Un-sanctioning Iran: What the nuclear deal means for the future of sanctions

When Hassan Rouhani was elected to the Iranian presidency on a platform of ending Tehran’s debilitating impasse with the world over its nuclear program, foreign policy analysts applauded the shift as a victory for the use of economic sanctions. That assessment was substantially correct: the fierce multilateral sanctions regime erected between 2007 and 2013 played a pivotal role in persuading Iran to abandon its recalcitrance toward the nuclear negotiations with six world powers, including the United States.

Ultimately, however, the text of the final deal concluded last month suggests a more ambivalent bottom line. The disparity between the agreement’s sweeping sanctions relief and the more parsimonious scope of its constraints on Tehran’s nuclear activities underscores the limitations to the use of sanctions as leverage in the negotiations themselves.

In this respect, the deal serves as a useful corrective to the recent infatuation with sanctions and the corresponding tendency to overestimate their efficacy in solving international problems without the use of military force. Sanctions may have been the silver bullet that brought Iran back to the negotiating table, but they proved too blunt an instrument to advance the most advantageous terms of a deal.

Before the deal, the debate focused on centrifuges instead of sanctions

For most of the 18-month tug-of-war over the terms of the final nuclear deal, sanctions has ranked as a distinctly secondary issue in the public debate, which was dominated by the technical elements of the proposed constraints on Iran’s nuclear industry. In many of the administration’s behind-the-scenes briefings for reporters and other interested constituencies in Washington, the specifics of sanctions relief were rarely raised and only superficially discussed.

To the extent that the issue of sanctions overcame the inside-the-Beltway fixation on centrifuges and breakout timelines, the discussion was largely a domestic (and defensive) one: should — and could — Congress up the ante and try to wrest more concessions from Iran by imposing new penalties? The result was a protracted and predictably divisive battle between Congress and the executive branch that only undercut Washington’s bargaining position.

Throughout the talks, the public inattention toward the sanctions aspect of the equation was aided and abetted by the confidence inspired by the interim accord, in which the Iranians effectively sold cheap. In November 2013, Tehran traded the most urgent concerns about its nuclear program in exchange for a modest trickle of the country’s overseas assets and short-lived relief from sanctions on important but effectively isolated sectors of the economy. The bargain generated a flood of business tourism to Tehran, but little in the way of serious new investment. 

As a result, the Obama administration could claim credibly that the core architecture of the sanctions regime remained intact during the negotiations. And by extension, its assurances that any sanctions relief in the final deal would be directed solely at sanctions specifically related to the nuclear issue, phased in conjunction with specific Iranian steps on constraining its nuclear infrastructure, and “easily reversed” in the event of Iranian noncompliance with those obligations, carried considerable weight.

Under the deal, the scope of sanctions relief is far-reaching

In the end, that wasn’t precisely how things turned out. Instead of a calibrated set of reciprocal steps that would provide economic incentives on a piecemeal basis, the final nuclear deal front-loads a massive package of sanctions relief at the outset of the formal agreement, deliverable upon Iran’s completion of a number of core responsibilities.

On “Implementation Day,” which is anticipated to arrive sometime in early/mid-2016, Iran will be unshackled from the preponderance of the sanctions regime that halved its oil exports, crashed the value of its currency, and cost the country tens of billions — at least — in lost revenues and additional costs over the course of the past five years. The United Nations Security Council measures, which served as a platform for most of the actions undertaken by the rest of the world against Iran, will vanish with a few notable exceptions pertaining to conventional arms and ballistic missiles.

The totality of European Union sanctions, including the embargo on Iranian oil and prohibitions on energy investment, will evaporate. And nearly all of the American measures that had effectively severed Iran’s economy from the international financial system will be waived, permitting somewhere in the realm of $100 to $150 billion in Iranian assets that had been held in overseas accounts to flow back in the hands of Iranian leaders. That figure has now become one of the most galvanizing tag lines for critics of the nuclear deal.

The agreement also provides for the effective cessation of a number of American measures that were predicated on the full range of concerns about Iranian policies, re-opens a loophole that permits U.S. corporations to trade with or operate in Iran via foreign subsidiaries, and carves out a wider array of permissible U.S. business with Iran than at any time since the comprehensive embargo was put in place twenty years ago. Like the release of Iran’s frozen assets, these new openings in the American sanctions architecture will go into effect immediately after Tehran’s initial nuclear constraints have been certified.

Iran sanctions after the deal

What remains is not insubstantial. The U.S. Treasury Department remains the long pole in the international sanctions architecture, and even residual American measures will pose a powerful deterrent against business in Iran. Iran’s worst actors will remain sanctioned by the United States — tainting, by extension, any foreign company that does business with them after the deal. For American firms and individuals, the embargo on U.S. trade and investment in Iran criminalizes even the most tangential involvement in the Iranian economy outside the specific sectors exempted under the deal.

Congressional opposition to sanctions termination means that the Obama administration will have to rely on waivers and other inherently temporary mechanisms for reversing existing measures; that alone entails sufficient uncertainty to give major investors around the world significant qualms about committing to the kind of multi-year, multi-billion dollar projects that Iran’s energy sector requires.

And of course the deal incorporates the threat of “snapping back” other sanctions, something the Obama administration fought for and has trumpeted in its defense of the agreement.

However, the provisions for reinstating sanctions are hardly fail-safe. No one should mistake the creative mechanism for re-imposing UNSC measures for a rapid or practical pathway to resuming the status quo. Under a snapback scenario, Iran would no longer be required to observe its obligations under the deal — a prospect that probably makes snapback mostly theoretical.

In addition, even if the Security Council measures snap back into place, there is no automaticity to the re-imposition of sanctions by the European Union and the handful of ‘like-minded states’ that had adopted unilateral penalties over the Iranian nuclear file, including Japan and South Korea. As companies across Europe seek to revive their formerly leading positions in Iran’s economy, it is difficult to imagine that all 28 capitals will readily jeopardize new business future Iranian violations of the deal.

And the text of the deal raises other questions about the future use of sanctions to dissuade the Iranian leadership from continuing its destabilizing policies around the region and its repression of its own citizens. Several provisions could complicate Washington’s ability and/or willingness to apply those unilateral measures that remain on the books after the agreement has gone into effect.

For example, the parties are required to execute the deal “in good faith and in a constructive atmosphere, based on mutual respect, and to refrain from any action inconsistent with the letter, spirit and intent of this JCPOA that would undermine its successful implementation.” While other clauses in the text of the deal seem designed to preserve Washington’s ability to continue to enforce its sanctions, Tehran will almost surely use the deal’s provisions to its own advantage. Would the possibility of fracturing the agreement compromise the Obama administration’s vigilance in enforcing counter-terrorism sanctions against Iran?

Finally, even if U.S. financial measures against Iran are reinstated for some future breach of the deal, Tehran will have already reclaimed the $100-$150 billion in assets currently held overseas — and the transfer of that windfall will be effectively irrevocable.

The simple reality is this: with the nuclear deal, the Iran sanctions regime that has existed since 2010 will evaporate, and the likelihood that it will ever be made whole again is slim to none, short of some truly epic Iranian provocation.

Iran sanctions in the absence of a deal

Of course, sanctions attrition would have occurred without a deal, albeit more slowly and in more disorderly fashion. As I’ve written before, the most recent iteration of Iran sanctions has been the exception to the rule of the past 36 years; throughout most of the history of the Islamic Republic, Washington found little support even among its closest allies for the application of economic pressure toward Tehran.

Some of the conditions that facilitated the more recent consensus, such as historic shifts in the global energy market, remain true today. However, Iran has effectively dispelled some of the other factors, such as the international abhorrence toward its former president, Mahmoud Ahmadinejad, and the outrage generated over his contested 2009 reelection and the repression of the protests that followed in its wake.

Rouhani’s election launched Iran’s rebranding, and this alone had begun to undermine cohesion on the strategy toward Tehran. Ultimately, the nuclear agreement will accelerate a process of reintegration into the global economy that is likely to have gained momentum even without a resolution to this crisis.

Washington could have sought to thwart this process until or unless Tehran had fully transformed itself into a responsible actor at home and in the region. The uniquely dominant U.S. role in the international financial system affords formidable leverage, and refusing to dismantle the blockade on Iranian banks would have curbed at least some of the world’s sudden enthusiasm for opportunities in Iran. Such a scenario may yet transpire, if Congress can muster a veto-proof majority to reject the nuclear deal.

However, the history of U.S. policy since the Islamic Revolution offers little reason to be sanguine about a go-it-alone approach on Iran. Trying to sustain Iran’s economic isolation without the participation, or at least the acquiescence, of the rest of the world’s major powers would inevitably pose fewer costs for Tehran and greater expenses for Washington in terms of transatlantic relations and American influence around the world. And, based on the track record of the nuclear negotiations since 2002, it almost surely would generate an even less favorable resolution to Iran’s nuclear ambitions.

Implications for future use of sanctions

The Iran negotiations have offered a striking case study in the dissuasive power of economic sanctions. When the price of Iranian policies rose to levels that the regime’s power brokers saw as problematic, even potentially threatening to the stability of the ruling system, Tehran chose to elevate a more conducive leadership and empower them to negotiate an end to a long-standing impasse.

For this reason, many have looked to the Iran sanctions regime as a kind of model for managing other bad actors or reconciling other intractable conflicts — a grand new era for coercive American diplomacy through the innovative use of financial penalties devised in the aftermath of the 9/11 attacks. Sanctions became Washington’s shiny new toy, infinitely applicable and devastatingly effective, with no apparent cost except to the target economy. These perceptions animate at least some of the confidence in Congress that there is a better deal to be had on the nuclear issue.

A balanced assessment of the Iranian nuclear agreement should puncture some of this triumphalism. The achievement of the first comprehensive set of constraints on Iran’s nuclear program was made possible not simply because of some clever new mechanism for hurting the Iranian economy, but because the consensus around implementing those measures garnered unprecedented reach around the world. Had Beijing, Delhi, Tokyo and Istanbul declined to reduce their imports of Iranian oil; had Europe not imposed its own embargo; had the ad hoc partnership among the five permanent members of the UN Security Council plus Germany failed to sustain its surprising degree of consensus through the hard-fought negotiations — it is unlikely that any would have emerged.

In this sense, the Iranian case only reinforces the longstanding conventional wisdom among policymakers (to which scholarship has offered considerable nuance) — that sanctions’ effectiveness directly correlates with the extent of the international support for their application.

However, the case of Iran also suggests the limitations of utilizing sanctions to craft a diplomatic resolution to a conflict. Others have noted the difficulty in calibrating sanctions’ impact on the target economy; the Iran deal speaks to the even greater difficulty of calibrating an exit strategy to a crisis. In the end, despite assertions to the contrary throughout the 18-month process of hammering out a final deal, Western negotiators were unable to design a deal that relied upon gradual de-sanctioning of Iran as a means of providing incentives and reassurance for continuing Iranian compliance with the accord.

The lack of incrementalism in the final agreement underscores another enduring truth about the use of sanctions as a policy instrument: no matter how “smart” or targeted they may be, sanctions do not necessarily provide deft instruments for advancing complex solutions or aligning incentives with actions. Sanctions may be valuable bargaining chips, but they are almost unavoidably clumsy ones.