Iran: Only a Reprieve

November 2018   ~ Scott Ritter


As expected, the US placed Iran under new sanctions last week that target its oil sales, but the six-month waivers it granted to eight countries are providing a temporary reprieve, forestalling a crisis. When the US pulled out of the Iran nuclear agreement in May, US President Donald Trump announced that the world had six months to wean itself off Iranian oil before the US implemented a full range of sanctions targeting Iran's oil sector with the goal of bringing Iran's oil exports to "zero." But turning intent into reality proved a bridge too far -- for now. Both the US and Iran will take full advantage of this six-month waiver period to strengthen their relative positions, and next spring still holds plenty of risks for world oil markets.

How will Iran react? Tehran has repeatedly threatened to pull out of the Joint Comprehensive Program of Action (JCPOA) if any other signatory violated that agreement. However, it is highly unlikely that Iran will do so at this time, despite the fact that the reapplication of nuclear-related sanctions by the US constitutes a clear violation of the commitments undertaken when the JCPOA was adopted.

The US decision to withdraw from the JCPOA puts it at odds with the other parties to that agreement, as well as international law in so far as applicable UN Security Council resolutions are concerned. So long as Tehran remains in compliance with the JCPOA, it will be able to leverage that compliance with the remaining parties and other nations in ways that seek to offset the impact on Iran of renewed US economic sanctions.

To date, the benefits of the JCPOA have fallen short of Iran's expectations and those benefits will now shrink further. But from the Iranian perspective, these shortfalls are nothing new -- the international community, Tehran contends, has been hampered from the start by a US failure to fully comply with its obligations under the JCPOA. While the US has consistently maintained that it could continue to deny Iran access to US banking institutions and prohibit it from conducting US dollar transactions due to pre-existing non-nuclear sanctions imposed by Congress, the JCPOA specifically obligated the US to lift certain nuclear-related sanctions should they prevent "the full implementation of the sanctions-lifting" under the JCPOA.

Central to this issue was the US licensing of so-called "U-turn" transactions, which would give Iran limited access to US dollar-clearing facilities. So long as the US restricted Iran's access to the dollar, international banking institutions were hesitant to engage with Iranian banks, thereby interfering with the full lifting of sanctions. The US position on U-turn transactions likewise violated its obligation to "agree on steps [with Iran] to ensure Iran's access in areas of trade, technology, finance and energy."

These US actions contrast dramatically with those of Iran, which has been found to be fully compliant at every review undertaken to date. The net result is that Iran has built up a reservoir of sympathy from an international community committed to make the JCPOA work, while the US has been seen by many as a spoiler of an effective treaty. Even prior to the Trump administration's decision to withdraw from the JCPOA, Iran had begun a process of rebalancing world opinion in its favor and away from the US.

However, Iran has an uphill struggle in this regard, given the decades of bad relations with the rest of the world dating back to the overthrow of the Shah in 1979. Moreover, Iran is going head to head with the world's sole superpower, which has the advantage of leading a system of global interaction that the US itself had built and led since the World War II. At the end of the day, the leverage the US could bring to bear against any nation or group of nations remains more than enough to offset any goodwill Iran has accrued through its compliance with the JCPOA.

All this goodwill that Iran has been trying to build up would dissipate in an instant if it withdraws from the JCPOA. The political will on the part of Europe, Russia, China and other nations to work with Iran to find viable work-arounds to the US economic sanctions would rapidly evaporate. Withdrawal from the JCPOA would open the floodgates of speculation as to what Iran was or wasn't doing to develop nuclear weapons. Furthermore, the specter of an Iranian nuclear weapon would be more than enough to solidify global support for any US response. Iran knows all this, so it will be abiding by the JCPOA for the foreseeable future.

Although Iran will probably stay in the nuclear agreement, it still may pose a serious threat to oil markets in six months. It has threatened to close the strategic Strait of Hormuz in retaliation for any large-scale targeting of its oil exports by the US sanctions. On the surface, this threat is real. If the Trump administration's "maximum pressure" campaign succeeds in halting Iranian oil exports, it could trigger this form of Iranian retaliation. Moreover, the Iranian Revolutionary Guard Command has been preparing for such an eventuality, and it is more than capable of accomplishing its mission. But this would be an act of last resort, and Iran has a long way to go before it reaches that threshold. The economic discomfort Iran is experiencing from US sanctions is real, but not unexpected. Anticipating this very behavior, Iran's leadership directed economic planners to maintain "resistance economy" measures that had been in place to counter the earlier Obama administration sanctions.

The new round of sanctions will not "shock" the Iranian economy with anything near the impact the Trump administration desires. First, because US failure to fully comply with the sanctions relief aspects of the JCPOA means the Iranian economy is already insulated against the restrictions on access to the US financial sector. The imposition of a new round of sanctions in July 2017 further conditioned Iran to the reality of shrinking economic opportunity. Iran has had six months to prepare for these sanctions and has been actively engaged with its trading partners to develop work-arounds on oil sales and other economic interaction. While most of these alternatives remain incomplete and untested, they provide a solid foundation upon which to build moving forward and maintain the flow of a modicum of oil exports.

At the end of the day, the Trump administration's "maximum pressure" campaign is more bark than bite. The US remains largely isolated when it comes to taking on Iran, with support coming primarily from Israel and Saudi Arabia. Israel is engaged in Gaza and nervous about the situation in Syria. Saudi Arabia is embroiled in multiple problems of its own, including the internal and international fallout from the Khashoggi murder. Saudi instability also undermines confidence in its ability to act effectively as guarantor of global oil supplies, creating fears of a spike in world oil prices should Iranian oil suddenly disappear from the market. The US granted six-month waivers to eight nations importing Iranian oil in order to offset these concerns but many of the recipients had already significantly reduced their purchases of Iranian oil. As a result of the waivers, Iran's oil exports could now rebound -- the exact opposite of the reaction intended by the Trump administration.

The bottom line is that the Trump administration's policy of "maximum pressure" against Iran has fallen short and may never achieve its objectives. While the US will be working hard to solidify its position on Iranian oil sales by next spring, the same holds true for Iran and its allies. The oil waivers provide Iran with more time in which to implement a system of workarounds designed to blunt the impact of the US sanctions.

Scott Ritter is a former US Marine Corps intelligence officer whose service over a 20-plus-year career included tours of duty in the former Soviet Union implementing arms control agreements, serving on the staff of US General Norman Schwarzkopf during the Gulf War and later as a chief weapons inspector with the UN in Iraq from 1991-98.

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