Nine months after the nuclear deal with Iran was struck, last July, and three months after it went into force, in January, the Joint Comprehensive Plan of Action (JCPOA) is proving its worth. Iran is keeping to the agreed limits on its uranium enrichment and other nuclear technologies, in exchange for which it is benefiting from sanctions relief. Both Iran and its Western antagonists blame the other side, however, for dishonouring the spirit of the agreement. As troubling as these claims are, they point to the potential for new diplomatic initiatives to address respective concerns.
Iranian popular support for the deal was evident in the February 2016 parliamentary elections, in which voters decisively rejected hardliners. It would be wrong to characterise the results as a victory by ‘moderates’ since almost all of the candidates from the reformist camp were excluded from running. But victory by supporters of President Hassan Rouhani in a majority of the seats demonstrated that Iranian citizens appreciate his pragmatic approach to foreign policy and his emphasis on improving the economy. The election also showed that the JCPOA had broader impact beyond the technical details of the accord.
Iran is certainly benefiting from the relaxation of sanctions. Oil sales have increased, now up to about 1.65 million barrels per day, from 1 million bpd before the deal, mostly as a result of regaining market share in Europe and India. Formerly blacklisted Iranian banks are now reconnected to the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Inflation is down to around 12% (compared to over 40% in mid-2013). A majority of Iranians polled now say economic conditions getting better.
The economic boost, however, is not nearly as big as Iran anticipated or as US opponents of the deal feared. The US Treasury calculated that Iranian assets unfrozen by the deal would amount to about $55 billion – not the $150bn estimate often cited by Republican presidential candidates (who also fail to appreciate that the money in question has always belonged to Iran; the US is not ‘giving’ Iran anything). Secretary of State John Kerry said on 19 April that Iran has so far only received $3bn of this amount.
Reinforcing the complaints of other Iranian officials, Supreme Leader Ali Khamenei in a speech celebrating Nowruz, the Iranian New Year, claimed that ‘the Americans have not acted on their promises and only removed the sanctions on paper’. He referred to sanctions 28 times in the speech, saying: ‘Today, in all Western countries and in all those countries that are under their influence, our banking transactions have been blocked. We have a problem bringing our wealth – which has been kept in their banks – back to the country … The US Department of the Treasury acts in a way that big companies, agencies and banks do not dare to approach the Islamic Republic and have business transactions with it.’
Khamenei got it wrong. The US Treasury actually has issued general licenses that go beyond the JCPOA. A general license issued in late March, for example, permits contingent contracts for the export or re-export to Iran by US persons of commercial passenger aircraft and related parts and services.
It is true, however, that after years of keeping Iran at arm’s length, Western banks are reluctant to re-engage. Waiting to see how circumstances evolve, none of them want to be among the first bank back in – nor the second, third or even fourth, said a sanctions expert at an IISS workshop in January. Waiting to be fifth back in is equivalent to waiting for Godot.
As an American economist Patrick Clawson put it, major European banks have been subject to billions in US fines for poor enforcement of sanctions and regulations concerning anti-money laundering and combating the financing of terrorism, and for other deceptive practices. They have therefore ‘adopted a “de-risking” strategy predicated on leaving markets where they judge the risk of violating rules – inadvertently or not – is too high to be worth the limited returns.’
It would be wrong to claim that this is the fault of the US government. Clawson cited other experts who described Iranian banks as being heavily politicised, non-transparent and reflective of Iran’s rampant corruption. Iran’s anti-money laundering deficiencies have earned it a designation by the Paris-based Financial Action Task Force as a ‘high risk jurisdiction’. In dealing with Iran, foreign banks accordingly must exercise enhanced due diligence, which is costly and potentially time-consuming. Moreover, to avoid US sanctions that still apply to the Iranian Revolutionary Guard Corps (IRGC), foreign firms and banks that seek to do business with Iran must ensure that their partners do not include the IRGC, which very often disguises its business ties.
One other problem facing foreign firms seeking to do business with Iran is the difficulty of conducting transactions in US dollars. Such transactions are not prohibited per se, but transactions with Iran through the US banking system are. It is possible, but cumbersome, to make dollar-denominated deals without coming through US banks.
Media reports in early April suggested that the White House was considering easing restrictions on the use of US dollars in trade with Iran. President Barack Obama himself denied speculation that the rules would be changed. Treasury Secretary Jacob Lew later clarified that ‘U-turn transactions’ with Iran would remain prohibited. U-turn transactions, in which dollar deals are cleared through a US financial institution, were banned in 2008.
During the negotiations that produced the JCPOA, consideration was given to removing this ban, but Iran did not fight hard enough for this condition or offer enough in return. It now will not be given up ‘for free’. But the US Treasury is trying to help banks understand what they can and cannot do, and in this way facilitate legitimate business with Iran. Although the Treasury and the State Department have had some differences about how far to go in this regard, clarity is expected soon.
In Iran, the bureaucratic divisions are far greater. Hardliners who retain control of most key power centres are making trouble for Rouhani and for the JCPOA. While they are creating trouble in various ways, the most provocative is the stepped-up tempo of ballistic-missile development. The launches in October and November of the Emad and Ghadr systems clearly violated the UN Security Council resolutions in place at the time, which prohibited testing of missiles that are capable of carrying nuclear weapons. Iran’s cooperation with North Korea also violated sanctions on North Korea. According to the US government, Iran bought components from the Korea Mining Development Trading Corporation and sent technicians to North Korea to jointly work on the development of an 80-tonne rocket booster.
Later missile tests in March did not explicitly violate UNSC Resolution 2231, which replaced the previous restrictions. The Qiam and Qadr (modified Scud C and Shahab-3) systems that were tested that month can travel further than 300 kilometres and carry payloads greater than 500 kilograms, which makes them nuclear-capable under commonly accepted guidelines of the Missile Technology Control Regime. But rather than continuing the mandate on no ballistic missile launches, Resolution 2231 only ‘called upon’ Iran not to conduct launches using technology of ballistic missiles designed to be capable of delivering nuclear weapons. In condemning the launches, France, Germany, the UK and the US thus did not claim they violated Resolution 2231, only that the launches were ‘inconsistent with’ the resolution and ‘in defiance of’ it.
Regardless of the launches’ legality, it was outrageously provocative for the IRGC to claim the systems were designed to hit the ‘Zionist enemy’, and to daub on the tested missile body the slogan in Hebrew ‘Israel should be wiped from the pages of history’.
Such behaviour cannot help but be met by a strong reaction by the US Congress, where moves are afoot to impose new sanctions on Iran and to extend the Iran Sanctions Act beyond 2016, when it would otherwise expire. Some members of Congress have made it clear that they want to recreate the pre-JCPOA sanctions on broad sections of the Iranian economy. Obama will veto any such legislation that would prevent the US from implementing the deal, and he continues to have the votes to sustain a veto. Other legislators are considering a more moderate set of sanctions that would not give Iran grounds for claiming abrogation of the accord, but which would add to the political burdens placed on it.
One way to address the missile issue would be to start a new set of negotiations to persuade Iran to accept limits on the development of more deadly and longer-range systems. Iran’s discontent with the de facto banking restrictions it still faces and the additional sanctions likely to be imposed over its missile tests suggests the potential for a trade-off. Kerry recently hinted as much, and although Iranian Foreign Minister Javad Zarif immediately dismissed the idea, it has merit.
Other forms of diplomacy should also be pursued to address Iran’s propensity for regional misbehaviour. In recent weeks there have been several interdictions of Iranian weapons shipments to Houthi rebels in Yemen. In Syria, Iran’s IRGC forces are now being supplemented by regular Iranian army troops. US CentCom commander General Lloyd Austin testified in March that Iran’s regional behaviour has not changed since the nuclear deal, for better or for worse: ‘The fact remains that Iran today is a significant destabilizing force in the region’, he said.
It must be recognised, however, that Iran is not the only regional state engaged in abetting these conflicts. Resolution of the Yemen civil war will require both Iran and Saudi Arabia to stop their military interventions. The sooner that these parties can work out a mutual pull-back, the better. Saudis and other Gulf state Arabs have complained that they were excluded from the nuclear negotiations. They should take matters into their own hands in engaging with Iran over the regional issues that are of most concern to them.
Mark Fitzpatrick is Executive Director of IISS-Americas. The above draws on a presentation by the author at an IISS corporate event at Arundel House on 14 April.