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Effective Sanctions Relief on Iran for Sanctions’ Sake
Effective Sanctions Relief on Iran for Sanctions’ Sake
A Way Out of the U.S.-Iranian Impasse
A Way Out of the U.S.-Iranian Impasse

Effective Sanctions Relief on Iran for Sanctions’ Sake

Originally published in The Hill

The one year anniversary of Iran nuclear agreement’s entering into force on Oct. 18, 2015 was buried in the noise and news of U.S. electoral campaign, operation to liberate Mosul and tragic agonies of Aleppo. This in itself is a testament to the accord’s remarkable success in addressing a major threat to global security. But in this success lies a peril: a “done deal” mentality that diverts attention to other priorities, treats implementation as a mere technical or bureaucratic exercise, and fails to remedy its inevitable hitches. Ensuring that Iran’s nuclear program remains peaceful and opening the door a crack or two for new opportunities to build balance, stability and security in the Middle East are worth fighting for.

Over the past year, the International Atomic Energy Agency (IAEA) has confirmed again and again that Iran has fully complied with its commitments. The U.S. and its allies too have implemented their end of the bargain, untangling the intricately woven web of sanctions around Iran, transforming it from the world’s most sanctioned state to the one with the most rigorously monitored nuclear program.

While an increasing number of small to medium-sized banks have re-engaged Iran, the persistence of the sanctions’ chilling effect still deters major financial institutions, thus hampering Iran’s reintegration into the global economy. To resolve the problem, U.S. Secretary of State John Kerry has gone the extra mile, encouraging European firms to do business with Iran – an initiative unthinkable until a few years ago. But the reasons behind these financial obstacles are manifold, and there is plenty of blame to go around.

If the deal’s dividends remain slim, they could discredit the advocates of diplomacy in Tehran and even jeopardize the accord.

Risk-averse banks are concerned that sanctions could snap back into place as a result of Iran’s noncompliance, the next U.S. president’s reneging or Congressional sabotage. Red tape -- U.S. primary trade embargo and secondary sanctions related to Iran’s missile program, regional policies and human rights record and state-level divestment legislations – continue to hamper commercial ties. But this was the inevitable result of a nuclear accord that was a narrow transaction, not part of a sweeping detente.

The Iranian government too has failed, including by not paving the way for the great economic “unshackling” it had promised its people. The country’s abject rank on the World Bank’s “ease of doing business” listing improved only by one level in the run-up to the agreement’s conclusion. Corruption remains rampant; banks are plagued by non-performing loans and low standards; and provocations – from missile tests to harassing the U.S. Navy in the Persian Gulf and sentencing dual national entrepreneurs like Siamak Namazi on phony accusations -- have heightened the political and reputational costs of dealing with Iran.

But the fact remains that nine months after easing the sanctions, not a single bank in London is willing to open an account for the Iranian embassy to conduct its daily business. Similar examples abound.

The sluggish pace of sanctions relief constitutes a serious threat to the accord. It has already dashed popular expectations in Iran, turning its generally pro-Western public opinion against the U.S. and playing into the hands of politicians in Tehran opposed to thawing ties with Washington. If the deal’s dividends remain slim, they could discredit the advocates of diplomacy in Tehran and even jeopardize the accord.

Some adjustments in the Iran deal’s implementation could help avert such perilous consequences.

First, the U.S. administration should provide the Office of Foreign Assets Control (OFAC) at the Treasury Department, which is in charge of enforcing the sanctions, with more resources. OFAC’s staff have been stretched thin by a greatly increased workload: publishing hundreds of pages of guidelines on Iran’s sanctions relief (including the most recent that clarifies how foreign companies and banks can operate with Iran using the U.S. dollar), answering incessant inquiries by foreign firms, granting numerous licenses, and traversing the world to clarify ambiguities.

According to a recent report by the U.S. Treasury the average time for processing licenses last year increased from 71 to 88 business days – a statistics that significantly understates the problems since half of the submissions remained unprocessed. The problem is not just the resources but institutional inertia: traditionally a source of pressure on the private sector to curb business with target countries, today the office is charged with opening the taps.

It is thus no surprise that it took nearly eight months to approve the sale of Boeing and Airbus civilian planes to Iran, which was a cornerstone of the agreement. A commitment by OFAC to publish monthly status reports on progress and create a target of reducing processing times as it enlarges staff could enhance efficiency.

Second, there is a need for more and direct communication between OFAC and the Iranian Central Bank. Contact between the two sides through the Joint Commission created under the deal to monitor its implementation is infrequent and at the diplomatic level, not at the level of experts who grapple daily with the technical and legal problems of normalizing Iran’s banking relations.

Failure here could doom future negotiations with countries, like North Korea, that are watching the Iranian experience carefully.

Third, the U.S. Treasury should rescind the designation of Iran under the USA Patriot Act as a zone of primary money-laundering concern, to facilitate Iran’s rehabilitation in the global financial system. This would be a reasonable follow-on to last June’s decision by the Financial Action Task Force (an international group that monitors money laundering worldwide) to suspend its measures against Tehran in response to the latter’s adoption of an action plan to address its anti-money laundering and anti-terror financing deficiencies. Additional measures to allow Iran to clear foreign currency transactions that require tangential reference to U.S. dollar could also smooth legitimate business with Iran.

Taking these steps is no mean feat for the Obama administration, soon to enter its twilight. Yet ensuring that Iran benefits from the dividends of the nuclear deal is neither a new concession to Tehran nor an endorsement of its regional policies. It is rather a necessity. At stake is not only preserving an accord that has removed the shadow of nuclear weapons from a region engulfed in turmoil, but also the reliability of the U.S. government’s word and even the credibility of sanctions as an instrument of coercive diplomacy.

Failure here could doom future negotiations with countries, like North Korea, that are watching the Iranian experience carefully.

Contributors

Project Director, Iran
AliVaez
Thomas R. Pickering
Crisis Group Board Member

A Way Out of the U.S.-Iranian Impasse

U.S.-Iranian clashes have pushed the JCPOA to the brink of collapse. In this excerpt from our Watch List 2020 for European policymakers, Crisis Group urges the EU and its member states to use their economic and diplomatic power to keep Iran in compliance with the JCPOA and prevent Iraq from being sucked further into the conflict.

This commentary is part of our Watch List 2020.

As 2019 faded into 2020, the U.S. and Iran careened up to the brink of war. In late December, a series of U.S. airstrikes on Iranian-backed Iraqi militias, in response to militia attacks on U.S. assets in Iraq, brought crowds of Iraqis with a battering ram to the doors of the U.S. embassy in Baghdad. On 2 January, reportedly stinging from the embassy assault and determined to restore what he considered to be eroded U.S. deterrence, President Donald Trump ordered a drone strike on Qassem Soleimani, head of the Quds Force, the expeditionary unit of Iran’s Islamic Revolutionary Guards Corps. Vowing revenge for the general’s death, Iran fired ballistic missiles at U.S. bases in Iraq, killing no one there, but in the aftermath inadvertently downing a Ukrainian passenger jet outbound from Tehran with 176 people on board. Both the exchange of attacks and the airline disaster seemed to close this particular chapter of the conflict between Tehran and Washington. But the danger of broader confrontation has not passed.

At the origin of these events lies the Trump administration’s exit from the 2015 nuclear deal, known as the Joint Comprehensive Plan of Action (JCPOA). Under the JCPOA, Iran accepted limits on its nuclear program in return for integration into global trade. Since May 2018, when it withdrew from the pact, the U.S. has been exerting “maximum pressure”, mostly through unilateral sanctions, to compel Iran to negotiate a more stringent, comprehensive deal and curb its regional behaviour. Sanctions have inflicted great harm upon Iran’s economy. In light of the failure of the JCPOA’s remaining signatories to provide Tehran economic respite, Iran took retaliatory measures of its own. It ramped up its regional activities, notably in the Gulf, and started loosening its compliance with the nuclear deal as of May 2019, shedding all restrictions on its uranium enrichment program by January 2020. That last move in turn led France, Germany and the UK, the so-called E3, to trigger the deal’s dispute resolution mechanism, which could ultimately resuscitate UN sanctions on the Islamic Republic. The JCPOA is closer than ever to collapse, and any small incident could fuel escalation, by either the U.S. or Iran.

To help ease tensions, the EU and its member states should:

  • Seek to salvage the nuclear deal by delivering some economic benefits to Iran in exchange for its compliance with the JCPOA. Triggering the dispute resolution mechanism could backfire if failure to reach a settlement leads the E3 to restore UN sanctions – a step that Tehran has warned would prompt it to withdraw from the deal and perhaps the non-proliferation treaty as well. The E3 should seek to stretch the timeline provided by the mechanism as much as possible;
  • Ensure the Iranian people’s access to humanitarian goods, via the Instrument in Support of Trade Exchanges (INSTEX);
  • Encourage a partial drawdown of U.S. forces from Iraq and a reaffirmation of the fight against ISIS as Western militaries’ sole objective in Iraq, which would remove an immediate source of U.S.-Iranian friction. As part of the drawdown, European states and other members of the International Coalition to Counter ISIS should take over some of the more visible military tasks from U.S. forces in Iraq.
  • Explore possible ways of lowering regional tensions, such as a deconfliction channel.

Salvaging the JCPOA

As the smoke cleared after the Soleimani killing and the Ukrainian airliner catastrophe, both Washington and Tehran were sticking to the strategies that produced the present impasse. The Trump administration boasted of having “restored deterrence” against Iran, claiming that by responding to Soleimani’s death with restraint, Tehran was tacitly admitting that “maximum pressure” works. Economic sanctions, notably those limiting oil exports, have indeed drained the Iranian state’s coffers, forcing it to enact deeply unpopular spending cuts, and hurt the living standards of Iranian citizens. To date, however, “maximum pressure” has failed to deliver on the goals laid out by the U.S. administration itself. Far from curtailing nuclear ambitions, it has led Iran to wriggle out of the JCPOA’s handcuffs; rather than stop Iranian meddling in the Middle East, it has prompted Tehran to redouble it. Meanwhile, and despite recurrent eruptions of mass discontent, the Islamic Republic appears firmly ensconced in power.

[Maximum pressure] has led Iran to wriggle out of the JCPOA’s handcuffs.

For its part, Iran is continuing to pursue parallel paths: escalating on the nuclear front while leaving a door open to diplomacy. On 5 January, Iran breached its nuclear commitments for the fifth time, announcing that it would cease observing JCPOA limits on centrifuge quantities – the last restriction it still faced. It stopped short of quitting the accord, however, and it did not say what practical steps it might take. The diplomatic part of its strategy suffered a blow on 15 January, when the E3 triggered the deal’s dispute resolution mechanism, which could result within 65 days in reimposition of the UN sanctions in place before the 2o15 deal – an outcome that the Trump administration appears to be keen on, if only because it would stop removal of the UN arms embargo on Iran that the JCPOA says should be lifted on 18 October 2020. U.S. Treasury Secretary Steven Mnuchin, in his statement welcoming the E3’s move, said he “expect[s] that the UN sanctions will snap back into place”, though E3 officials were at pains to say they have no such intention. Should there be no resolution within the coming months, U.S. pressure on the E3 to take the next step – snapback of sanctions – inevitably will grow.

As renewed UN sanctions would signal the nuclear accord’s demise, the E3 should do all they can to ward off this outcome. In the short term, their best option is to extend the timeline for dispute resolution – something the JCPOA allows – so that they can assemble an economic relief package that might persuade Iran to reverse its breaches and stay in the deal. They also should accelerate efforts to meet humanitarian needs in Iran, ensuring that the INSTEX mechanism gets fully up and running.

The E3 could also help broker other means of rescuing the nuclear deal. One option that had previously been mooted would be for the U.S. to reissue limited oil waivers for key Iranian importers and restore civil nuclear waivers, in return for Iran’s full compliance with the JCPOA, de-escalation in the region and, possibly, its agreement to initiate negotiations with the U.S. and others over a new nuclear arrangement, but also regional security and ballistic missiles. In a narrower version, the U.S. would suspend key non-oil sanctions (eg, on Iran’s metals and petrochemical sectors) and restore civil nuclear waivers, in return for Iran agreeing not to ramp up its nuclear program beyond its current status and, possibly, reversing one or more of its breaches, as well as halting aggressive behaviour in Iraq and the Gulf. A third party would almost certainly be required to facilitate either of these bargains.

Sparing the Region from Further Harm

From the outset of the U.S.-Iranian standoff, Crisis Group has warned that it could take its deadliest form in third countries where both powers have strong interests. Particularly in the wake of the Soleimani killing, the country at highest risk of becoming a battleground is Iraq.

The circumstances surrounding the killing – the preceding bombing of Iraqi militia bases without notice to Baghdad, the targeting of the Quds Force leader on Iraqi soil, the death of militia commander Abu Mahdi al-Muhandis alongside Soleimani – have greatly angered many Iraqis and not just those close to Iran. Many Iraqi politicians are calling upon the government to expel U.S. troops from the country. The result is a triple challenge: first, the demand, while popular with many, is nevertheless liable to be so divisive that it paralyses Iraqi political institutions. Secondly, some of the factions opposed to the U.S.-led troop presence will resort to violence, particularly if attempts to end that presence through parliamentary and diplomatic means fail. Thirdly, a full U.S. withdrawal would likely put paid to the mission of the International Coalition to Counter ISIS, perhaps giving the jihadist organisation a new lease on life.

To mitigate the attendant risks, the EU should encourage the U.S. to partially draw down its military forces in Iraq and to transfer some military tasks to other members of the International Coalition to Counter ISIS, while continuing to provide logistical and other forms of support. The EU should also encourage the Coalition to reaffirm the fight against ISIS as its sole objective in Iraq.

The EU ought to send unambiguous signals that it respects Iraqi sovereignty above all else.

In addition, the EU and its member states should expand existing cooperation with Iraq, in particular in, but not restricted to, the security sector. While calling for foreign troops to leave the country, Iraqi authorities have affirmed that the EU’s civilian Advisory Mission to Iraq is welcome to stay for the purpose of security sector reform support. In order for this mission to be effective, the EU should make sure that all its personnel return to Iraq, with adequate resources and security guarantees to maintain a full presence. Iraq desperately needs more security forces that are committed to the state, rather than various factions, and that can handle challenges such as public protests in a professional manner. At the same time, the EU ought to send unambiguous signals that it respects Iraqi sovereignty above all else, as the contrary impression created by the U.S. attacks and dismissal of calls for its departure threatens the very basis of any cooperation. The High Representative has received the acting Iraqi prime minister in Brussels to demonstrate the EU’s support for the country’s stability and reconstruction, which is a good start.

The EU also needs to urgently impress on the U.S. and Iran the need to refrain from turning Iraq into an arena for their rivalry. The contestation between Tehran and Washington is already polarising the Iraqi political system, rendering reform impossible and creating a real risk of backsliding to the partial state collapse that pertained in 2014. The EU should clearly convey this message to Washington, while it should tell Tehran that it, too, would be harmed were the Iraqi government to weaken further and the resulting vacuum to allow ISIS to re-emerge.

Outside Iraq, the EU and its member states should seek to expand possibilities for engagement between U.S. regional allies, in particular Saudi Arabia and the United Arab Emirates, with Iran, either bilaterally or through other Gulf countries, such as Kuwait and Oman. European states could establish a core group to encourage Gulf states to set in motion an inclusive regional security dialogue on issues of dispute in order to open up new channels of communication, gradually build trust among these governments and thus reduce risks of inadvertent conflict. A deconfliction channel through a mutually acceptable third party – perhaps Oman – could also diminish such risks by relaying messages between the U.S. Central Command and Iran’s general staff.