On Monday, November 5, the United States imposed a new round of sanctions on Iran, hoping to cripple the country’s economy and to force the Islamic Republic to dramatically change its policies. Secretary of State Mike Pompeo set a high bar when announcing the new measures against Iran’s oil exports and its access to global financial services: he demanded nothing less than “a 180-degree turn from its outlaw course of action and (to) act like a normal country,” based on twelve demands.
America’s latest action follows President Trump’s unilateral withdrawal from the Joint Comprehensive Plan of Action (the official name of the 2015 nuclear agreement with Iran, or the JCPOA), and is part of the administration’s stated strategy to isolate Iran in an attempt to force it back to the negotiating table. The Trump administration’s goal is to discuss a new and “improved” deal, which would cover a number of issues outside the realm of the nuclear program, including Iran’s nefarious activities in the region and its missile program.
But this policy won’t succeed.
The United States will not be able to isolate Iran in the same way it had prior to the nuclear deal. First, Iran is now better integrated into the international system than it was before 2015, with a wider range of economic and diplomatic ties. Tehran learned its lesson from successive rounds of sanctions: it spent several years cultivating ties with countries such as Russia and China to give it a buffer against unilateral measures. Second, when Trump directed that the United States pull out of the JCPOA, he was walking away from a deal that was accomplishing what it had set out to do: curb Iran’s nuclear program. Furthermore, in going back on the JCPOA, Washington effectively pitted itself against the remaining states that were party to the deal—not just Iran, but also the crucial European Union partners to the agreement. Washington alone returned to a policy of isolating Iran through sanctions. With these sanctions, Turmp’s stated aim is to isolate Iran, but their implementation seems to have backfired for the United States. While the United States’ financial reach is significant, it is not all-encompassing, and sanctions are effective only when their implementation is universal. In unilaterally leaving the JCPOA, Washington is in effect isolating itself from its allies and partners, and undercutting its ability to use sanctions as a foreign policy tool, both now and in the future.
Trump’s Disdain for the Iran Deal
President Trump never made his disdain for the 2015 nuclear deal a secret. Throughout his campaign, he referred to it as “bad,” “disastrous,” and the “dumbest” deal he’s ever seen, and vowed to dismantle it when he became president—a statement echoed by his vice president. And indeed, President Trump took a hard line on Iran, stacking his cabinet with well-known Iran hawks, including several advocates of regime change. Once in office, his administration immediately toughened its stance on Iran, putting the country “on notice” within weeks of inauguration. In October 2017, Trump refused to recertify the nuclear agreement, and in May 2018, he pulled the United States out of the deal altogether, announcing the re-imposition of unilateral U.S. sanctions on Iran.
At first, it was unclear just how “hard” this exit—and the re-imposition of sanctions—would be. Some experts thought President Trump might implement U.S. sanctions loosely, allowing allies who were party to the nuclear agreement to maintain their business ties with Iran under the terms of the deal. But it quickly became clear that the administration had no intention of doing that. In early August 2018, after an initial ninety-day grace period, the first wave of U.S. sanctions came into effect. They included a ban on the sale or transfer to or from Iran of graphite and metals such as aluminum, a ban on the export of Iranian carpets and foods such as pistachios to the United States, and a prohibition on the trade of Iranian gold. U.S. Treasury Secretary Steven Mnuchin also stated that business licenses for Boeing and Airbus, both slated to help Iran upgrade its ageing airline fleet, would be revoked—a real kick in the gut for Iran, given that Boeing’s return to the country was included by name in the 2015 nuclear deal, because of its significance for Iran’s aging fleet of planes and the symbolism of including a major U.S. corporation in the deal. These sanctions were followed by another major blow: the announcement that the United States would seek to re-impose an oil embargo in early November 2018, in which all countries would draw down their imports of Iranian oil to zero by that date. (Note that the United States doesn’t control global oil consumption—it can only ask other countries to join the oil embargo, and use an array of inducements and secondary sanctions to try to persuade or cajole ambivalent consumers, such as India, to end their oil contracts with Iran.) While some of Iran’s oil customers have complied with America’s wishes, not all will do so. It is unlikely that the U.S. goal of zero oil exports from Iran to the global market will be achieved.
In October, the Trump administration went one step further, announcing a series of designations of Iranian entities, including the Bank Mellat—one of the largest government-owned banks in Iran—as specially designated global terrorists (SDGT) under a presidential executive order. The significance of this action is threefold: First, because this designation was made under a framework addressing global terrorism—an issue the 2015 JCPOA did not resolve—it would persist even if a future U.S. president re-endorsed the nuclear deal. Second, it establishes an unparalleled “know-your-client” standard for business operating in difficult or sanctioned markets such as Iran. In this particular case, there were seven layers of separation between the Iranian banks targeted by the United States and the Basij—a paramilitary branch of the Revolutionary Guards that were accused of participating in terrorism. This standard sends the message that business with Iran is effectively impossible, because any deals with non-designated parties inside Iran could result in sanctions from the U.S. Department of the Treasury, no matter how far their businesses deals are removed from already designated entities like the Revolutionary Guards. And finally, the designation demonstrates that even banks that facilitate the legal humanitarian trade with Iran are not exempt from being sanctioned.
While Trump’s disdain for Iran is obvious, it is unclear what his administration aims to achieve through his general Iran policy—and whether the costs to the United States are worth it. Before withdrawing from the deal, the United States had succeeded in fostering an atmosphere of uncertainty that ensured many businesses interested in entering the Iranian market held off on doing so. During that waiting period, President Trump effectively prevented Iran from reaping the benefits of sanction relief—a key carrot to ensuring Tehran’s continued implementation of the deal—without incurring any costs. Now, following withdrawal, the United States finds itself isolated in its desire to scuttle the nuclear deal. In its attempt to penalize Iran, Washington had gone so far as to threaten its allies and partners if they did not follow the U.S. lead: on September 25, National Security Advisor John Bolton warned Iran that “The days of impunity for Tehran and its enablers are over. . . . Let my message today be clear: We are watching, and we will come after you.” But the European Union and its member states, as well as Russia, and China have all made clear that they remain committed to the deal. Washington’s isolation on this issue could not have been more obvious than during the September 2018 UN Security Council (UNSC) special session, where the United States intended to call Iran out for its nefarious activities, but instead faced a barrage of criticism from countries successively stating their support for and commitment to the deal. The irony was not lost on Iranian president Hassan Rouhani, who gleefully thanked the UNSC for its support during his press conference held shortly after the UNSC session.
Iran, Better Insulated against Isolation
The Islamic Republic of Iran has been subject to U.S.-led sanctions since the 1980s. As a result, for the better part of the past four decades, Tehran has been hedging against international isolation by developing deeper political, economic, and military ties with China and Russia. During the Iran–Iraq War in the 1980s, China provided an isolated Tehran with weapons and military equipment. When the war ended, China was crucial to Iran’s post-conflict reconstruction efforts, particularly in infrastructure projects and the supply of consumer goods—an effort it has kept up in recent years. In the 1990s, Russia worked with Tehran to develop Iran’s port and rail infrastructure. Russia also developed a quasi-monopoly in Iran’s nuclear sector by the turn of the century, as no other supplier was willing to work with Tehran. (As a result of these partnerships, Russia and China were reluctant signatories to the UN sanctions on Iran in 2010, and both continued to develop ties with the Islamic Republic.) In the absence of a western presence in the Iranian aerospace industry, Russia has become an important player in that sector as well. During the Syrian civil war, Russia and Iran have coordinated their efforts there, though this has not been without its ups and downs. China has continued to increase its involvement in Iran, which is a key component of its Belt and Road Initiative, through joint infrastructure development projects, including the building of the Tehran Metro.
Yet, Iran for its part was torn. Iranians regarded the Russians and the Chinese with suspicion, accusing them of dragging their feet on the implementation of key projects, and claiming their products of being second-rate. This reticence in going all in with non-western alliances partly explains Iran’s enthusiasm for the revival of the nuclear talks in 2013. Ever pragmatic during this period of optimism, however, Iran maintained its relations with Russia and China on the back burner, in case its bet on Europe and the United States did not pay off.
And so here we are.
Today, as the survival of the nuclear deal is in doubt, and the United States continues to try to shut down avenues for trade with Iran, Russia and China remain as potential partners that Iran can turn to. Energy-hungry China in particular will be key, once the oil embargo is more firmly in place. For now, China seems to be assessing its options: it does not want to be in overt noncompliance with U.S. sanctions, and as such, its state-run refinery reduced its imports of Iranian oil in September 2018. But it also announced it would not blindly comply with U.S. pressure, making room for greater imports from Iran to refineries isolated from U.S. sanctions and pushing for a waiver from the U.S. government—a waiver it has since received. Concurrently, China has been looking into ways to pay for oil that would evade the reach of the embargo, including a return to the bartering mechanism Iran and China had in place under the previous round of sanctions, or using the Yuan rather than the U.S. dollar as its unit of currency. It is also possible that China is waiting out the current period of uncertainty on how U.S. sanctions will play out until it becomes clearer, and Iran is forced to cut the price of its oil to make deals more attractive. At the same time, China continues to increase its involvement in Iran’s nuclear program, as it helps Tehran redesign the Arak Heavy Water Reactor. Russia and China effectively shelter Iran from complete isolation, providing it with political support, defense assistance, and economic relief.
As it turns out, Russia and China are not the only ones hampering President Trump’s policy of isolating Iran. By walking away from a deal that was being successfully implemented, and by threatening U.S. allies with action if they did not follow the U.S. lead, President Trump has alienated and angered his European partners in the JCPOA. As a result, the newly renamed P4+1 (the group of states party to the deal with Iran were named the P5+1, for the permanent members of the UN Security Council, and Germany), under EU foreign policy chief Frederica Mogherini, announced in September 2018 a new payment mechanism to help Iran reap the promised benefits of the nuclear deal, despite the American withdrawal. The Special Purpose Vehicle (SPV) aims to ensure that payments for deals with Iran can be made despite the existence of U.S. sanctions, though the exact way they will make this happen remains to be fleshed out. In addition, the Europeans expressed a willingness to resort to their blocking mechanisms, should the United States decide to sanction SWIFT, the European financial messaging system that sits under EU law.
The European Union has clearly demonstrated its commitment to the nuclear deal, and as such, will try to ensure that it can support trade with Iran so long as Tehran complies with its commitments. But it remains to be seen whether European governments will be successful in protecting their citizens, businesses, and financial institutions from U.S. sanctions.
Every day it becomes clearer that President Trump’s policy of isolating Iran will not succeed, because Iran has other countries it can turn to to offset the impact of U.S. sanctions. While the sanctions will cause clear harm to Iran’s economy, they will come nowhere close to dealing it a death blow. Iran, for its part, will survive—but it won’t thrive, as it hoped to do as a result of the economic benefits promised in the 2015 nuclear deal. What’s more, Trump’s sanctions will likely have the effect of turning even pro-western Iranians against the United States, and will have a rally-around-the-flag effect, potentially making the Iranian government stronger and more popular with its people.
As a result of the pattern of increasing unilateral financial and other measures on the part of the United States in recent years, countries like Russia and China have been exploring ways to isolate themselves from the reach of U.S. sanctions, setting up alternative financial messaging and payments systems, and bypassing the use of the dollar in trade by bartering or using alternative currencies for oil payments and futures trading. Europe’s SPV system would “provide an infrastructure for legal, secure sanctions-busting—and a guarantee that the transactions would not be reported to American regulators,” effectively beginning the creation of a “defensible banking architecture” in Europe. Once the measures intended to facilitate business with Iran are in place, they can be extended to other countries and scenarios where Europe and others disagree with U.S. policies. In fact, just two days after the imposition of the oil embargo, France’s economy minister Bruno LeMaire explained that Europe’s goal was to develop the SPV beyond the Iran issue as an instrument to safeguard European economic and policy independence more generally. While these systems are still in their infancy and are not yet an effective means to do business, they point to a growing trend that will ultimately affect the United States’ ability to use sanctions as a policy tool in the future, and as a result, its reach and ability to influence the behavior of others. A workaround to solve a problem with Iran might well evolve into an alternate financial channel that makes it impossible for the United States to deploy sanctions as a tool against other countries in the future.
Meanwhile, Iran’s lasting commitment to the JCPOA has given it considerable political capital. In continuing implementation of the deal despite a U.S. withdrawal, President Rouhani aimed to garner goodwill and challenge the perception in some quarters of Iran as an aggressive, expansionist power. And his bet has paid off, flipping the script: to many observers, Iran looks like a rational country supporting multilateralism, facing an increasingly isolated, belligerent United States. Although this improved image will not deliver Tehran the economic gains it was promised—a more complicated conundrum it has yet to resolve—it will prevent the United States from building a coalition, beyond the few token Gulf Arab states and Israel, to isolate Iran.
Simply said, Trump’s stated goal of isolating Iran to pressure its government to return to the negotiating table and craft a more favorable deal to the United States is not a viable policy in its current form. Isolation only works when it is implemented by all key players in the international community. Today, Iran has other partners it can turn to that will mitigate the fallout from U.S.-led sanctions and prevent the collapse or crumbling of the nuclear deal. Russia and China in particular will not buy into a policy of endless pressure, especially given their growing strategic and economic interests in Iran. Even U.S. allies in Europe are now looking for ways to ensure the continued implementation of the nuclear deal, effectively putting in place mechanisms that would allow their companies to evade U.S. sanctions.
Not only is Iran’s isolation no longer possible (so long as it continues to implement its commitments under the nuclear deal), but the Trump administration’s overuse of sanctions without the support of its friends and allies will ultimately diminish U.S. influence and coercive power globally, as countries look for ways to isolate themselves from the reach of U.S. sanctions. While Iran will suffer some economic hardship in the short term—and surely mourns the lost opportunities for development that it expected after signing the 2015 nuclear agreement—it will fare well politically, so long as it continues to implement the nuclear deal. Political dividends are not as tangible as the promised economic benefits that would have come with the implementation of the nuclear deal and a potential for normalized relations with the United States. But the boost to Iran’s image, and its ability to withstand U.S. efforts to isolate it, give it a long-term edge against the United States; meanwhile, for the United States, the Trump administration may have ushered in a global financial regime that is increasingly insulated against the threat of U.S. sanctions.
Cover Photo: Secretary of State Mike Pompeo.