On November 5, the Trump administration re-imposed the full scope of U.S. sanctions on Iran, nearly six months after it unilaterally withdrew from the 2015 nuclear accord, also known as the Joint Comprehensive Plan of Action (JCPOA). The stringent sanctions target Iran’s energy, shipping and banking sectors and make it difficult, if not impossible, for foreign companies to continue to do business with the Islamic Republic. The Treasury Department reinstated all sanctions removed under the JCPOA, and blacklisted 300 new entities and individuals, in what the Treasury called it the “largest ever single-day action targeting the Iranian regime.”
By increasing diplomatic and economic pressure on Iran, President Trump hopes he can compel Tehran to renegotiate a new, more comprehensive deal that should place additional restrictions on Iran’s nuclear activities, but also address Tehran’s controversial missile activities and regional policies. Secretary of State Mike Pompeo has listed a dozen requirements for a new deal with Tehran, ranging from calling on Iran to halt all enrichment activity to completely changing its military doctrine in the region. Tehran has predictably rejected all U.S. demands.
By taking a maximalist approach, President Trump appears to be trying to replicate his North Korea negotiating strategy with Iran. He has repeatedly said that he would be willing to sit down with Iranian President Hassan Rouhani to discuss the potential for a new deal. But Iran’s complicated domestic politics makes such a presidential summit and grand bargain more difficult. Rouhani may be willing to meet with Trump to reach an agreement to help Iran’s struggling economy, but that would be a political suicide for him back home because of pressure from hardliners, who, after Trump’s withdrawal from the JCPOA, feel vindicated about having long argued that diplomacy with Washington is futile.
The administration’s ultimate goal is to reduce Iranian oil exports to zero – hitting Iran where it hurts most. For now, however, it has granted waivers to at least eight countries, including China and India, Iran’s two largest oil export destinations respectively. While the exemptions run counter to the administration’s “maximum pressure” campaign against Iran, they reflect an understanding within the administration that not all countries are willing or able to immediately halt purchase of Iranian oil. Moreover, the waivers, which are limited in time and scope, are to ensure that an abrupt decrease in Iranian oil exports would not push up oil prices globally, hurting American consumers at home and aiding Iran to offset some of the revenues lost because of export reduction. Iran is the third-largest producer of oil within the OPEC cartel.
Some members of the Trump administration also hope that the sanctions cripple the Iranian economy, triggering a nationwide rebellion to topple the regime. Administration officials also argue that the sanctions would deny Iran the ability to use oil revenues and sanctions relief to fund its proxy allies in the region, although Tehran has managed to do so under previous sanctions.
Impact on Iranian economy
Neither the Iranian economy nor global oil prices are likely to experience a major shock in the short term as world markets were anticipating the U.S. sanctions for months. Indeed, the Tehran Stock Exchange was slightly up after the U.S. announcement of sanctions and the Iranian currency was largely stable. But despite projecting a bold face, Iranian leaders are under no illusion that the new sanctions will weaken the country’s economy further.
Washington’s punitive economic measures have already had their impact. Iran’s oil exports have fallen from 2.5 million bpd in April to slightly over 1 million bpd; its currency has lost about 70 percent of its value since the May U.S. exit from JCPOA; rising prices of food and other commodities have triggered nationwide protests; and even Iran’s close allies appear to be scaling down their trade and commercial ties with Iran. However, as the most crippling batch of sanctions, particularly those targeting the energy sector, have now come into effect, Iran’s economic woes are set to get even worse. About 80 percent of Iran’s tax revenues come from the country’s oil exports. The International Monetary Fund (IFM) warned last month that U.S. sanction would thrust Iran deeper into economic recession next year.
It is worth noting that Iran’s economic challenges are not merely because of sanctions; corruption and mismanagement are equally, if not more, to blame. However, the government in Tehran does not appear to have any comprehensive plan to implement effective reforms to improve the economy and minimize the impact of external pressure. Quite the opposite, Tehran appears to be doubling down on same failed policies that have stymied the country’s economy. As Washington announced the new sanctions today, for example, Iran’s Guardian Council rejected a parliamentary bill that would assist Iran to join the U.N. convention against terrorist financing and maintaining trade and banking ties with the world.
How will Tehran respond?
Since the Trump administration left the nuclear accord in May, power centers inside Iran have been mulling two different options. For now, the Rouhani government is determined to continue with the status quo, by remaining in the deal and working with the JCPOA’s other five signatories – namely France, Germany, Britain, China and Russia – to salvage the agreement and minimize the impact of U.S. sanctions. After today’s announcement by the Trump administration, Rouhani took a defiant stance, vowing to “break the sanctions” and arguing that Iranian diplomacy has “isolated” the United States. The Iranian president is banking on European support to help Tehran maintain its trade relations with the outside world despite U.S. sanctions.
But as European governments are struggling to block U.S. sanctions and most major international companies and banks have halted their activities in Iran, the Rouhani government has come under tremendous pressure from hardline clerics and Revolutionary Guards leaders to take a stronger stance vis-à-vis the United States. And even Rouhani and his aides have warned that, if Europe fails to incentivize Tehran to remain in the deal, the Islamic Republic will consider withdrawing from the JCPOA, potentially leave the Non-Proliferation Treaty (NPT), and resume high-level enrichment.
Rouhani and his team also hope that Trump will be a one-time president and will be weakened by a Democratic victory in the midterm elections, believing that Tehran can ride out the sanctions in the next two years. Hardliners, however, argue that Washington will continue its pressure tactics against the Islamic Republic regardless of who controls the White House or Congress.
Recently, Iranian leaders, including Rouhani, have also warned that Iran would shut down the Strait of Hormuz, a strategic passageway in the Persian Gulf for about a third of global crude oil traded by sea, if Washington manages to prevent Iran from exporting its own oil. Furthermore, Iranian military leaders have hinted that they could resort to harming American interests in the region through its vast proxy network if tension between the two countries escalates further.
Can E3, China and Russia save the JCPOA?
All other parties to the Iran deal have said they will do their utmost to salvage the accord. But they are all struggling to find ways to counter U.S. sanctions and maintain business ties with the Islamic Republic.
The European Union has been working on setting up a payment mechanism – called Special Purpose Vehicle – to sidestep U.S. sanctions and process Iran’s export and import transactions. But they have yet to finalize the details and no European country has volunteered to host the system fearing U.S. retaliation. In a major blow to European efforts to help Iran maintain trade ties with the outside world, the Belgium-based Swift global banking messaging service said yesterday it would comply with the U.S. sanctions. Recent allegations of Iranian government attempts to assassinate political dissidents in France and Denmark have also complicated collective European efforts to help Tehran to counter U.S. sanctions. Furthermore, while European leaders have encouraged their companies and banks to continue to do business with Iran, private business entities make their own decisions and do not heed government instructions. Major companies such as French energy giant Total have already left Iran.
Russia has said that it will continue its business tie with Iran despite U.S. sanctions. Russian President Vladimir Putin sent his special envoy Alexander Lavrentiev to Tehran yesterday to reiterate Moscow’s support for Iran against U.S. sanctions. Moscow and Tehran have been discussing the potential for trading in local currency rather than U.S. dollar or bartering Iranian oil for Russian products. But such deals in the past have not worked out well for the either side.
As the largest importer of Iranian oil, China is certainly the biggest elephant in the room. Tehran hopes that China will disregard U.S. sanctions and continue to purchase Iranian oil. But a recent decision by major Chinese companies to temporarily halt ordering oil purchase orders from Iran pending U.S. waivers must have worried Tehran. There is also the possibility that China agrees to bring its oil purchases from Iran close to zero if the country’s broader trade talks with Washington go smoothly. And historically, both China and Russia have exploited Iran’s isolation from international markets to purchase Iranian oil much cheaper and sell their own products at higher prices.
So the key question is: Will the reinstatement of sanctions force Tehran to acquiesce to Washington’s demands? The short answer is at least not in the short and immediate terms. While the U.S. sanctions will further exacerbate Iran’s economic woes, the Islamic Republic has survived previous U.S. and international sanctions and have found licit and illicit ways of trading with the outside world and preventing its economy from a total collapse. Also, while the new sanctions are even broader in scope than those imposed on Iran during the Obama administration, there is a lack of international support to enforce the U.S. sanctions to their fullest potential. The Islamic Republic will most likely continue to defy U.S. pressure, in the hope that it can weather the impact of sanctions and outlast the Trump presidency.