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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.
Britain's Prime Minister Theresa May is flanked by French President Emmanuel Macron and German Chancellor Angela Merkel before their trilateral meeting at the European Union leaders summit in Brussels, Belgium on 22 March 2018. REUTERS/Ludovic Marin/Pool via Reuters

How Europe Can Save the Iran Nuclear Deal

The U.S. is threatening to withdraw from the international agreement on Iran’s nuclear program if no one “fixes” it by President Donald Trump’s deadline of 12 May. The danger of deeper Middle East turmoil is great. Europe should salvage the deal no matter what Trump decides. 

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What’s new? The U.S. is threatening to withdraw from the 2015 nuclear accord with Iran if what it calls the deal’s “disastrous flaws” are not fixed by 12 May. Europe is scrambling to placate Washington without alienating Tehran, but the prospects appear dim.

Why does it matter? U.S. withdrawal from the deal might kill it instantly; more uncertainty over the deal’s fate might suffocate it, as opinion in Tehran is turning against it. Iran could cancel the deal; target the U.S. or its Middle East-ern allies; or leave the Nuclear Non-Proliferation Treaty – all exacerbating the regional turmoil.

What should be done? Europe should develop a plan B to keep Iran party to the deal regardless of what the U.S. does on 12 May. This plan should include short- and medium-term measures to build trade with Iran, contingent upon verification of continued Iranian compliance with the deal and additional re-forms.

Executive Summary

The nuclear agreement between Iran and the P5+1 (also known as the E3/EU+3) is beginning to look like a pyrrhic victory. U.S. President Donald Trump has had the 2015 Joint Comprehensive Plan of Action (JCPOA) in his crosshairs since taking office in January 2017. A year into his term, he declared that unless the U.S. Congress and European allies addressed the deal’s “disastrous flaws” by 12 May 2018, the U.S. would withdraw from it despite Iran’s ongoing, independently verified compliance. Amid rising tensions in the region, Israel has once again alleged that Iran has neither come clean about its past nuclear activities nor abandoned its nuclear weapons ambitions. Europe has made last-ditch efforts to meet Trump’s challenge. But it may very well need a backup plan to salvage the nuclear deal if the U.S. withdraws or carries out its part of the bargain half-heartedly.

Negotiators for the U.S. and the UK, France and Germany, collectively known as the E3, have made progress toward accommodating the White House’s concerns. In the last week of April, French President Emmanuel Macron and German Chancellor Angela Merkel were in Washington to give talks a final push. Yet, notwithstanding the rollercoaster quality of Macron’s visit (first suggesting an understanding might be struck, saying there is no “plan B”, then dashing hopes the following day), at this writing the success of their entreaties is highly questionable. Indeed, even were Trump to accede, uncertainty will likely continue to hover over the accord, economic benefits to Iran will therefore dwindle, and Tehran’s incentives to remain in the deal will diminish.

Since Trump’s ultimatum, negotiators have discussed four main concerns: Iran’s ballistic missile program, its regional policies, the inspection of Iranian nuclear sites and so-called sunset clauses contained in the JCPOA, which refer to time-limited restraints on Iran’s nuclear capabilities. The contours of a transatlantic understanding have emerged, particularly on the first three items. But the E3 insist they will not unilaterally change the JCPOA’s terms, which means that – contrary to the White House’s demand – they will not agree to automatically punish Iran if it expands its nuclear activities in ways consistent with the deal’s terms. They also are unconvinced that Trump will ever abide by a deal he has consistently derided. In fact, they fear he will reject whatever compromise the negotiators reach.

Tehran has left no doubt as to its determination to respond if the U.S. reimposes sanctions.

President Trump’s administration has four broad options: reach some kind of understanding with the E3 that includes U.S. compliance with the JCPOA and continued waiving of U.S. nuclear-related sanctions on Iran; postpone a decision by waiving sanctions once more to allow for additional negotiations with the E3; refuse to waive sanctions but delay their imposition, again to allow for additional negotiations with the E3; or withdraw from the deal, refusing to waive sanctions and beginning penalising those who violate them. The first option would be the best but also, based on what Macron said at the tail end of his visit, and given Israel’s recent accusations, the least likely. As for the other three, they range from the undesirable to the frankly destructive. Each would, at a minimum, mean the damaging ambiguity surrounding the nuclear deal’s fate would persist.

Absent from the deliberations are Russia, China and Iran. Moscow and Beijing have both expressed continued support for the accord. As for Tehran, it has left no doubt as to its determination to respond if the U.S. reimposes sanctions; there is greater uncertainty as to how it would react to a U.S./E3 agreement that preserves the JCPOA but sanctions its missile program and regional activities, suggests a tough U.S./E3 line toward Iran’s future nuclear program, and insists on negotiating a broader deal addressing all those issues. Iranian leaders bitterly criticised Macron’s suggestion of a U.S./E3 push for a broader agreement with Iran covering all those matters, seeing it as rewarding the U.S.’s threats to exit the deal by appeasing Trump rather than simply insisting on Washington’s full compliance.

Without a European initiative vis-à-vis Tehran ... the deal either will expire instantaneously or die a slow death.

Views vary in Tehran, but those who advocate continued adherence to the deal and attempting to drive a wedge between Europe and the U.S. are losing ground. Iran’s reaction to a U.S. withdrawal or to what it perceives as a hostile U.S./E3 understanding could be to violate its own JCPOA commitments; respond asymmetrically against U.S. forces or assets in the Middle East; or, in the most extreme version, withdraw from the deal and go even further by pulling out of the Nuclear Non-Proliferation Treaty (NPT). As talks with the U.S. continue, the E3 should be careful not to act in ways that will be read in Tehran as moving the goalposts given Iranian domestic dynamics: opinion is rapidly turning against any additional compromises with what Tehran views as a mercurial U.S. and an unreliable Europe.

At this point, it appears that without a European initiative vis-à-vis Tehran – and barring a last-minute understanding with Washington that meaningfully preserves the JCPOA – the deal either will expire instantaneously or die a slow death. To minimise these risks, the E3 should cease focusing solely on keeping the U.S. in compliance with the JCPOA; it should also devise a means of keeping Iran on board even if the U.S. is not. As the E3 continue discussions with the U.S. until the 12 May deadline, they should develop a plan B to roll out if a compromise agreement proves elusive or the U.S. keeps chipping away at the JCPOA’s intended dividends for Iran. This contingency plan could succeed if the E3 present it to Iran as an economic cooperation package with short- and medium-term components. Of course, such an effort would be conditioned on Iran’s continued compliance with the JCPOA and meaningful action toward reforming its financial institutions and de-escalating tensions in the region.

A unilateral U.S. withdrawal would doubtless deal a serious blow to the JCPOA. Proactive E3/EU steps could ensure it is not fatal.

Washington/Brussels, 2 May 2018

I. Introduction

U.S. President Donald Trump came into office as a staunch Joint Comprehensive Plan of Action (JCPOA) critic.[fn]Crisis Group Statement, “President Trump and the Art of the Iran Nuclear Deal”, 23 November 2016.Hide Footnote Some thought he would abrogate the deal immediately or during the first year of his presidency. He did not, due at least in part to warnings from his national security team about adverse diplomatic repercussions of a unilateral – and given Iran’s compliance, unjustified[fn]Since the JCPOA’s implementation in January 2016, the International Atomic Energy Agency (IAEA) has verified on ten separate occasions that Iran is fulfilling its JCPOA obligations, most recently in “Verification and Monitoring in the Islamic Republic of Iran in Light of United Nations Security Council Resolution 2231 (2015)”, GOV/2018/7, IAEA, 22 February 2018.Hide Footnote – withdrawal. Another reason he stayed his hand was an inter-agency strategic review of U.S. policy toward Iran that took nearly ten months to complete. In the meantime, his administration continued to issue periodic, congressionally mandated certifications of Iran’s compliance and extend nuclear sanctions relief, while in parallel designating new Iranian individuals and entities for non-nuclear U.S. sanctions and withholding licences for commercial agreements allowed under the JCPOA.[fn]President Trump has issued nine extensions of Iran’s sanctions relief so far. See Crisis Group Middle East and North Africa Report N°181, The Iran Nuclear Deal at Two: A Status Report, 16 January 2018. Iranians argue that most important evidence for the U.S.’s failure to live up to its end of the bargain is its refusal to issue licences for the sale of civilian airliners to Iran. As a U.S. diplomat told his Iranian counterparts: “You use your commercial airlines to move terrorists and weapons around the Middle East, including to Syria, and we will not issue licences at the expense of our national security”. Quoted in “Director of Policy Planning Brian Hook on the Joint Comprehensive Plan of Action Joint Commission in Vienna”, U.S. State Department, 21 March 2018. A European official noted that the U.S. Treasury Department has not issued a single licence for civilian aircraft since 2017 and that maintenance of existing planes has also faced hurdles. Crisis Group interview, Paris, March 2018. Scuttling the aircraft sales would violate a U.S. commitment under Annex II, Section B, paragraph 5 of the JCPOA. See www.un.org/en/sc/2231. Iran has refrained from paying instalments for the delivery of 80 Boeing planes that Iran Air purchased in 2016, lest U.S. authorities seize the down payment. Crisis Group interviews, Iranian official, Brussels, February 2018; British official, London, March 2018. See also Felicia Schwartz and Ian Talley, “Boeing ordered to give Israeli terror victims details of $16b Iran deal”, Associated Press, 2 March 2018.Hide Footnote The strategic review laid out a broadly pressure-centric policy toward Iran; in tandem, the president refused to certify the JCPOA on the grounds that sanctions relief had been disproportionate to steps Iran had taken to implement the deal.[fn]Crisis Group Statement, “Saving the Iran Nuclear Deal, Despite Trump’s Decertification”, 13 October 2017; “Remarks by President Trump on Iran strategy”, White House, 13 October 2017; Peter Baker, “‘He threw a fit’: Trump’s anger over Iran deal forced aides to scramble for a compromise”, Washington Post, 11 October 2017.Hide Footnote

This decision placed the deal’s fate into the hands of the U.S. Congress, which had the power – under the 2015 Iran Nuclear Agreement Review Act (INARA) – to use an expedited process to restore U.S. nuclear-related sanctions by a simple majority.[fn]See Crisis Group Statement, “Saving the Iran Nuclear Deal, Despite Trump's Decertification”, op. cit.; the “Iran Nuclear Agreement Review Act of 2015”, H.R. 1191, Public Law: 114-17, 22 May 2015.Hide Footnote Yet Congress, reluctant to alienate such key U.S. allies as the E3, instead attempted to put in place an automatic snapback mechanism in case Iran were to expand its nuclear program after some of the JCPOA-imposed restraints lapse between 2026 and 2031.[fn]Crisis Group interviews, congressional staff, Washington, November-December 2017.Hide Footnote The effort ran aground when most Democrats and key Republicans proved loath to consider measures that risked jeopardising European support and could put the U.S. in violation of the JCPOA.[fn]Rebecca Kheel, “Corker ‘semi-hopeful’ on Iran legislation as key deadline passes”, The Hill, 12 December 2017.Hide Footnote Instead, Congress effectively threw the ball back into the E3’s court, with the Republican leadership telling the administration that if it reached a deal with the E3, they would be happy to legislate that agreement.[fn]Crisis Group interviews, members of Congress, Washington, March 2018.Hide Footnote

By January, Trump, who had long expressed distaste for his predecessor’s every achievement, had run out of patience and his national security team seemingly out of excuses to buy time.[fn]A White House official observed, “the national security advisor, the secretary of state and the defense secretary are at the end of their rope. They can no longer buy time”. Crisis Group interview, Washington, 19 February 2018.Hide Footnote While renewing U.S. sanctions waivers on 12 January, he declared that unless Congress and Europe addressed several “disastrous flaws” in the agreement, he would no longer extend sanctions relief but pull the U.S. out of the agreement. “This is a last chance”, the president warned.[fn]“Statement by the president on the Iran nuclear deal”, White House, 12 January 2018. Crisis Group Report, The Iran Nuclear Deal at Two, op. cit.Hide Footnote The announcement triggered a 120-day deadline to meet the White House’s terms to “fix” the JCPOA before 12 May 2018.[fn]The waiver due for renewal on 12 May is related to Section 1245 of the “National Defense Authorization Act for fiscal year 2012”, H.R. 1540, Public Law: 112-81, 31 December 2011, which bans, inter alia, foreign banks from processing oil receipts through the Central Bank of Iran. See also Richard Nephew, “Trump’s middle ground on Iran deal sanctions waivers is a myth”, Foreign Policy, 26 April 2018.Hide Footnote

II. Between a Rock and a Hard Place

President Trump’s declaration put the burden of alleviating the U.S. administration’s concerns on Europe’s shoulders.[fn]A European diplomat said, “this JCPOA drama is not induced by a flagrant violation. It stems from a change in the U.S. administration and is basically an intra-American debate. The antagonism toward the deal has no parallel in Europe”. Crisis Group interview, Washington, 7 February 2018.Hide Footnote The E3 evinced surprise. A senior European official noted: “It didn’t make much sense for U.S. negotiators to try to address with us what they could not get agreement on with their own Congress”.[fn]Crisis Group interview, Paris, February 2018.Hide Footnote

Nonetheless, the E3 believed that even if the path through which the U.S. could remain party to the deal was narrow, it was incumbent upon them to explore whether a compromise consistent with the JCPOA was reachable.[fn]Crisis Group interviews, French, German and British officials, Paris, Berlin and London, January-March 2018.Hide Footnote The ultimatum created a sense of urgency.[fn]A European official said, “we once told a senior U.S. diplomat that we felt he was putting us under pressure and presenting us with an ultimatum. Referring to President Trump, he responded: ‘I feel the same way!’” Crisis Group interview, Paris, March 2018.Hide Footnote Between February and April, the U.S. and E3 negotiators met four times, in London, Paris, Berlin and Washington, to address U.S. concerns within and beyond the JCPOA.[fn]According to the lead U.S. negotiator, each session was split between discussions over the parameters of an E3-U.S. “supplemental agreement” addressing Iran’s ballistic missile program, international inspections of its nuclear program and the “sunset” provisions laid out in the JCPOA, and further discussions over six issues falling under “Iran’s other malign activities”. “Brian Hook on the Joint Comprehensive Plan of Action Joint Commission in Vienna”, State Department, op. cit.Hide Footnote

While the quartet’s discussions dismayed other JCPOA participants, there was a high degree of harmony among the E3.[fn]The EU attended the E3-U.S. talks, but only as an observer. A Russian diplomat complained: “This is an effort to divide the P5+1. It is neither possible nor acceptable to use the JCPOA as leverage to extract more concessions from Iran”. Crisis Group interview, Washington, 7 February 2018. Tom Miles, “Russia and China seek international support for Iran nuclear deal”, Reuters, 24 April 2018.Hide Footnote Moreover, transatlantic talks showed there was considerable common ground concerning Iran’s ballistic missile program and its Middle East policies.[fn]Crisis Group interviews, Washington, Brussels and Paris, January-March 2018.Hide Footnote Both sides could agree on imposing tough penalties on any Iranian move toward developing intercontinental ballistic missiles (ICBMs); on enforcing strict export controls and responding jointly to Iran’s testing of short- and medium-range missiles capable of carrying a nuclear warhead; and on pushing back against what they see as Iran’s regional meddling. There is likewise apparent consensus on steps related to efforts by the International Atomic Energy Agency (IAEA): that it should vigorously verify Iranian compliance; receive from the E3 and U.S. timely intelligence regarding suspicious activities at Iranian military or nuclear sites; and rigorously enforce the JCPOA’s access provisions.[fn]Annex I of the JCPOA provides a unique mechanism for IAEA access to suspect sites within 24 days through the Joint Commission, with Iranian non-cooperation resulting in the activation of a dispute resolution mechanism and potential snapback of UN sanctions.Hide Footnote A senior European official said, “we are going very far but, honestly, it is justified, regardless of the JCPOA. We were awakened to the magnitude of what Iran is doing”.[fn]Crisis Group interview, Berlin, April 2018.Hide Footnote

It’s totally unrealistic to believe that Iran will accept perpetual limits on its sovereignty.

The four countries also made progress on the most contentious issue, the JCPOA’s so-called sunset clauses – ie, the fact that several, albeit not all, restrictions on Iran’s nuclear program will expire at some point. Critics, the U.S. administration among them, claim that the expiry provides Iran with a pathway to building nuclear weapons over time.[fn]Under the JCPOA, some restrictions on the production and testing of advanced centrifuges will be relaxed in 2024; in 2026, Iran can start phasing out its first-generation centrifuges, but its total enrichment capacity (less than one third of what it was prior to the deal) will remain at the 2016 level until 2028. Until 2031, the enrichment level is restricted to 3.67 per cent; Iran’s low-enriched uranium stockpile is capped at 300kg; and constructing a new heavy-water reactor and reprocessing spent fuel are banned. Continuous surveillance of centrifuge production sites lasts until 2036, while the monitoring of Iran’s uranium mines and mills will continue until 2041. Some provisions have no expiry date. For instance, Tehran is forever required to notify the IAEA when it makes a decision to build a nuclear facility. If Iran ratifies the Additional Protocol to its Comprehensive Safeguards Agreement in 2023 in conjunction with the U.S. Congress permanently lifting its nuclear-related sanctions, the IAEA will have enhanced access to suspect Iranian sites in perpetuity.Hide Footnote The U.S. has been seeking an E3 commitment to automatically reimpose sanctions if Iran, although acting in compliance with the JCPOA, expands its nuclear program after certain constraints go away.[fn]As a U.S. official asked, “if you agree that it is a good thing Iran is twelve months away from a breakout and that’s why you like the deal, then why wouldn’t you like Iran to preserve that distance in the future?” Crisis Group interview, Washington, 8 February 2018.Hide Footnote For the E3, however, this step would be tantamount to a violation – even if a deferred one – of the JCPOA, which contemplates the normalisation of Iran’s civilian nuclear program after a confidence-building period that ends gradually between 2026 and 2031. A senior Iranian official said, “the question of duration was the toughest in the talks. We wanted two years and the U.S. wanted twenty. We compromised and now will agree to neither a one-sided change nor a renegotiation [of this clause]. It is either all or nothing”.[fn]Crisis Group interview, New York, 21 April 2018.Hide Footnote As a French official put it, “it’s totally unrealistic to believe that Iran will accept perpetual limits on its sovereignty”.[fn]Crisis Group interview, Washington, 8 February 2018.Hide Footnote

Instead, the E3 have said they are willing to reassert their determination not to allow Iran to acquire a bomb and to judge Tehran’s intentions by assessing a range of factors, including whether its nuclear program was commensurate with its civilian needs for nuclear fuel.[fn]The JCPOA’s preface notes: “The JCPOA reflects mutually determined parameters, consistent with practical needs, with agreed limits on the scope of Iran’s nuclear program, including enrichment activities and R&D”.Hide Footnote In other words, the U.S. and E3 would seek to define indicators of a potential Iranian move toward nuclear weapons. They would also agree on what they would and would not provide Iran in terms of nuclear-related technology after those constraints expire.[fn]Crisis Group interviews, European officials, Paris, Berlin and London, March-April 2018.Hide Footnote Finally, they would consent to a U.S.-E3 review after a few years to assess Iran’s intent.

In return for their cooperation with the U.S., the E3 would want the Trump administration to stabilise the JCPOA by halting the cycle of uncertainty that derives from the administration having to certify Iranian compliance or extend sanctions relief at frequent intervals. They also seek a firm commitment that the U.S. will issue licences for legitimate business in Iran and put a stop to U.S. Treasury officials explicitly discouraging such commerce, in contravention of the JCPOA.[fn]Crisis Group interviews, European officials, Paris, London, Berlin and Brussels, March-April 2018. A Treasury official said: “We say any company thinking about doing business in Iran or with Iranian companies faces serious risks that they will be doing business with those, like the [Islamic Revolutionary Guard Corps (IRGC)], supporting terrorism and instability throughout the world”. Quoted in William James, “U.S. backs EU Iran sanctions push, warns firms against Tehran trade”, Reuters, 10 April 2018.Hide Footnote

By late April, a mutually acceptable compromise seemed within reach, with a few brackets remaining over the key question of the sunset clauses. Even if the differences were bridged, however, it remains unclear whether a compromise would satisfy Trump.[fn]Crisis Group interviews, European officials, Washington and Berlin, 11-17 April 2018. U.S. diplomats and congressional staffers interviewed for this report put the odds of Trump accepting a potential U.S.-E3 agreement at no more than 50 per cent. Crisis Group interviews, Washington, March-April 2018.Hide Footnote His April 2018 decision to bring ardent JCPOA opponents into key national security posts bodes ill. Both the new national security advisor, John Bolton, and the new secretary of state, Mike Pompeo, have in the past openly favoured abrogating the agreement, a military strike on Iran and regime change.[fn]John Bolton, “How to get out of the Iran nuclear deal”, National Review, 28 August 2017. More recently, he has written that “no fix will remedy the diplomatic Waterloo Mr. Obama negotiated”, going on to propose that “America’s declared policy should be ending Iran’s 1979 Islamic Revolution before its 40th anniversary”. See “Beyond the Iran nuclear deal”, Wall Street Journal, 15 January 2018. In his last tweet prior to his selection as Trump’s Central Intelligence Agency (CIA) director in November 2016, Pompeo stated, “I look forward to rolling back this disastrous deal with the world’s largest state sponsor of terrorism”. In 2014, as a member of Congress, he said it would take “2,000 sorties to destroy the Iranian nuclear capacity. This is not an insurmountable task”. Quoted in Shashank Begali and Ramin Mostaghim, “Iran reacts to Pompeo as Trump’s secretary of state pick: ‘Cowboyish’ and ‘eager to start a war’”, Los Angeles Times, 14 March 2018.Hide Footnote Indeed, in dismissing his first secretary of state, Rex Tillerson, Trump specifically cited the JCPOA as one area of disagreement: “I wanted to either break it or do something, and he felt a little bit differently”.[fn]Quoted in Michael Crowley, “Tillerson’s ouster could kill the Iran nuclear deal”, Politico, 13 March 2018.Hide Footnote As seen from Europe, these changes at the top portend a growing hawkishness and cast a shadow over the viability of putative U.S.-E3 compromise on the JCPOA, even though the talks have made progress in the interim.[fn]A European official said, “our impression is that our U.S. counterparts have deduced a set of criteria from Trump’s 12 January statement that they believe might address his concerns. But neither they nor we know if he’d accept a compromise along those lines. Now we are not even sure if our interlocutors will remain in their posts in the coming weeks”. Crisis Group interview, Paris, March 2018. Another European official said: “Our conversations with Bolton have not left us optimistic. We interpreted the fact that no one from the White House attended the latest meeting with the E3 as Bolton’s desire to have nothing to do with the negotiations, so that he can oppose whatever emerges at the end”. Crisis Group interview, Paris, April 2018.Hide Footnote

The Trump administration’s problem is not with the deal; it’s with the Islamic Republic of Iran.

Some European officials are sceptical that the administration’s ultimate goal is to improve the accord. They believe its aim is to restore maximum coercive pressure on Iran in order to change not only that country’s behaviour, but also its regime. In that reading of Trump’s intentions, the JCPOA is an obstacle. As a French official put it, “the truth is that the Trump administration’s problem is not with the deal; it’s with the Islamic Republic of Iran. We are in 2018, but the U.S. is stuck in 1979”.[fn]Crisis Group interview, Paris, 29 March 2018.Hide Footnote Trump seems to have bought into Israeli Prime Minister Benjamin Netanyahu’s argument that because little investment has flowed into Iran thus far, the time to cut it off is now, before European firms develop a strong financial interest in the country being open. Withdrawing from the JCPOA and increasing pressure on Iran might also satisfy the president’s political base ahead of U.S. midterm elections in November.[fn]Crisis Group interviews, Republican senators and Israeli officials, Washington, March 2018. An Israeli official said, “the leverage is to fix it now, not later, when the benefits for Iran are there”. Crisis Group interview, Jerusalem, April 2018.Hide Footnote Should Trump decide to leave the JCPOA, his approach arguably would enable him to pin responsibility on the E3. As a Republican senator mused, “Trump is in the ‘catbird seat’. He’ll be able to blame Europe if a ‘fix’ fails to emerge, and whether or not this is fair, his base is likely to buy it. Internationally, perceptions may be different, but that is not Trump’s concern”.[fn]Crisis Group interview, Washington, March 2018.Hide Footnote

Macron engaged in a last-ditch effort to sway Trump during his visit to Washington. In what appeared to be a somewhat new approach, the French president suggested that he and Trump had discussed building on, rather than destroying, the JCPOA. As he described it, the U.S., Europe, along with several other interested countries would seek to achieve a “new” broader agreement with Iran that had “four pillars”, of which preserving the JCPOA would be one. As he explained:

The first one is to block any nuclear activity of Iran until 2025. This was feasible thanks to the JCPOA. The second is to make sure that, in the long run, there is no nuclear Iranian activity. The third fundamental topic is to be able to put an end to the ballistic activities of Iran in the region. And the fourth one is to generate the conditions for a solution – a political solution to contain Iran in the region – in Yemen, in Syria, in Iraq and in Lebanon.[fn]Trump said, “I think we will have a great shot at doing a much bigger maybe deal, maybe not deal. We’re going to find out, but we’ll know fairly soon”. “Remarks by President Trump and President Macron of France in joint press conference”, White House, 24 April 2018.Hide Footnote

The idea was intriguing, though it left many important questions unanswered – notably, whether the JCPOA would remain in force regardless of the outcome of the negotiations and, if so, for how long; whether Trump would agree to fully implement it; and why Iran would accept negotiations about these matters under these conditions. Yet, before such issues could even begin to be elucidated, Macron poured considerable cold water on his own proposal. As he was departing Washington, he said, “my view – I don’t know what your president will decide – is that he will get rid of this deal on his own, for domestic reasons”. He added that “his experience with North Korea is that when you are very tough, you make the other side move and you can try to go to a good deal or a better deal” – though he went on to say that “it can work in the short term, but it’s very insane in the medium to long term”.[fn]Julian Borger, “Donald Trump likely to scrap Iran deal amid ‘insane’ changes of stance, says Macron”, The Guardian, 25 April 2018.Hide Footnote In other words, and as a senior French official had previewed the previous week, “Trump believes he can negotiate a better deal than anyone. So he’s tempted to do with Tehran as he did with Pyongyang – maximum pressure, followed by negotiations. Whether he’d try to do those unilaterally or in a multilateral format is anyone’s guess”.[fn]Crisis Group interview, senior French official, Paris, April 2018.Hide Footnote

 Nonetheless, the idea of adding provisions to the JCPOA as a means of securing continued U.S. adherence to the deal has gained more currency within the E3.[fn]“Entretien téléphonique avec le président iranien Hassan Rohani”, Elysée, 29 April 2018; “Britain, France and Germany agree on support for Iran nuclear deal”, Reuters, 29 April 2018.Hide Footnote For its part, Iran seems loath to accept additional constraints on its nuclear program, but has declared itself ready to discuss regional issues.[fn]“President: Iran will not accept limitations beyond commitments”, IRNA, 29 April 2018.Hide Footnote

III. The Iranian Wild Card

Increased anxiety over the JCPOA’s fate means that Iran has not reaped the foreign capital and investment it keenly anticipated and badly needs.

Even prior to President Trump’s refusal to certify the JCPOA in October 2017, Iranian officials complained of U.S. “bad-faith implementation”.[fn]Crisis Group interviews, Iranian officials, Tehran and Brussels, January 2017-April 2018.Hide Footnote An official said he believed that “the White House wants to turn the JCPOA into an empty shell by creating uncertainty around it, depriving Iran of its economic dividends and forcing us to walk away from the deal”.[fn]Crisis Group interview, New York, September 2017. At a meeting of the JCPOA’s Joint Commission in April, a senior Iranian official reportedly asked a senior U.S. official, “if even you can’t say whether President Trump will extend sanctions relief in May, how do you expect companies to invest in Iran?” Crisis Group interview, European official, Washington, April 2018.Hide Footnote The leadership in Tehran, however, decided not to fall into what they viewed as a trap by announcing that Iran would not be the first to violate the agreement.[fn]Crisis Group interviews, Iranian officials, Tehran and Vienna, December 2017. See also “Iran says it will not be the first to violate nuclear deal”, Reuters, 20 September 2017. As Iran’s deputy foreign minister puts it, “as far as Iran is concerned, the JCPOA is not a success story … [the U.S.] is violating the JCPOA on a daily basis almost”. Abbas Araqchi, “Iran’s foreign policy priorities”, speech to Chatham House, London, 22 February 2018. Available at https://www.chathamhouse.org/event/irans-foreign-policy-priorities. European officials privately agree with this assessment. Crisis Group interviews, Washington, March-April 2018.Hide Footnote But increased anxiety over the JCPOA’s fate means that Iran has not reaped the foreign capital and investment it keenly anticipated and badly needs. Instead Iran has witnessed massive capital flight and currency devaluation as a result of JCPOA-related uncertainties and structural economic problems in the country.[fn]A French lawyer involved in facilitating European firms’ access to the Iranian market said, “since Trump’s decision not to certify the JCPOA in October, there is an absolute standstill. All the investment projects have come to a grinding halt”. Crisis Group interview, Brussels, 18 April 2018. Echoing a similar view, a European banker said, “from the perspective of 90 per cent of international banks, the JCPOA is already dead”. Crisis Group interview, Brussels, 18 April 2018. See also “خروج 30 میلیارد دلار در چند ماه” [“$30 billion capital flight in a few months”], Bourse Press, 27 March 2018. At the start of 2018, the dollar was trading at around 43,000 rials. It broke the 60,000 rial barrier in late March or early April. The International Monetary Fund identified “a weak banking sector, structural bottlenecks and heightened uncertainty” as significant risks adversely affecting Iran’s economic growth. See “Islamic Republic of Iran: Staff Report for the 2018 Article IV Consultation”, IMF, 7 March 2018.Hide Footnote

Iranian officials have been critical of the E3 for putting so much effort into reassuring the U.S., arguing that Tehran is in full compliance with its JCPOA obligations – but not Washington. A senior Iranian diplomat complained, “the E3 are dead set on appeasing Trump, forgetting that we, who unlike the U.S. have fulfilled our JCPOA commitments, also have a contentious domestic atmosphere”.[fn]Crisis Group interview, Brussels, 28 March 2018. An Iranian official said, “the consensus around the JCPOA’s utility for Iran has been shattered, and its proponents are in danger – not just politically, but even physically”. Crisis Group interview, Brussels, April 2018. Reza Haghighatnejad, “Iran’s nuclear negotiators discredited amid spy allegations”, IranWire.com, 16 April 2018.Hide Footnote A conservative lawmaker added, “the irony is that we signed the JCPOA to unshackle ourselves from sanctions. Now the Europeans are telling us, ‘we have to sanction you to satisfy Trump and preserve the JCPOA’”.[fn]Crisis Group interview, Tehran, April 2018.Hide Footnote They also reject any U.S.-E3 initiative to alter the deal or seek to negotiate a new one, as Macron proposed. “Together with a leader of a European country [the U.S. leaders] say: ‘We want to decide on an agreement reached by seven parties’. For what? With what right?” President Hassan Rouhani asked, adding: “If Europe wishes to satisfy Trump, it should spend out of its own pocket, not Iran’s”.[fn]“Iran nuclear deal: Rouhani says West has no right to make changes”, BBC, 25 April 2018.Hide Footnote

Iranian officials have warned that internal political imperatives will compel them to reject a joint U.S.-E3 agreement and to react even more strongly if the U.S. withdraws from the JCPOA.[fn]A senior Iranian official explained: “Hardliners have accused the Rouhani administration of being naïve and too compromising. They tell us, ‘if you had enriched uranium to 3.8 per cent instead of 3.7 in response to U.S. violations, we would not have ended up here’. If we don’t react to a hostile joint U.S.-E3 effort to punish us, we will provide the government’s critics with more ammunition”. Crisis Group interview, Brussels, March 2018.Hide Footnote The nature of such a response is a subject of debate within the political elite. There appear to be three schools of thought. One group – an increasingly narrow circle around President Rouhani – argues that while it is important to rectify the European perception that Iran is willing to stay in the deal no matter what the circumstances or how meagre the economic dividends, Tehran should not play into the Trump administration’s hands. In other words, it should remain committed to its JCPOA obligations, preserve the moral high ground, and seek to drive a wedge between the U.S. and other E3/EU+3 members to neutralise new or revived U.S. sanctions. This course of action, however, would not be an option if Europe either fails to preserve as much of the deal’s economic dividends for Iran as possible or joins the U.S. in slapping sectoral sanctions (targeting economic sectors instead of individuals and entities) on Iran.[fn]Crisis Group interviews, Iranian officials, Brussels and Tehran, March-April 2018.Hide Footnote The bleak economic situation has rendered this posture difficult to sustain for JCPOA supporters in Tehran.[fn]The editors of a pro-Rouhani daily wrote: “If the U.S. abrogates the JCPOA, it might be better for us. Instead of investing our hope in an agreement that has no benefit for us, we can move on and focus on enhancing our domestic [economic] capabilities”. See “ترامپ، درصدد مذاكرات هسته‌اي” [“Trump bent on nuclear talks”], Arman, 7 April 2018. A European diplomat based in Tehran observed, “even the Rouhani team, for whom the JCPOA is a major achievement, might welcome a scapegoat for explaining the economic malaise in the face of dashed popular expectations”. Crisis Group interview, Washington, 11 April 2018. See also “Iran says may withdraw from nuclear deal if banks continue to stay away”, Reuters, 22 February 2018; “Iran tells Trump he would regret dropping nuclear deal”, Reuters, 9 April 2018.Hide Footnote One official predicted that the foreign ministry might soon lose control over the nuclear dossier. It might be reassigned to the Supreme National Security Council, where the deal’s sceptics have more sway.[fn]Crisis Group interview, Brussels, April 2018. During the nuclear standoff, from 2003 to 2013, the nuclear file was highly securitised under the control of the Supreme National Security Council. It was transferred to the foreign ministry in 2013 as the talks with the P5+1 started making progress toward an agreement. Crisis Group Middle East and North Africa Briefing N°36, Great Expectations: Iran’s New President and the Nuclear Talks, 13 August 2013.Hide Footnote

A second group, apparently comprising the majority of national security decision-makers, argues that if the E3 impose sectoral sanctions on Iran or fail to stand up to the U.S. in case the latter violates the JCPOA, Iran should retaliate with its own JCPOA violations. These could include stepping up its nuclear research and development, resuming enrichment at the Fordow bunker facility up to 20 per cent and/or halting voluntary cooperation with the IAEA (thus limiting the agency’s access to Iran’s non-nuclear sites).[fn]Crisis Group interviews, Iranian national security officials, Tehran, March-April 2018. This move would be on a par with Iran’s reaction in 2005 and 2006, when it resumed uranium enrichment, after the 2003-2005 nuclear negotiations with the E3 collapsed. In mid-2003, the E3 had taken the lead in formal discussions with Iran over its nuclear program, in the absence of U.S.-Iranian contacts. See Crisis Group Middle East and North Africa Report N°51, Iran: Is There a Way Out of the Nuclear Impasse?, 23 February 2006. Since two cascades of centrifuges remain operational in the bunkered Fordow facility, it is possible to quickly rearrange them to start producing 20 per cent enriched uranium. “Iran can resume 20% uranium enrichment in 4 days”, Mehr News, 9 April 2018.Hide Footnote It could also hit back through non-nuclear/indirect measures: targeting U.S. forces in Iraq and Syria through Shiite militias; encouraging Huthi rebels in Yemen to fire rockets and missiles at Saudi or Emirati cities or ships in the Red Sea.[fn]Crisis Group interviews, Iranian officials, Brussels and Tehran, March-April 2018. See also, Borzou Dargahi, “Iranian-backed militias set sights on U.S. forces”, Foreign Policy, 16 April 2018.Hide Footnote Finally, the most dramatic step would be to walk away from the JCPOA altogether. They might do this by first initiating the JCPOA’s dispute resolution mechanism, thereby giving themselves 35 days to try to reach an understanding with Europe, or by withdrawing immediately.[fn]According to Article 36 of the JCPOA, after receiving a complaint from a deal participant, the Joint Commission, comprised of all the signatories and chaired by the EU, would have fifteen days to resolve the issue, unless the time period was extended by consensus. After Joint Commission consideration, any participant could refer the issue to foreign affairs ministers, who would have a similar fifteen-day window (unless extended by consensus). If after this 30-day process the issue is not resolved, the Joint Commission would consider the non-binding opinion of an advisory board, comprised of three members (one appointed by each participant in the dispute and a third independent member) for no more than five days. A senior Iranian official said, “if we go to the Joint Commission it will be only to set the record straight and demonstrate to the world that we exhausted all options”. Crisis Group interview, New York, April 2018.Hide Footnote

The third group, which is now gaining momentum, consists of even more hard-line political elements and some within the Islamic Revolutionary Guard Corps (IRGC). The response to a U.S. withdrawal from the JCPOA that they advocate is pulling out of not just the JCPOA, but also the Nuclear Non-Proliferation Treaty (NPT). This move would allow Iran to resuscitate its enrichment program at full speed and change its nuclear doctrine to pursue weaponisation.[fn]Crisis Group interviews, Iranian officials, Tehran and Brussels, April 2018. See also Fouad Izadi, “خروج ايران از «ان پي تي» مي‌تواند هزينه خروج آمريکا از برجام باشد” [“Iran’s withdrawal from the NPT can be the price of the U.S. withdrawal from the JCPOA”], Resalat, 11 April 2018; Bozorgmehr Sharafedin, “Iran warns Trump it might withdraw from Non-Proliferation Treaty”, Reuters, 24 April 2018.Hide Footnote They point to the Trump administration’s desire to engage with North Korea as evidence that Iran can only deal with the U.S. from a position of strength with the ultimate deterrent in hand. A senior Iranian official said, “the [nuclear] bomb is increasingly seen as the rational option”.[fn]Crisis Group interview, senior Iranian official, New York, April 2018.Hide Footnote Pursuing this option would allow them to close the door on any further improvement in Iran’s relations with the West, which they view as a threat to their economic interests and loathe for its cultural subversion; it would also further discredit the Rouhani administration ahead of the 2020 parliamentary and 2021 presidential elections, with the supreme leader’s succession additionally looming on the horizon.[fn]Crisis Group interviews, current and former Iranian officials, Tehran, April 2018.Hide Footnote Thus the hardliners reject continued adherence to the deal after a U.S. withdrawal. As the editors of the Kayhan newspaper, which is closely aligned with the supreme leader, wrote, “the JCPOA is a disaster, with or without the U.S.”[fn]“برجام فاجعه است با آمریکا یا بدون آمریکا” [“the JCPOA is a disaster, with or without the U.S.”], Kayhan, 17 April 2018.Hide Footnote

Iran’s response will be informed both by domestic politics and by the supreme leader’s determination not to project weakness in the face of what he considers U.S. bullying.

It is difficult to predict the outcome of this debate though a dash to nuclear breakout capability – let alone the pursuit of a bomb – is far from the most likely response. The Iranians also see merit in trying to get Europe to side with it against Trump, rather than with the U.S. against the Islamic republic. But complacency would be ill-advised. As a senior European official noted, “Iran, facing a lot of threats now, sees the JCPOA as more than an economic guarantee – as also a security one. They fear that without it they could be exposed to an attack by the U.S. or Israel. So they are likely to remain in the deal”.[fn]Crisis Group interview, Berlin, April 2018.Hide Footnote Yet Iran’s response will be informed both by domestic politics and by the supreme leader’s determination not to project weakness in the face of what he considers U.S. bullying, lest Iran invite more harassment. As a senior Iranian official put it, “even JCPOA supporters within Iran’s political elite express regret at how little, in their view, President Rouhani has pushed back against growing U.S. pressure”.[fn]Crisis Group interview, New York, April 2018.Hide Footnote

Compounding these risks, the JCPOA’s apparent demise is occurring amid rising tensions between Iran, the U.S. and their respective Middle Eastern allies. As detailed in Crisis Group’s Iran-U.S. Trigger List, an incident at any one of the points of friction between the parties, be it in Yemen, Syria, Iraq, Lebanon, Afghanistan or the Gulf, could easily spiral into military confrontation.[fn]These flashpoints can be monitored on Crisis Group’s Iran-U.S. Trigger List: https://www.crisis.group.org/trigger-list/iran-us-trigger-list.Hide Footnote Paradoxically, one result of the Macron visit to Washington appears to have been to bolster Trump’s resolve to counter Iran in Syria – in other words, and contrary to the French president’s hope, we could find ourselves with a more bellicose U.S. posture and without the JCPOA.[fn]Trump said, “Emmanuel and myself have discussed the fact that we don’t want to give Iran open season to the Mediterranean, especially since we really control it”. See “Remarks by President Trump and President Macron”, White House, op. cit.Hide Footnote

IV. A European Contingency Plan

On the eve of his April state visit to the U.S., President Macron said there was no “plan B” if the JCPOA collapses. He might have said that to warn the U.S. against a unilateral withdrawal or because he knows Europe cannot defy the U.S. with contingency measures to protect the deal. Or he might have had both factors in mind.[fn]“France’s Macron says he has no ‘plan B’ for Iran nuclear deal”, Reuters, 22 April 2018.Hide Footnote A senior European official said: “Our firms are clear that they will not be able to do business with Iran if sanctions are reimposed. This is not like the 1990s; integration into international banking and financial sectors is such that all our firms touch the U.S. and thus risk losing big. Even oil exports from Iran might not be able to continue. So we can try, but Iran will soon see economic benefits disappear, so pressure will grow on them to withdraw or violate [the] deal”.[fn]Crisis Group interview, Paris, April 2018.Hide Footnote

For these reasons, the E3 are trying hard to keep the U.S. in the agreement. Yet, while the odds of achieving a JCPOA-compliant compromise that would stabilise the deal seem long, there could still be a joint U.S.-E3 understanding that would signal to Washington the E3’s willingness to act on issues of mutual concern regarding Iranian behaviour, while stopping short of violating a multilateral agreement with which Tehran continues to comply. It could also bring a degree of reassurance for foreign capital and technology to flow into Iran. As a stepping stone toward a broader agreement with Iran to address its ballistic missile program and regional activities, such an understanding could include the following elements:

  • A permanent commitment to prevent Iran from manufacturing or acquiring nuclear weapons; this could apply specifically to the list in the JCPOA’s Section T concerning activities that could contribute to the design and development of a nuclear explosive device,[fn]Crisis Group interviews, European officials, Paris and Berlin, April 2018. The NPT fails to define what is entailed in manufacturing a nuclear weapon. The JCPOA’s Section T closes that loophole in the case of Iran by explicitly banning certain activities and dual-use material related to nuclear weaponisation. It outlines four categories of activities: computer modelling to simulate nuclear explosive devices; using multi-point explosive detonation systems suitable for a nuclear explosive device; using explosive diagnostic systems; and using explosively driven neutron sources. Section T is the only part of the JCPOA, however, that neither explicitly names the IAEA nor specifies Iran’s commitments. The deal’s detractors charge that the agency is not authorised to verify Iran’s compliance under this provision. What they fail to mention is that Section T was devised primarily as a deterrent to ensure that weaponisation activities are unambiguously banned with no sunset provisions.Hide Footnote as well as regular U.S./E3 assessments of the growth and evolution of Iran’s uranium enrichment activities and their commensurability with the country’s civilian nuclear fuel needs;
     
  • A commitment to seek a supplemental agreement among JCPOA signatories to address all parties’ concerns. Talks could begin once confidence in the JCPOA’s implementation has been restored, optimally two years prior to the JCPOA’s Transition Day in October 2023, when Iran is to ratify the Additional Protocol to the NPT and the U.S. and EU are to terminate nuclear-related sanctions;[fn]For details see Annex V, Section D of the JCPOA.Hide Footnote
     
  • A commitment to consider an Iranian move toward acquiring long-range intercontinental ballistic missiles a threat to international peace and security, and grounds for imposing targeted sanctions;
     
  • Enforce strict export controls and impose targeted sanctions against individuals and entities engaged in the production of missiles that are designed to be nuclear capable, specifically Ghadr medium-range missiles, as well as anyone engaged in transferring ballistic missile technology to non-state actors in the region;[fn]See Michael Elleman and Mark Fitzpatrick, “Are Iran’s ballistic missiles designed to be nuclear capable?” International Institute for Strategic Studies, 28 February 2018. There is evidence that Iranian weapons, including missile parts, are going to the Huthis. A January 2018 UN panel of experts accused Iran of violating the arms embargo against Yemen. “Final Report of the Panel of Experts on Yemen”, UNSC S/2018/68, 26 January 2018.Hide Footnote
     
  • Dedicate additional intelligence resources to, and share information about, suspicious activities at Iranian nuclear and non-nuclear sites; assess and fulfil the funding needs of the IAEA; and underscore the IAEA’s full authority under the JCPOA’s Section Q to inspect non-nuclear sites in Iran;
     
  • A statement of policy by the Trump administration to adhere to U.S. commitments under the JCPOA, as long as the IAEA has verified Iran to be complying with the JCPOA’s terms;[fn]This should include reiteration of the JCPOA’s paragraph 28, which notes that the U.S. should make its “best efforts in good faith to sustain [the] JCPOA and prevent interference with realization of the full benefits by Iran of the sanctions lifting”.Hide Footnote to refrain from discouraging business that is permissible under the JCPOA; and to issue licences for legitimate trade with Iran, including those related to civilian aircraft, in a timely manner;
     
  • White House support for congressional action to amend existing Iran sanctions statutes by removing the periodic waiver requirements and replacing them with a bill pursuant to which sanctions would be reimposed if the executive branch reports to Congress a significant JCPOA violation by Iran, as verified by the IAEA; and support for congressional action to replace INARA’s 90-day certification requirement on Iran’s JCPOA compliance with an executive branch report to Congress in case of a significant JCPOA violation by Iran, as verified by the IAEA.

In parallel to these measures, the E3/EU could launch an effort to prevent the proliferation of dual-use nuclear fuel cycle technology in the Gulf region. This goal could be reached in several ways: proposing a joint venture enrichment plant among countries in the region; multinationalising Iran’s enrichment program by staffing its facilities with technicians and experts from Iran and the EU countries to add another layer of monitoring; and/or establishing a nuclear fuel bank for use by Iran and other countries in the region before the JCPOA’s Transition Day to discourage enrichment activities on their soil.[fn]The most feasible approach to multinationalising Iran’s enrichment program would be through a multinational staffing arrangement. Iranian centrifuge halls could be staffed by experts from the E3, possibly under the guise of civilian nuclear cooperation, as outlined in Annex III of the JCPOA. This step could help increase confidence that no undeclared activities are taking place and that centrifuge cascades have not been modified. The Ford administration pursued a similar approach toward Iran in the 1970s. William Burr, “A Brief History of U.S.-Iranian Nuclear Negotiations”, Bulletin of the Atomic Scientists, vol. 65, no. 1, 1 January 2009, p. 23; Peter Friend, “URENCO’s views on International Safeguards Inspection”, 8th International Conference on Facility-Safeguards Interface, Portland, Oregon, 30 March 2008. The IAEA inaugurated its first nuclear fuel bank in Kazakhstan in 2017. “U.N. nuclear watchdog opens uranium bank in Kazakhstan”, Reuters, 29 August 2017.Hide Footnote

The E3 should broaden its approach, developing a plan B that might induce Iran to continue respecting the JCPOA’s terms even if the U.S. stops doing so.

The E3’s negotiating position is complicated by the uncertainty over what Trump will decide in May. Among possible options, he could reach an agreement with the E3, waive sanctions, bring the U.S. into compliance with the JCPOA and shift the focus of his and Europe’s pressure strategy to Iran’s regional activities; once more waive sanctions to give the U.S.-E3 talks more time to yield results while maintaining uncertainty about the JCPOA’s fate; reimpose nuclear-related sanctions but not enforce them in order to grant negotiations more time; or reimpose sanctions and enforce them as soon as bureaucratically possible.[fn]“Renewed sanctions need not mean U.S. exit from Iran deal: Mnuchin”, Reuters, 11 April 2018. The next deadline for waiving sanctions is on 12 July 2018.Hide Footnote

Neither unilateral U.S. withdrawal from the JCPOA nor protracted uncertainty about Washington’s stance is desirable – either for Europe or for the future of the nuclear deal. By taking the former course, the Trump administration might strangle the nuclear deal; by taking the latter, it might condemn the accord to slow suffocation. To minimise the damage, the E3 should broaden its approach, developing a plan B that might induce Iran to continue respecting the JCPOA’s terms even if the U.S. stops doing so, whether entirely or in part.

If the U.S. withdraws, and the nuclear agreement no longer can be maintained as an E3/EU+3 arrangement, Europe might still be able to salvage it as a JCPOA minus – with Russia and China, but without the U.S. This, at a minimum, would require presenting an economic and political package to Tehran pursuant to which as many of the benefits envisioned by the JCPOA for Iran as possible would be preserved. This could help Iranian policymakers justify restraint in the face of U.S. non-compliance, prevent renewed crisis over Iran’s nuclear activities and leave the door open to continued EU-Iran dialogue on Iran’s ballistic missile program, regional policies and human rights situation, as well as the fate of dual nationals arrested in Iran on dubious charges.[fn]“Europeans engage with Iran on regional issues as Trump deadline nears”, Reuters, 1 March 2018.Hide Footnote Alternatively, if the U.S. remains party to the JCPOA but in a grudging and potentially temporary way, adopting parts of the package could offset continued uncertainty as to the accord’s fate and tackle existing bottlenecks in permissible trade.

While there is no foolproof way to shield Iran’s economy completely from the repercussions of a U.S. exit or from continued uncertainty, the E3 could develop a package whose political and economic value would be greater than the sum of its individual elements. The package could contain two sets of elements:

Short-term measures designed to provide immediate reassurance to European businesses interested in entering the Iranian market, while empowering those in the Iranian leadership who advocate continued compliance with the deal:

  • The E3 and European Council would publish a statement reiterating their strong support for the JCPOA;[fn]This would be on par with their statements after President Trump’s October 2017 decision. See “Declaration by the heads of state and governments of France, Germany and the United Kingdom”, 10 Downing Street, 13 October 2017; and “EU 28 committed to full and effective implementation of Iran deal”, EU External Action Service, 16 October 2017.Hide Footnote
     
  • In an effort to minimise the effects of U.S. secondary sanctions on Iran’s ability to export oil and repatriate its revenue, the EU would protect energy companies with a small footprint in the U.S. to continue purchasing Iranian oil and gas, and empower pertinent European central banks to process related payments. Movement of funds could occur at the “net level”, ie, Iran’s revenues from exporting oil to Europe could be used to pay for Iran’s imports from Europe;
  • The EU could publish a general licence describing an acceptable standard for due diligence and regulatory compliance for its companies to conduct legitimate business with Iran, thus providing them with a legal shield against secondary U.S. sanctions;[fn]Many European firms have sought letters of comfort from their local regulators for doing business with Iran. A general licence could replace and standardise these.Hide Footnote Brussels could also negotiate with the U.S. Treasury Department to retain General License H, which authorises U.S.-owned or controlled foreign entities to engage in certain Iran-related transactions;[fn]“General License H”, Iranian transactions and sanctions regulations, 31 C.F.R. Part 560, Office of Foreign Assets Control, U.S. Treasury Department.
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  • In parallel, the EU – as a whole, not each state individually – could negotiate with the U.S. to acquire special protection for a set of its industries or companies that do business with Iran, threatening to impose tariffs on U.S. exports to the EU if such carve-outs are not granted;[fn]Such negotiations should not occur before the U.S. withdraws from the agreement, as they could make it easier for the Trump administration to contemplate withdrawal. “Oil major Total to seek waiver if U.S. reimposes Iran sanctions: UAE newspaper”, Reuters, 18 March 2018.Hide Footnote
     
  • The EU could replace its so-called 1996 Blocking Statute that prohibited European companies from complying with secondary U.S. sanctions imposed on Iran with legislation that supports its companies when they press charges against U.S. regulators at the International Court of Justice or International Chamber of Commerce. It could also establish a “clawback” clause for recovery of damages incurred for alleged sanctions violations through imposing tariffs on U.S. exports to the EU.[fn]Council Regulation (EC) 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. A senior European official said, “statutes are technically easy to revise but politically difficult to enforce”. Crisis Group interview, Washington, March 2018. See also Esfandyar Batmanghelidj, “Can blocking regulations help Europe protect its Iran business from Trump?” Bourse & Bazaar, 13 February 2018.Hide Footnote
     
  • The E3 – along with other willing EU member states – could announce a joint effort by their state-owned export credit or investment agencies to cover the risks, including those related to sanctions, that their companies might face in trading with Iran. In the past few months, a number of European governments have taken significant steps to facilitate legitimate trade with Iran by sharing the risks through such a mechanism, but the E3 can spearhead a more systematic, multilateral effort;[fn]Italy’s Invitalia Global Investment signed a master credit agreement with two Iranian banks on 11 January 2018 for up to €5 billion. “Italy and Iran sign a master credit agreement for investments in Iran,” press release, Italian Ministry of Economy and Finance, 11 January 2018. Bpifrance intends to provide €1.5 billion in export guarantees by the end 2018. “France to finance exports to Iran, aims to sidestep U.S. sanctions”, Reuters, 1 February 2018.Hide Footnote

    Italy’s Invitalia Global Investment signed a master credit agreement with two Iranian banks on 11 January 2018 for up to €5 billion. “Italy and Iran sign a master credit agreement for investments in Iran,” press release, Italian Ministry of Economy and Finance, 11 January 2018. Bpifrance intends to provide €1.5 billion in export guarantees by the end 2018. “France to finance exports to Iran, aims to sidestep U.S. sanctions”, Reuters, 1 February 2018.Hide Footnote
  • France’s Agence Française de Développement, Germany’s Kreditanstalt für Wiederaufbau and the UK’s Department for International Development could launch a joint effort to support infrastructural development projects in Iran and enter into negotiations with Tehran to select projects and extend loans as soon as possible; and
     
  • The E3 could more readily facilitate visas for Iranian students and entrepreneurs.

Medium-term measures would require more time to negotiate and implement, but could signal the seriousness of the European commitment to the JCPOA as well as to developing a cooperative and mutually beneficial relationship with Iran:

  • The EU could create a multilateral Euro-denominated trading bank comprising state-owned and medium-size to smaller private banks. Its aim would be to pool these institutions’ resources and share risks, process payments, and provide credit guarantees and insurance services to European private-sector firms seeking to trade with or invest in Iran, and share due diligence and compliance information;[fn]Most international banks are likely to stay away from Iran, and smaller financial institutions lack the resources to fund large projects in Iran. This is a multipronged challenge: most international banks have considerable U.S. exposure (operations in U.S. jurisdiction, employment of U.S. staff or reliance on U.S. corresponding banking network), and thus fear running afoul of existing U.S. sanctions and/or the return of nuclear-related ones. Some have agreements with U.S. regulators in which their prosecution was deferred in return for a commitment not to do business with Iran. Iran’s own internal banking shortcomings (from inadequate standards related to anti-money laundering and financing of terrorism to a high ratio of non-performing loans) compound the problem. Crisis Group interviews, European bankers, Brussels, 18 April 2018. For more background, see Crisis Group Middle East and North Africa Report N°173, Implementing the Iran Nuclear Deal: A Status Report, 16 January 2017.Hide Footnote
     
  • The European Commission could move Iran from the list of potentially eligible to fully eligible countries for receiving loans from the European Investment Bank to finance large public or private sector projects, and negotiate a framework for the bank’s operations in Iran;[fn]On 8 February 2018, the European Parliament passed a resolution noting that “Iran should be added to the list of potentially eligible regions and countries”; the European Council followed up on 27 February with a regulation that confirmed Iran as “potentially eligible” for European Investment Bank loans. Crisis Group interviews, Brussels, March 2018.Hide Footnote
     
  • The EU and Iran could negotiate and sign a long-term energy partnership, which in return for Iranian natural gas supplies to Europe via existing or new pipelines would provide Iran with access to cutting-edge renewable energy technologies;
     
  • The EU and Iran could support the establishment of an Iran-EU chamber of commerce; and
     
  • The EU and Iran could enhance civil nuclear cooperation, including construction of new civilian nuclear power reactors, in return for an agreement to turn Iran’s enrichment plants into joint European-Iranian ventures, or staff them with European nationals.
The onus is on Iran to act first if it wants the E3’s help in preserving the JCPOA.

Of course, such measures would have to be conditioned on Iran abiding by its JCPOA commitments. If Iran resuscitates its nuclear activities, gradually or at full speed, the E3 almost certainly would themselves end their support for the JCPOA and back the reimposition of multilateral nuclear-related sanctions. As a French official said, “the nuclear crisis began in 2003 because of concerns over Iran’s nuclear activities. If Iran restarts the program, we are back to square one and have no choice but to side with the U.S. in imposing maximum pressure on Iran”. [fn]Crisis Group interview, Paris, 29 March 2018.Hide Footnote Furthermore, Iran could not benefit from the banking mechanisms described above if it fails to take additional steps to reform its finance and banking sectors, including outstanding areas of its action plan with the Financial Action Task Force (FATF).[fn]The FATF decided to continue suspending countermeasures against Iran in February 2018. Still, it called on Iran to implement reforms across nine areas still inadequately implemented. FATF public statement, 23 February 2018. European sanctions officials say that Tehran has done little to avail itself of the expertise and assistance they have offered to provide. Crisis Group interviews, Brussels, March 2018.Hide Footnote

A genuine and measurable Iranian effort to de-escalate tensions in the region, along the lines Crisis Group recommended in an April 2018 report, is equally critical.[fn]Crisis Group Middle East and North Africa Report N°184, Iran’s Priorities in a Turbulent Middle East, 13 April 2018.Hide Footnote Recent European (E3 plus Italy, coordinated by the EU) engagement with Iranian officials over the crisis in Yemen has yielded little.[fn]The first round of talks took place in Munich in February 2018 and the second round will occur in Rome in early May.Hide Footnote The Europeans criticised Iran for intransigence, while Tehran put the blame on European unpreparedness and Saudi Arabia’s unwillingness to reciprocate.[fn]A European official expressed frustration: “Rouhani and Zarif promised cooperation, but they haven’t delivered at all”. Crisis Group interview, Paris, 29 March 2018. A senior Iranian official said, “Iran agreed with the E3/EU and encouraged the Huthis to cooperate with the UN special envoy for Yemen, yet the following day France and the UK joined the U.S. in tabling a resolution against Iran’s role in Yemen at the UN Security Council, poisoning the air. They should decide whether they want to cooperate with Iran or confront it. They can’t do both”. Crisis Group interview, New York, April 2018. See also Michelle Nichols, “Russia resists Western bid to condemn Iran at U.N. over Yemen arms”, Reuters, 21 February 2018.Hide Footnote Regardless, given the perception of its ascendancy in the region, the onus is on Iran to act first if it wants the E3’s help in preserving the JCPOA. By taking the first step, Tehran would demonstrate the value of engaging it versus coercing it to play a more constructive regional role.

Finally, Tehran should agree in principle to future negotiations over a mutually beneficial supplemental agreement that could alleviate concerns about the eventual expansion of Iran’s nuclear fuel cycle activities and set in place regional limits on range and payload of ballistic missiles in return for reciprocal steps – eg, the lifting in whole or in part of U.S. primary sanctions that, as the JCPOA’s implementation record proves, hinder Iran’s reintegration in the global financial system.[fn]Recommending a better-for-better deal, Crisis Group wrote in 2017: “A Republican president backed by a Republican-controlled Congress would have more credibility in offering incentives to Iran than President Barack Obama ever did”. See Crisis Group, Implementing the Iran Nuclear Deal: A Status Report, op. cit., p. ii.Hide Footnote

V. Conclusion

The E3 now find themselves caught between trying to placate the U.S. by “fixing” the JCPOA and ensuring that, in so doing, they do not prompt Iran to walk away. They face the additional challenge of ensuring that other EU member states accept what they propose. This is not self-evident; in April 2018, EU member states rejected an E3 recommendation to impose targeted sanctions upon fifteen Iranian individuals and entities involved in the country’s ballistic missile program and regional activities.[fn]“EU fails to agree new Iran sanctions as Trump deadline nears”, Reuters, 16 April 2018.Hide Footnote

Given the intricate set of compromises on which the agreement is built, the E3 have made it clear that it can be neither renegotiated nor reinterpreted (at least, not without a consensus decision of the Joint Commission established under the JCPOA). Nonetheless, the E3 engaged the Trump administration in an effort to accommodate its principal concerns in order to keep it a party to the JCPOA. The question is not only whether this can be done, but also whether it can be done in a manner that will not push Iran out of the deal and that does not merely preserve the deal beyond yet another deadline. The goal – aside from the declared aim of achieving stronger transatlantic consensus on how to address Iran’s ballistic missile program and regional activities – should be to stabilise the JCPOA by allowing Iran the economic dividends to which it is entitled.

Iran has given away most of its nuclear leverage and would be loath to renegotiate from a position of perceived weakness.

The Trump administration, confident in the utility of its maximum pressure strategy, which appears to have borne some fruit in opening dialogue with North Korea, appears oblivious to the fact that no broader deal could be constructed on the JCPOA’s ruins in the foreseeable future, as its demise likely would destroy Iranian trust in the utility of future talks. Also, unlike Pyongyang, which has secured the ultimate deterrent, Iran has given away most of its nuclear leverage and would be loath to renegotiate from a position of perceived weakness.

It is not too early for Europe to devise a plan that would seek to protect the JCPOA from both a U.S. withdrawal and continued uncertainty. This aim could be achieved through a package of incentives aimed at persuading the Iranian leadership that the benefits of remaining compliant with the JCPOA outweigh the potential costs of noncompliance and retaliation. If the E3 preserve their current unified position and, if need be, chart a path independent of the U.S. to salvage the nuclear deal, they potentially could help avert the reignition of the nuclear crisis in a Middle East in turmoil.[fn]A senior Republican lawmaker said, “if the U.S. leaves the deal, it will lose its leverage to influence Europeans on issues like IRGC activities and its missile program”. Crisis Group interview, Washington, March 2018.Hide Footnote This course also would leave the door open for a future U.S. return to the JCPOA. Trump has demonstrated in other cases that he might be prepared to rejoin agreements he previously abandoned.[fn]“Trump changes his mind on joining the TPP on Twitter again”, Vox, 18 April 2018.Hide Footnote Moreover, even if U.S. nuclear-related sanctions against Iran come back into force, there will be another U.S. presidential election in two years that could bring to power leaders with a different view about U.S. adherence to its international commitments.[fn]As a U.S. official explained, “the redesignation of nearly 400 Iranian individuals and entities, who were delisted after the JCPOA came into force, will take between three to six months. Also, the U.S. authorities appear committed for now to grant Iran’s trading partners a 180-day grace period to wind down their businesses in Iran”. Crisis Group interview, Washington, April 2018. If this position is maintained, it would mean that if U.S. sanctions are reimposed in May, they would not come into force until mid-November 2018.Hide Footnote

Almost everyone thinks that, with his next decision on the JCPOA, Trump will endanger the deal. But the peril need not be mortal.

Washington/Brussels, 2 May 2018

Appendix A: Map of Iran

Map of the Islamic Republic of Iran United Nations/January 2004