvals via the ministries, with their lengthy and opaque bureaucratic procedures.[fn]Crisis Group interview, Iraqi academic close to government, Baghdad, March 2018.Hide Footnote Riyadh has a preference for personal over institutional relationships, but to bypass the ministries would run the risk of exacerbating and even instigating corruption among office holders. Pledges at the Kuwait conference offered another route: credit and export guarantees meant to provide the Gulf private sector with insurance for riskier investments. Another model relies on Gulf countries’ sovereign development funds and charities to allocate funding to projects, paying contractors or even carrying out projects directly. An Emirati official explained:

I see this as a new approach to foreign aid, to link it to institutions such as the Abu Dhabi Fund that have their very specific criteria. What it does is to fix the cash problem of corruption. With the Abu Dhabi Fund, the [Iraqi] government provides us with projects, [the Fund] does a technical assessment, and instead of just giving cash, which could disappear, we build relationships with local institutions.[fn]Crisis Group interview, UAE official, Abu Dhabi, March 2018.Hide Footnote

No matter their risk-hedging mechanisms, Saudi Arabia and Gulf allies may still struggle to compete with Iran’s economic heft in Iraq, because of Tehran’s head start since 2003 and its willingness to deploy resources swiftly and ask questions later. The electricity sector is an example. Emirati and Saudi companies have both expressed interest in working to improve Iraq’s power systems, and Kuwait is set to start exporting power to Iraq.[fn]Crisis Group interview, senior UAE official, Abu Dhabi, March 2018.Hide Footnote But today, when the grid in southern Iraq reaches capacity, Iran has readily filled the gap to meet demand.[fn]“Iraq to start electricity imports from Kuwait: Ministry”, Iraqi News, 21 February 2018.Hide Footnote An Iraqi academic explained the Iranian mentality: “They say: ‘whatever you need, we will give you. We won’t ask a penny. But eventually we will get the money back from you’. They believe Iraq can pay for itself, and that Iran can have the best influence by being the first in the door”.[fn]Crisis Group interview, Iraqi academic close to government, Baghdad, March 2018.Hide Footnote

While the Gulf states may be able to disburse funds as fast, their success in displacing Iranian products may well depend on what financial terms they set in comparison. If Saudi Arabia is intent on entering the Iraqi market quickly, it will almost certainly fuel corruption. But if Riyadh is indeed concerned about graft, it may be unable to compete for contracts and bids when other parties offer kickbacks to Iraqi partners. Without clear terms, Saudi Arabia risks contributing to a cycle of economic predation that has weakened Iraq’s political system.

If Saudi Arabia is intent on entering the Iraqi market quickly, it will almost certainly fuel corruption.

D. Social Outreach

Saudi Arabia faces a complex challenge to rewrite the narrative of its past engagement with Iraq. The kingdom’s history of promoting a particularly arid and intolerant form of Salafi Islam, whose proponents at times cast Shiites as non-Muslims, has planted it firmly in the minds of many Iraqis as synonymous with ISIS.[fn]Crisis Group discussion, al-Nahrain Center for Strategic Studies, Baghdad, March 2018. See also, “How Muslim sectarianism affects politics and vice-versa”, The Economist, 11 September 2016.Hide Footnote Even if the state does not endorse radical clerics or the expression of their ideas, the longstanding refusal by the kingdom’s clerical establishment to acknowledge Shiite religious practice blurs the distinction for many Iraqis and creates a receptive ideological environment in which extremists can operate. Saudi Arabia’s reticence about supporting the post-Saddam order in Iraq, its discriminatory treatment of its own Shiite population and, indirectly, Bahrain’s, and the ongoing war in Yemen against the Huthi movement, which subscribes to an offshoot of Shiism, have all left deep wounds.[fn]Crisis Group interviews, officials at al-Nahrain Center for Strategic Studies, Baghdad, March 2018; senior Shiite cleric, Najaf, March 2018; former Iraqi diplomat, phone, February 2018. In early 2018, a number of buses in Baghdad carried posters criticising MbS for having inflicted civilian casualties in Syria, Bahrain and Yemen. One poster called him a “criminal” (mujrim).Hide Footnote

The kingdom is attempting to repair its image through media engagement, tribal and personal outreach, and direct patronage of Iraqi tribes, communities and individuals.[fn]In February 2018, the first Saudi media delegation to visit Iraq in 28 years met senior officials, including Abadi, Araji and parliamentary speaker, Salim Jabouri. “Media Saudi editors pay landmark visit to Baghdad”, Kuwait News Agency, 23 February 2018. A senior Saudi official relayed the following anecdote: during a recent visit to Shiite tribesmen, he discovered that an Iraqi MP had a medical condition that needed treatment, at a cost of $25,000. The official asked and secured the crown prince’s permission to pay for the MP’s care in India. Crisis Group interview, Riyadh, January 2018.Hide Footnote Semi-governmental organisations in Saudi Arabia and Iraq are also exploring joint cultural festivals, parliamentary exchanges and educational links.[fn]Crisis Group interview, Saudi academic close to government, Riyadh, February 2018. See also “Saudi Arabia’s use of soft power in Iraq is making Iran nervous”, The Economist, 8 March 2018.Hide Footnote All of these moves could help dull sceptics’ anger, but they will ultimately do little unless Riyadh fundamentally changes its relationship with Shiite communities across the region, beginning at home.[fn]A former Iraqi diplomat said, “Iraqi Shiites are worried about fellow Shiites in Bahrain, and they view this as clear Saudi domination. Saudi Arabia’s conduct in Yemen will be a persistent concern for us from a humanitarian perspective and also a sign to us that there is not enough maturity in Saudi Arabia to understand that [their approach] is futile and counterproductive”. Crisis Group interview, phone, February 2018.Hide Footnote

So far, Saudi Arabia’s greatest success in improving its social standing in Iraq has come through football. In March 2018, the Saudi Arabian national team travelled to Basra for a friendly game with an Iraqi team, the Lions of Mesopotamia. Thousands of spectators waved both countries’ flags in a euphoric atmosphere further amplified on social media.[fn]See, for example, the tweet by “Soccer Iraq”, 2 March 2018, https://bit.ly/2LbiM4n.Hide Footnote Days later, King Salman called Abadi and promised to build a new soccer stadium in a yet-to-be-determined location in Iraq. By late March, the Saudi sports minister had helped convince the Fédération internationale de football association (FIFA) to lift its ban on Iraq hosting international matches.[fn]“FIFA lifts three-decade ban on Iraq hosting international games”, The National, 18 March 2018; and “President of Iraq football association thanks Turki al-Sheikh for his efforts in lifting ban on Iraqi stadiums”, Saudi Press Agency, 17 March 2018.Hide Footnote

The UAE, similarly, announced in April that it would fund the $50.4 million reconstruction of Mosul’s Grand al-Nouri mosque.[fn]Dubai Media Office, Twitter, 24 April 2018, https://bit.ly/2IR6Ru5.Hide Footnote More than 800 years old, this place of worship was a defining landmark before ISIS blew up its minaret during its rule. Such gestures could help soften Iraqi antipathy for the kingdom and its Gulf allies, though their impact will depend on timely follow-through, and more importantly on the broader political and economic context in which they take place.

III. The View from Baghdad

Saudi Arabia’s nearly universal welcome in Baghdad comes with a widely shared caveat: do not engage with Iraq in order to counter Iran.[fn]Crisis Group interviews, officials at al-Nahrain Center for Strategic Studies, Baghdad, March 2018; senior Iraqi security official, Baghdad, March 2018; Iraqi foreign ministry official, Baghdad, March 2018; former Iraqi security official, Baghdad, March 2018; adviser to National Wisdom Movement, Baghdad, March 2018; Iraqi Sunni MP, Baghdad, March 2018; senior Shiite cleric, Najaf, March 2018; European Union official, Brussels, March 2018.Hide Footnote This reservation illuminates a fundamental mismatch between Iraqi and Saudi motivations for reopening relations. Many Saudis are happy to rebuild ties with Arab cousins – sometimes literally cousins – in Iraq.[fn]The Shammar are the largest tribe with ties to both Iraq and Saudi Arabia. Members live on both sides of the border between the two countries, as well as in Syria and Jordan; they comprise both Shiite and Sunni Muslims. Saudi Arabia’s first two ambassadors to Iraq after 2016 have been members of the Shammar tribe, and both have engaged heavily with Iraq’s Shammar community.Hide Footnote But as a Gulf official put it, “Saudi Arabia today views Iraq as a zero-sum game. They believe Iran is winning”.[fn]Crisis Group interview, April 2018. A former Iraqi security official shared this anecdote to illustrate what he saw as Riyadh’s zero-sum mentality: after the 2003 invasion, then Saudi Crown Prince Sultan bin Abdulaziz asked him: “We want to know: who is the winner in Iraq?” Baghdad, March 2018.Hide Footnote

Few in Iraq want to see their country devolve into another Saudi-Iranian battleground. Instead, policymakers now speak of an alternative, if highly aspirational, paradigm. Rather than a flashpoint for conflict, Baghdad could provide a theatre for de-escalation, “to pacify tensions [between] the Saudis and Iran that are putting fire to the region”.[fn]Crisis Group interviews, senior Iraqi security official, Baghdad, March 2018; Iraqi academic close to government, Baghdad, March 2018. Proponents of this approach cite the example of Iranian and U.S. coexistence in Iraq, which developed after those two countries had battled for years.Hide Footnote In principle, Saudi Arabia and Iran could build on shared interests, such as Iraq’s economic recovery, elimination of ISIS, the country’s territorial integrity and even combatting drug smuggling.[fn]Crisis Group interview, senior Iraqi security official, Baghdad, March 2018. Some in Iran also believe that “Iraq can be a place to de-escalate tensions in the framework of Iranian-Saudi cooperation on reconstruction of Iraq in the post-ISIS era”. Crisis Group interview, senior official at government-backed, non-profit Iraq reconstruction organisation, Tehran, March 2018.Hide Footnote

Saudi Arabia will have to be cognisant of divergent Iraqi interest groups, as well as Iran’s priorities and red lines.

Such a scenario would require at a minimum a stronger Iraqi state, able to resist regional attempts to use the country’s soil to settle geopolitical scores.[fn]Crisis Group interviews, former Iraqi security official, Baghdad, March 2018; Iraqi foreign ministry official, Baghdad, March 2018.Hide Footnote For now, Iraqi policymakers are prioritising Saudi Arabia’s economic engagement as the least provocative way to reopen ties. Through public and private investment, they say, Saudi Arabia could develop infrastructure, revitalise the housing sector, inject new capital into the oil industry and, ultimately, create jobs. A Sunni parliamentarian put it this way: “Wherever they go, they will find things to do”.[fn]Crisis Group interview, Sunni MP, Baghdad, March 2018.Hide Footnote

While many priorities are shared across constituencies, Saudi Arabia will have to be cognisant of divergent Iraqi interest groups, as well as Iran’s priorities and red lines. The various perspectives can be roughly divided into five: the federal government, Shiite Iraqi nationalists, the Najaf religious establishment, the Sunni political class and Iran.

A. The Government

Iraqi institutions have oscillated between ambition and pragmatism in their engagement with Saudi Arabia since late 2016. The new bilateral ties have been applauded amid triumphant optics: promises of reconstruction aid and cultural good-will. The Iraqi government needs Riyadh to deliver quick economic benefits to justify reopening ties and to acquire breathing room for dealing with thornier issues. Specifically, if ties are to last, current and former Iraqi officials say they need to be institutionalised rather than depend entirely on high-level personal contacts.[fn]Crisis Group interviews, former Iraqi diplomat, February 2018; senior Iraqi security official, Baghdad, March 2018.Hide Footnote This process will be time-consuming and likely fraught with disagreement. “We can’t agree to have big goals” for the relationship initially, said a senior Iraqi official.[fn]Crisis Group interview, senior Iraqi security official, Baghdad, March 2018.Hide Footnote

In the short to medium term, Iraq’s government needs Gulf states to help finance reconstruction. The U.S., UK and European Union (EU) are unlikely to contribute sufficiently to rebuild destroyed cities, focusing instead on humanitarian priorities.[fn]Crisis Group interviews, EU humanitarian official, February 2018; Western diplomat, Baghdad, March 2018. See also Susannah George and Lori Hinnant, “Few ready to pay to rebuild Iraq after Islamic State group defeat”, Associated Press, 28 December 2017.Hide Footnote Riyadh, Abu Dhabi, Kuwait City and Doha are among the only bilateral donors that can credibly provide the resources needed to resuscitate former ISIS areas. Failing to do so risks undermining Abadi and his allies, who have bet their political reputations on delivering reconstruction – or worse, seeing a return of the social and political resentment that facilitated ISIS’s rise in these areas.

Inevitably, Saudi Arabia and Iraq will disagree on major technical issues concerning reconstruction and on broader aspects of their relationship. Immediately after the Kuwait conference, Gulf officials described a host of obstacles to seeing their pledges materialise.[fn]Crisis Group interview, Gulf diplomat, Riyadh, February 2018.Hide Footnote They would like to see stronger guarantees, for example to ensure repayment in case investments default, as well as visible attempts to curb corruption.[fn]Crisis Group interview, senior UAE official, Abu Dhabi, March 2018. For more on anti-corruption challenges, see Douglas Ollivant, “The other battle in Iraq”, Lawfare, 11 February 2018.Hide Footnote A Gulf diplomat said, “the Iraqis have unrealistic expectations; these [pledges] are gestures, not commitments. They don’t seem to understand this; they thought checks would be arriving in the mail”.[fn]Crisis Group interview, Gulf diplomat, Riyadh, February 2018. Another example of technocratic debate comes from a Gulf Cooperation Council (GCC) proposal for a “plan of action” on cooperation with Iraq. Proposed in late 2017, the plan was still under consideration in Baghdad as of April 2018. The plan would include mechanisms to convene ministerial-level Iraq-GCC meetings to address disagreements before they escalate or erupt in the media.Hide Footnote

To succeed, the bilateral ties will need to both move big and visibly on the economy while working small and tediously day-to-day.

The May 2018 election results may encourage Gulf investors, however. Sadr’s On the Move electoral bloc, which included the Communists, was the most persistent critic of government corruption in the lead-up to the vote; its victory is telling of the frustration many Iraqis feel with state decay. Prior to the election, Sadrists said their aim was to build an anti-corruption majority bloc in parliament to begin pushing through structural change.[fn]Crisis Group interview, Sadrist MP, Baghdad, March 2018. Ahead of the May elections, Sadr wrote: “Your Iraq remains a prisoner of corruption after it has been liberated from occupation and terrorism. So free it by your votes”. Muqtada Sadr’s Twitter account, 9 May 2018, https://bit.ly/2rT56SK.Hide Footnote

Still, Iraqi officials urge an adjustment of investors’ expectations. Iraq cannot wait to rebuild until it has eradicated graft from its contracting system. In order to get projects off the ground, Baghdad will need creative solutions of the sort Riyadh and its allies are already considering.[fn]Crisis Group interviews, Iraqi official, Baghdad, March 2018; Iraqi academic close to the government, Baghdad, March 2018.Hide Footnote Put simply, to succeed, the bilateral ties will need to both move big and visibly on the economy while working small and tediously day-to-day.

The federal government’s priorities are unlikely to change significantly under the next prime minister, particularly if the successful coalition excludes Maliki’s State of Law and the PMUs’ Fatah list.[fn]In an initial statement on Twitter after the election results, Sadr expressed interest in working with electoral blocs, including Hakim’s Wisdom Movement and Iyad Allawi’s Wataniya, though not the State of Law or Fatah lists. Muqtada Sadr’s Twitter account, 14 May 2018, https://bit.ly/2Iwv6dI.Hide Footnote But with either or both of those blocs in opposition, the Saudi-Iraqi relationship could become a bargaining chip in parliamentary politics. Members of Fatah and State of Law are politically close to Tehran, and while still nominally supportive of Saudi investment, their members have been significantly cooler to the prospect of closer ties with Riyadh.[fn]Crisis Group interview, parliamentary candidate on Maliki’s list, Baghdad, March 2018.Hide Footnote Analysts close to Maliki expect that his list can resist Saudi engagement in alliance with Fatah.[fn]The means of resistance could include the PMUs holding a tighter grip on Sunni Arab areas in which they are deployed or singling out Shiite politicians who have engaged with Saudi Arabia, either in the media or with personal security threats. Crisis Group interview, Iraqi journalist close to Maliki, phone and email correspondence, March 2018.Hide Footnote

B. Shiite Politicians Seeking Regional Balance

Shiite leaders who favour re-engagement and call themselves nationalists view part of their role as demonstrating to Riyadh that their constituents favour their Arab, national and even tribal identities over their sectarian affiliation. A Sadrist MP said: “To their amazement, the [Saudis] found that Iraqi Shiites are Arabs, that they do not follow velayat-e faqih and that they want to build a modern civic state”.[fn]Crisis Group interview, Sadrist MP, Baghdad, March 2018.Hide Footnote With this understanding, some urge Saudi Arabia to embrace not only Iraqi Shiites but also Shiism generally as a legitimate school of Islam.[fn]Crisis Group interviews, Sadrist MP, Baghdad, March 2018; Iraqi academic close to the government, Baghdad, March 2018; adviser to the National Wisdom Movement, Baghdad, March 2018.Hide Footnote Even the most elementary steps toward recognition could improve Saudi Arabia’s relations with Shiites across Iraq and the region.

Pro-engagement Shiite politicians would also like to see a more nuanced policy toward the PMUs, which Riyadh, Abu Dhabi and Bahrain see as an Iranian front and a threat to their own security.[fn]PMUs have reportedly been active near the border crossing at Arar, which may be an attempt to levy fees on increased economic activity. For example, these groups have facilitated pilgrims’ movement through Arar for the hajj. See “العطية: الحشد اسند القوات الأمنية في تأمين عرعر ويؤكد خفض الأسعار امام الحجاج, Alghad Press, 11 August 2017. Bahrain also has domestic concerns. A Bahraini government spokesperson wrote: “Numerous suspects received training in Iraq from terrorist organisations in an aim to commit terrorist acts in Bahrain. Many of them are still in Iraq. We are in constant contact with the Iraqi government, and we have found them to be very supportive and understanding of our concerns in this regard”. Crisis Group correspondence, March 2018. Conflict Armament Research reported in March 2018 that it had found forensic links between Iranian components of explosively formed projectiles and improvised explosive devices used in Yemen, Bahrain and Iraq. “Radio-controlled, passive infrared-initiated IEDs: Iran’s latest technological contributions to the war in Yemen”, Conflict Armament Research, 26 March 2018.Hide Footnote A UAE official said: “As of now, the whole Hashd al-Shaabi is a red line for us. … They are one group”.[fn]Crisis Group interview, UAE official, Abu Dhabi, March 2018.Hide Footnote Many Iraqis are offended by criticism of these forces, which took some of the heaviest casualties fighting ISIS and not all of which are close to Iran. An Iraqi security analyst said: “When the Hashd started facing ISIS in battle, the Saudi media started name-calling against them. But the Hashd were our last resort. We would consider any entity that talks about them negatively an enemy. The Saudis need to understand this”.[fn]Crisis Group interview, Baghdad, March 2018.Hide Footnote Although the PMUs have been linked to abuses and other misconduct, including sectarian discrimination, they were also invaluable in defeating ISIS and holding territory ever since. Shiite communities have suffered thousands of losses, such that nearly every street corner of Najaf features photos of neighbourhood martyrs. A senior Shiite cleric described the situation this way:

Without the Hashd, ISIS would have invaded [all of Iraq]. I would encourage the Saudi government to hold a ceremony for the Iraqi people – Kurds, Sunnis, Shiites, all – because they defeated ISIS on behalf of the whole world. I am not saying all the Hashd are good. There are more than 150,000 of them. Some we cannot control; some have made bad mistakes. Is it fair to look at just the 5 per cent who did bad things rather than the 95 per cent who did good?[fn]Crisis Group interview, senior Shiite cleric, Najaf, March 2018.Hide Footnote

Shiite nationalists urge Riyadh and its Gulf allies to show patience in their wish to see these groups demobilised. Iraq’s next government may assume the difficult task of integrating the PMUs into formal security institutions while managing the risks and autonomy that pro-Iran brigades wield on the ground.[fn]A prime ministerial decree issued 8 March 2018 granted PMU fighters pay and benefits from the defence ministry. “رئيس مجلس الوزراء القائد العام للقوات المسلحة الدكتور حيدر العبادي يصدر ضوابط تكييف اوضاع مقاتلي الحشد الشعبي”, Iraqi prime minister’s office, 8 March 2018.Hide Footnote Some warn that certain unwelcome practical concessions may be inevitable, for example offering service or security contracts to the PMUs as part of large infrastructure development projects to both create jobs for fighters and prevent them from targeting these very endeavours.[fn]Crisis Group interviews, Iraqi official, Baghdad, March 2018; oil industry analyst, phone, February 2018.Hide Footnote

The Iraqi government will almost certainly have to devote a larger portion of its budget to paying PMUs and former PMU fighters’ salaries than it would like. But releasing trained, armed men into civilian life without an economic outlet has failed more than once before in Iraq.[fn]Crisis Group interview, UAE official, Abu Dhabi, March 2018. Previously, disbanded armed groups have contributed to a cycle of resentment and instability. The list includes the entire Iraqi army, which the U.S. dismantled in 2003 without extending pension benefits; and the tribal Awakening Councils (or Sons of Iraq) established to fight al-Qaeda in Iraq in 2007-2008, which the U.S. had promised salaries, which the Maliki government then mostly failed to pay.Hide Footnote As unsavoury as these options appear in Gulf capitals, policymakers there should resist the urge to make maximalist demands or give up on Iraq altogether.

C. Najaf

Najaf has a particularly delicate role in the Saudi-Iraqi relationship. Riyadh sees the Shiite clerical leadership (marjaiya) there as a counterweight to Iranian influence. As a religious leader, Sistani has been a critic of velayat-e faqih. He also has favoured an independent Iraq that can stand on its own, unbound by Iranian or other foreign power.

Many members of the Najaf religious establishment would embrace renewed ties with Saudi Arabia, including as a way to de-escalate regional sectarian tensions.[fn]A senior official at the Iraq reconstruction organisation in Tehran said, “some Shiite leaders like Ayatollah Sistani welcome de-escalating measures, as they believe this would be beneficial for decreasing sectarianism and the Shiite-Sunni dispute”. Crisis Group interview, Tehran, March 2018.Hide Footnote Ayatollah Sistani himself reportedly maintains a back channel for communication with Riyadh.[fn]Erika Solomon, “Sunni Saudi Arabia courts an ally in Iraq’s Shia”, Financial Times, 2 April 2018.Hide Footnote But the marjaiya would equally resist any Saudi attempt to politicise Najaf or place it in competition with Iran. A senior cleric said: “Our message to Saudi Arabia is: ‘We won’t be wooed into this fight …. We say the same thing to Iran’”.[fn]Crisis Group interview, senior Shiite cleric, Najaf, March 2018.Hide Footnote Positive responses by Shiite clerics to a proposed Saudi consulate in Najaf are telling of the religious leadership’s insistence on remaining above politics and geopolitical feuds. The planned consulate would primarily serve Shiites, and it has been welcomed by many in Najaf. According to a source close to the clerical elite, “after [Saudi Arabia] indicated they wanted to open a consulate, the Iranian ambassador sent word to one of the grand ayatollahs that this is unacceptable. The cleric turned around and said, ‘Isn’t there a Saudi consulate in Mashhad [Iran]?’”[fn]Crisis Group interview, Iraqi academic close to Najaf, February 2018.Hide Footnote

It may be difficult for Riyadh to properly calibrate its engagement with Najaf – to walk the line between appropriate indications of support and excessive politicisation.

Shiite leaders close to the marja (religious reference) share their political colleagues’ support for Saudi steps toward acknowledging and better understanding Shiite religious practice. One cleric suggested that Saudi Arabia’s Sunni clergy expand its written scholarship on Shiite jurisprudence.[fn]Crisis Group interview, Shiite cleric, Najaf, March 2018. A senior cleric said, “we agree to building a good relationship slowly, step by step. We have a long bad history, so we need to move slowly”. Crisis Group interview, Najaf, March 2018.Hide Footnote Najaf would particularly applaud any Saudi efforts to limit anti-Shiite rhetoric among Sunni clerics with television or social media platforms.[fn]Crisis Group interview, Sadrist MP, Baghdad, March 2018.Hide Footnote Intolerant speech on Saudi television networks leaves a poisonous aftertaste, giving the impression that the kingdom subscribes to a sectarian interpretation of Iraqi society that Iraqis themselves resist. Shiite clerics suggest that, as host to the two holy cities of Mecca and Medina, Saudi Arabia could also open up more pilgrimage slots for Iraqi Shiites.[fn]By some accounts, the kingdom has already eased its limitations on Shiite rituals during the hajj in recent years. Crisis Group interview, Sadrist MP, Baghdad, March 2018.Hide Footnote

It may be difficult for Riyadh to properly calibrate its engagement with Najaf – to walk the line between appropriate indications of support and excessive politicisation. Simple, non-confessional gestures may prove best in the short term. As in the rest of Iraq, Najaf sees Saudi economic engagement as vital to rebuilding trust.[fn]Crisis Group interview, senior Shiite cleric, Najaf, March 2018.Hide Footnote The senior cleric said: “We hope [the Saudis] will open many places here – academic institutions, education, business. … Help the Iraqi people recover from the mistakes of others. Don’t repeat the mistakes of the past, and don’t make us choose sides”.[fn]Crisis Group interview, senior Shiite cleric, Najaf, March 2018.Hide Footnote

A sign welcomes visitors to Najaf. This center of Shiite religious scholarship has seen an economic boom in recent years, amid better security and the opening of a new international airport. CRISISGROUP/Elizabeth Dickinson

D. Sunni Arab Leaders

Some Sunni Arab leaders feel they are being overlooked in the renewed outreach from Riyadh. Sunni Arabs expect Gulf states to support post-ISIS reconstruction of their cities, and many Shiite policymakers agree.[fn]Crisis Group interview, Sunni MP, Baghdad, March 2018. Many Iraqi Shiite politicians hold Saudi Arabia responsible for the rise of ISIS through its longstanding promotion of Salafi Sunni Islam. They argue Riyadh should take responsibility for its alleged role by rebuilding areas destroyed in the fight against ISIS. Crisis Group interview, Iraqi academic close to the government, Baghdad, March 2018.Hide Footnote So far, however, the vast majority of investor interest has been in the Shiite-dominated south, the location of Iraq’s main oilfields, where the Iraqi National Investment Commission is seeking to direct the bulk of foreign investment in oil, gas and petrochemicals.[fn]“Iraq Investment Map 2017”, National Investment Commission, 2017. The U.S. is also concerned about the lack of regional distribution in reconstruction pledges. A defence official said, “different parts of the U.S. government were excited about what came out [of the Kuwait reconstruction conference], but we also recognised that a lot of the investment and proposals were for areas that were not actually affected [by conflict]. There are a lot of proposals for Shia areas, very few for Sunni areas, almost none for Kurdish areas”. Crisis Group interview, phone, April 2018.Hide Footnote “Let the Gulf states forget about Sunni politicians, but let them not forget our areas”, a Sunni Arab parliamentarian said.[fn]Crisis Group interview, Sunni MP, Baghdad, March 2018.Hide Footnote

In fact, some Gulf countries have quietly supported and financed Sunni Arab politicians in Iraq for many years – to debatable effect.[fn]The same phenomenon took place before the 2010 parliamentary elections, when Qatar and Turkey funded a nominally non-sectarian list headed by Iyad Allawi.Hide Footnote From at least 2017 onward, several Gulf countries and Turkey were involved in hosting events aimed at uniting Sunni Arab political leaders ahead of Iraq’s 2018 elections.[fn]See, for example, “مصدر لـ”الخليج أونلاين”: تشكيل تحالف عراقي “سني” جديد”, Al-Khaleej, 9 March 2017.Hide Footnote But each country’s support aligns with its respective interests and political preferences.[fn]Crisis Group interviews, UN official, February 2018; Western diplomat, Baghdad, March 2018.Hide Footnote Reflecting a broader geopolitical split in the Gulf, Saudi Arabia and the UAE tend to favour secular coalitions and co-tribesmen (such as the Shammar), while Qatar and Turkey have generally supported Sunni Islamists.[fn]The UAE denies funding individuals, though some politicians enjoy visibility in UAE-aligned media outlets. Crisis Group interview, Gulf official, April 2018.Hide Footnote A senior UAE official said:

A more secular Iraq is a better Iraq. We don’t want a Shiite or Sunni Iraq. … [Nationalists] is who we support. We will definitely not support, on the Shiite side, those who are pro-Iranian, and on the Sunni side, those who are pro-Islamist.[fn]Crisis Group interview, senior UAE official, Abu Dhabi, March 2018. Both at home and abroad, the UAE is opposed to political Islamists, viewing their ideology as a gateway to extremist views.Hide Footnote

External patrons have at times channelled funding through Iraqi exiles and businessmen with their own agendas or without a clear constituency on the ground.[fn]Crisis Group interviews, senior Iraqi security official, Baghdad, March 2018; Western diplomat, Baghdad, March 2018.Hide Footnote “They put all their money on political figures to give life to dead horses”, an Iraqi official said. “This is not a good investment and it won’t help Iraq”.[fn]Crisis Group interview, senior Iraqi security official, Baghdad, March 2018.Hide Footnote

Asking Gulf countries to stop their political patronage of nationalist leaders and Sunni Arabs more broadly is unrealistic and could even undermine their ability to compete politically, as Iran also funds preferred candidates across ethnic and confessional lines.[fn]Crisis Group interview, Iraqi official, Baghdad, March 2018.Hide Footnote There is also no law on the books prohibiting foreign campaign finance.[fn]Crisis Group correspondence, al-Nahrain Center for Strategic Studies official, April 2018.Hide Footnote

The targeting of patronage may be improved, however, to support Iraq-based politicians with proven track records of delivering services to their constituents. Saudi Arabia and fellow Gulf patrons could shift their financial focus toward improving local economic conditions, for example financing projects in the seven provinces the government has prioritised for reconstruction. In their engagement with Shiite politicians, Saudi Arabia could also push for some specific Sunni Arab demands, such as the withdrawal of PMUs from towns and neighbourhoods now that the military dimension of the fight against ISIS is more or less in the past.[fn]Crisis Group interview, Sunni MP, Baghdad, March 2018. Saudi leaders took some steps in this direction in conversations with Sadr. By one account of the cleric’s visit to Riyadh in August 2017, “Saudi officials said they were worried about the future of Sunnis in Iraq and the permanence of the Hashd al-Shaabi. Sadr told them, ‘Sunnis are our brothers and we will protect them if there is any danger their well-being will be threatened’”. Crisis Group interview, Sadrist MP, Baghdad, March 2018.Hide Footnote

A failure by Saudi Arabia to sufficiently engage in Sunni Arab areas could, in a plot twist, encourage these communities to turn to Iran for both economic aid and help in managing their relationship with the PMUs. A Qods force strategist said that Iran has begun improving relations with Sunni Arab groups and “can play a mediatory role [between Sunni and Shiite politicians], as it did in uniting some anti-Daesh [ISIS] Shiite and Sunni groups now equipped and mobilised in the framework of the Hashd al-Shaabi”.[fn]Crisis Group interview, Qods force strategist, Tehran, March 2018.Hide Footnote

E. Iran’s Response

Some parts of the Iranian government appear interested in the opportunity for Iraq to serve as a theatre of de-escalation.

Iran’s reaction to Saudi engagement is the topic of intense speculation in Baghdad political circles. Some see common interests. Iran may need to devote less blood and treasure to supporting Iraq if Saudi Arabia contributes economically.[fn]Crisis Group interview, academic close to the government, Baghdad, March 2018.Hide Footnote Others warn that Iran-allied politicians and militias are planning to embarrass, politically disrupt or even attack Saudi interests in Iraq.[fn]Crisis Group correspondence, Iraqi journalist, March 2018. One taste of the possible disruption tactics came in late March 2018, when several hundred people protested in Baghdad against a rumoured visit by the Saudi crown prince to Iraq. The Saudi foreign ministry quickly issued a statement denying any plans for a visit. Emailed statement, Saudi Arabia Center for International Communication, 31 March 2018.Hide Footnote What is clear is that Tehran is watching Riyadh’s moves closely. An Iraqi academic close to Najaf noted, “by definition, if the Saudis are serious, we can’t expect a win-win for all. The Iranians are going to be very anxious about what that means for their influence and presence”.[fn]Crisis Group interview, February 2018.Hide Footnote

At least some parts of the Iranian government appear interested in the opportunity for Iraq to serve as a theatre of de-escalation, if it aligns with trends toward conciliation between Tehran and Riyadh – and by extension Washington – elsewhere in the region.[fn]Crisis Group interview, senior official at Iraq reconstruction organisation, Tehran, March 2018.Hide Footnote Yet even among those in Tehran who hope for better relations expect the opposite, because they believe Riyadh “started this process only because they want to defeat Iran”.[fn]Crisis Group interview, Middle East analyst, President Hassan Rouhani’s office, Tehran, March 2018.Hide Footnote

Iranian officials across government downplay the Saudi role as limited and nothing to fear, particularly in weakening Iran’s influence.[fn]Crisis Group interview, Qods force strategist, Tehran, March 2018.Hide Footnote Iran, they say, has better trade ties, deeper penetration of the security sector and more political clout across a far broader array of actors.[fn]Crisis Group interview, senior diplomat, Iranian Foreign Affairs Ministry, Tehran, March 2018. A U.S. defence official described the Iranian strategy as being “to spread the money as widely as they can”. Crisis Group interview, phone, April 2018.Hide Footnote To the extent that Tehran sees Riyadh engaging with Shiite politicians, Iranian policymakers see an affirmation of just how much power the Shiite political class has consolidated – with their help.[fn]Crisis Group interview, Middle East analyst, President Rouhani’s office, Tehran, March 2018.Hide Footnote A senior Iranian foreign ministry official said, “it is good for Iran that Saudi Arabia has decided to deal with the central government in Baghdad. Their opening a consulate in Najaf means they are recognising Najaf”.[fn]Crisis Group discussion, May 2018.Hide Footnote

Based on the pattern so far, Riyadh can expect a continuation of low-level harassment from Iran-allied groups in Iraq in the coming months. This could manifest itself in the anti-Saudi campaign in Iranian and allied Iraqi media outlets and PMU posturing along the Saudi Arabian border. Perceived Saudi oversteps – reaching too deeply or directly into the security establishment, which Iran has effectively penetrated but does not control – could trigger a stronger reaction.[fn]Crisis Group interview, UN official, phone, February 2018.Hide Footnote That pushback could include protests or threats against Saudi companies or businessmen.[fn]Crisis Group correspondence, Iraqi journalist, March 2018.Hide Footnote Tehran or pro-Iranian groups could also attempt to undermine some of the Shiite politicians who have engaged with Riyadh and been critical of Iran, as has already happened. After Sadr visited Riyadh and Abu Dhabi, several Iranian media outlets described the cleric as a pawn in a Saudi plan to split Iraq’s Shiites.[fn]A senior official at the Iraq reconstruction organisation in Tehran said, “the Shiite groups that seek better relations with Saudi Arabia, like Moqtada al-Sadr, are not the main influential Shiite groups in Iraq”. Crisis Group interview, Tehran, March 2018. See also, “اهداف و زوایای سفر مقتدا صدر به عربستان”, Mehr News Agency, 1 August 2017.Hide Footnote Finally, an Iraqi official suggested that Iran may attempt to “buy back” certain politicians being courted by Riyadh.[fn]Crisis Group interview, Iraqi official, Baghdad, March 2018.Hide Footnote

Saudi escalations of the war in Yemen, or in Bahrain, Syria or Lebanon, could reverberate in Iraq, where Iran has an ample supply of allies to call upon.

Gulf countries will need to have thick skins to resist withdrawing or taking rash or counterproductive steps if they face media broadsides or political setbacks in the months ahead.[fn]Crisis Group interview, UAE senior official, Abu Dhabi, March 2018.Hide Footnote They will need patience, a tolerance for risk and criticism, and restraint – for example, understanding that PMU behaviour is at times linked to local political disputes, not only to Tehran’s druthers.

External developments, however, may prove pivotal in determining whether a Saudi-Iranian balance is possible. The U.S. withdrawal from the Iran nuclear deal, announced on 8 May, could provoke Tehran to attack Gulf or U.S. interests in the region more directly.[fn]Crisis Group interview, Western diplomat, Abu Dhabi, April 2018.Hide Footnote Several Iranian officials attributed Riyadh’s Iraq strategy to Washington, raising concerns that an escalation in Saudi-Iranian tensions could present a risk to U.S. forces on the ground.[fn]Crisis Group interviews, Qods force strategist, Tehran, March 2018; Middle East analyst, President Rouhani’s office, Tehran, March 2018; U.S. defence official, phone, April 2018.Hide Footnote The Iranian response will also depend on Saudi Arabia’s actions elsewhere in the region. Saudi escalations of the war in Yemen, or in Bahrain, Syria or Lebanon, could reverberate in Iraq, where Iran has an ample supply of allies to call upon.

IV. A Saudi-Iraqi Reset

Restarting a relationship after a quarter-century’s break will entail compromises on both sides. Saudi Arabia and its Gulf allies need to understand Iraq’s fragility and the urgency of stabilising it politically and economically, not weakening it further by turning it into a ring for sparring with Iran. Iraq, for its part, should take seriously Gulf concerns about corruption and security and find ways to address the most pointed issues to enable reconstruction. The following three areas merit special attention:

Facilitating Rapid Progress on Reconstruction

Riyadh and its allies will need to play the long game in Iraq and therefore may have to tolerate low or negative returns on investment in the early years. Gulf governments or public finance institutions can help make investments more attractive to the private sector, as they have begun to do with credit and export guarantees.

Saudi Arabia could also consider sending liaisons from its chambers of commerce to work in its embassy and consulates in Iraq and facilitate contacts and paperwork.[fn]Crisis Group interview, consultant to oil sector, phone, February 2018.Hide Footnote Gulf countries could offer assistance to Iraq’s efforts to join the World Trade Organisation (WTO). Membership would reduce some of the uncertainty concerning regulations and dispute resolution that currently deters trading partners.[fn]Crisis Group interview, Gulf diplomat, Riyadh, February 2018. Iraq indicated its intent to restart accession talks with the WTO in November 2017.Hide Footnote More peripherally, Saudi Arabia, as well as the UAE and Qatar, could loosen visa access for Iraqis seeking work or medical care, as well as for students.[fn]Crisis Group interviews, Iraqi investor, February 2018; senior Shiite cleric, Najaf, March 2018; Iraqi security researcher, Baghdad, March 2018. A Qods force strategist claimed that 100,000 Iraqis travel to Iran for medical treatment each year. Crisis Group interview, Tehran, March 2018.Hide Footnote

In supporting reconstruction, Riyadh should use its expanding political network to give a boost to state institutions. Many communities in need of post-ISIS reconstruction remain deeply distrustful of the government’s will and ability to rebuild their areas.[fn]Crisis Group interviews, Sunni MP, Baghdad, March 2018; and Western security official, March 2018.Hide Footnote Saudi Arabia could carry out projects in coordination with the Iraqi government, jointly branded with the kingdom’s signage. Doing so could enhance the credibility of both Saudi allies and the government.

For its part, Iraq needs to better prioritise reconstruction projects that create jobs or restore services. Some of the potential projects advertised at the Kuwait conference – such as urban metro systems – struck investors as vanity projects.[fn]Crisis Group interviews, Gulf diplomat, Riyadh, February 2018; former Iraqi security official, Baghdad, March 2018.Hide Footnote Agricultural rehabilitation, job-creating construction, housing and vital service infrastructure are better fits – and would distribute investment across Iraq’s regions.[fn]“Major Strategic Large and Medium-Sized Projects Available for Investment According to Sector”, Iraq National Investment Commission, February 2018.Hide Footnote Once projects and investors are identified, the Iraqi National Investment Commission should aim to accelerate paperwork, calling upon political leaders to lean on the bureaucracy if necessary. As is already the case, the Iraqi government should be willing to find financing arrangements that avoid injecting cash into state coffers. As an Iraqi academic put it: “Iraqis don’t want cash anymore – the model we prefer is: ‘you implement it’”.[fn]Crisis Group interview, Iraqi academic close to the government, Baghdad, March 2018.Hide Footnote

Improving Saudi Arabia’s Relationship with Shiite Communities

Riyadh can knock down the single greatest public opinion barrier to its engagement with Iraq by taking concrete measures to unravel its historical denial of the legitimacy of Shiite theology and rituals. The Saudi royal family has traditionally left Islamic jurisprudence in the hands of the state-sanctioned Council of Senior Religious Scholars. Without weighing in on theology, the Saudi government could prohibit defamatory language in weekly sermons and online materials, while reviewing curriculum and other state documents for offensive material.[fn]The Council of Senior Religious Scholars and associated clerics have issued fatwas and rulings denouncing Shiite practices and customs; an anti-Shiite bias persists in school curriculums and popular conversations. “They Are Not our Brothers: Hate Speech by Saudi officials”, Human Rights Watch, 26 September 2017.Hide Footnote The kingdom could legislate stronger policies against sectarian labour discrimination, criminalise disparagement of Shiites in the education system, and ensure that its own ministries and agencies deliver services equally to Shiite communities.[fn]“International Religious Freedom Report for 2016: Saudi Arabia”, U.S. Department of State, Bureau of Democracy, Human Rights and Labor, 2017.Hide Footnote These are major steps, but they will be necessary if the kingdom is truly intent on bettering its relationship with Shiites across the region. Some in Iran are also optimistic about this potential. A senior foreign ministry official said, “the results of the reform inside Saudi Arabia will be good for Iran, because it will reduce sectarian conflict”.[fn]Crisis Group discussion, May 2018.Hide Footnote

Changing entrenched Saudi Arabian biases against Shiites will take time, but signals from the leadership about what is and is not acceptable in the discourse will help.

A still stronger political move would be for Saudi Arabia and the Muslim World League, the kingdom’s global vehicle for propagating Islam, to signal alignment with the decisions of the pre-eminent Sunni scholarly centre, al-Azhar in Cairo, which recognises the Jaafari (Shiite) school of Islamic law taught in Najaf.[fn]While there has been some dissent among al-Azhar scholars, the school maintains its 1959 fatwa recognising the legitimacy of Jaafari interpretations. See “Al-Azhar verdict on the Shia”,  Al-Islam.org.Hide Footnote The Saudi leadership could also speak publicly about tolerance for Shiite religious practice, as they have begun to do already.[fn]MbS said of Saudi Arabia’s Shiites: “All of us are Muslim, all of us speak Arabic, we all have the same culture and the same interest .… [W]e believe that we are a mix of Muslim schools and sects”. Quoted in Jeffrey Goldberg, “Saudi crown prince: Iran’s supreme leader ‘makes Hitler look good’”, The Atlantic, 2 April 2018. This positive sentiment could, however, prove counterproductive if anti-Shiite rhetoric is simply repackaged as anti-Persian discourse that directs the same prejudices toward a new target.
 Hide Footnote
Changing entrenched Saudi Arabian biases against Shiites will take time, but signals from the leadership about what is and is not acceptable in the discourse will help.

Sadr’s visit to the Gulf offered additional ideas for the Iraqi context: Saudi Arabia could invest economically in Shiite communities and engage Shiite tribes who live on both sides of the Saudi-Iraqi border. As a sign of respect to Shiites in Saudi Arabia, the kingdom could rebuild the four tombs of the Shiite imams of al-Baqi’ in Medina; the kingdom demolished these tombs, which Shiite practitioners consider holy, in 1926.[fn]Crisis Group interview, Sadrist MP, Baghdad, March 2018. Rebuilding these religious sites would be symbolically significant because past Sunni critiques of Shiite practice focus on its supposedly excessive veneration of descendants of the Prophet. A Saudi gesture toward rehabilitation of the shrines would thus be a sign of respect for Shiite rituals.Hide Footnote Numerous Iraqi interlocutors suggested that Saudi Arabia should avoid building Salafi mosques in Iraq. Shiites are highly sensitive to any indication the kingdom might encourage extremism and intolerance.[fn]Crisis Group interviews, former Iraqi security official, Baghdad, March 2018; Western diplomat, Baghdad, March 2018.Hide Footnote An Iraqi academic close to Najaf’s clerical elite said, “let them build schools in Sunni areas, be present in the Sunni areas, so long as they are sensitive about it”.[fn]Crisis Group interview, phone, February 2018.Hide Footnote

Keeping Iraq Out of Saudi-Iranian Regional Competition

Iraq could become a de-escalation zone in Saudi-Iranian tensions. But, at a minimum, it would require its politicians and officials to proactively identify shared interests between Riyadh and Tehran and encourage both sides to move toward convergence. Some Saudi and Iranian officials are already seeing common ground, including in boosting the Iraqi economy, preventing the re-emergence of ISIS, maintaining Iraq’s territorial integrity and reducing sectarian conflict.[fn]Crisis Group interviews, former Saudi official, May 2018; Iranian foreign ministry senior official, May 2018.Hide Footnote Oil policy could also help build trust, as all three countries would prefer a higher medium-term market price.

Whether Iran and Saudi Arabia can be persuaded to actively cooperate on these and other areas of potential alignment remains to be seen, but both would stand to gain. Riyadh and Tehran are now bogged down in costly regional engagements that distract the governments from domestic priorities. None of those conflicts, or the sectarian stories grafted upon them, will be resolved without a détente between these regional giants. “We are trying to put away the sectarian conflict”, a senior Saudi official said of the kingdom’s regional goals.[fn]Crisis Group interview, Riyadh, January 2018.Hide Footnote A strategist in President Hassan Rouhani’s office said, “Iran also wants to decrease tensions and revive its ties with Arab countries. Iraqi-Saudi relations would be helpful to Iran’s efforts for this purpose”.[fn]Crisis Group interview, Tehran, March 2018.Hide Footnote Simple first steps could include a joint statement or op-ed by Saudi and Iranian scholars or policymakers, indicating a shared commitment to Iraq’s future.

Still, for now, the potential for conflict is greater than the prospect of better ties. Saudi Arabia, Iran and Iraq will all need to remain vigilant to managing Saudi-Iranian tensions. Particularly with Shiite religious engagement, Saudi Arabia risks provoking an Iranian reaction if it oversteps or politicises the question of the marjaiya, for example attempting to force a rift between clerics in Najaf and Iran.[fn]An Iranian Qods force strategist said, “Iran’s first priority is to maintain its social ties with Shiite communities, marjaiya and clerics in Iraq who cannot be easily influenced by people like Sadr and Hakim. Currently, the economy of Shiite cities with holy sites is greatly entangled with 4,500,000 Iranian pilgrims who visit Iraq every year”. Crisis Group interview, Tehran, March 2018.Hide Footnote Najaf is keenly aware of this dilemma and Riyadh should take cues from there about how best to engage on the religious front. Making clear that the invitation is on the table, for example, Riyadh could leave the time and place for any public (or private) meetings with clerics in the hands of the marjaiya. As they have avoided doing so far, Saudi leaders should not mention Ayatollah Sistani in public discussions of politics. Riyadh should take care not to put religious figures – or any Iraqis for that matter – in the position of being asked to choose between Saudi Arabia and Iran as social, cultural or economic partners.

V. Conclusion

Given the host of challenges ahead, some analysts and politicians who welcome Riyadh’s return to Baghdad nonetheless fear the improvement in Iraqi-Saudi relations will not last. Leaders in both countries should be steadfast.

Saudi Arabia has the opportunity to construct a long-term policy toward Iraq that has deep social roots and buy-in. Supporting cross-confessional Iraqi political trends can offer the kingdom a new model of how to boost its influence and shore up regional stability. Whereas in Yemen Saudi Arabia played to Iran’s strengths (namely, its ability to work effectively in situations of state failure, in cooperation with non-state actors who are fighting Riyadh), in Iraq it is showing an ability to function through political and economic channels, where it possesses its own comparative advantage. For Iraq, too, there are important potential benefits: by balancing Saudi and Iranian influence, it can gain from the support of both without alienating either.[fn]A senior Iranian diplomat said, “Iran has come to the understanding that Sunnis are irrevocable parts of Iraq’s politics and thus Iran should try to keep a good relationship with moderate [Arab] Sunnis as it had done with [Sunni] Kurds. This is exactly the policy that Saudi Arabia tends to follow with regard to Shiites”. Crisis Group interview, Tehran, March 2018.Hide Footnote

In turn, stability in Iraq could have knock-on effects for regional conflicts around its borders, most notably in Syria. A stronger, physically and institutionally rebuilt Iraq would be more resilient against a re-emerging ISIS (or any future iteration). Better relations between Saudi Arabia and Shiite communities likewise could help roll back sectarian polarisation across the region, including in the kingdom itself.

Perhaps the best way to ensure that all sides stay the course is for Iraqis and Saudis to make political, social, economic and cultural investments that engender a dynamic of interdependency between their countries. If, for example, Saudi companies invest in Iraq, and Iraqi consumers come to depend on Saudi goods, the bilateral relationship would be far more sustainable, even in the face of political disputes.

The Iraqi ideal of becoming a bridge between regional powers may be years or decades off, but this optimistic moment is a chance to lay the foundation stones. Riyadh can help, and it should have an interest in doing so.

Riyadh/Baghdad/Brussels, 22 May 2018

Appendix A: Saudi Arabia's Investment in Iraq

Saudi Arabia's Investment in Iraq International Crisis Group

Appendix B: Damage and Total Reconstruction Needs per Sector

Damage and Total Reconstruction Needs per Sector Iraq, Reconstruction and Investment: Damage and Needs Assessment of Affected Governorates, Government of Iraq and the World Bank Group
Damage and Total Reconstruction Needs per Sector Iraq, Reconstruction and Investment: Damage and Needs Assessment of Affected Governorates, Government of Iraq and the World Bank Group