US Withdrawal From the JCPOA and Anti-Iranian Sanctions: Pros and Cons

Sanctions researchers and enforcers are acutely intrigued by the question of whether the new sanctions imposed by the United States on Iran would be effective. By withdrawing from the Joint Comprehensive Plan of Action (JCPOA) on the Iranian nuclear program, the United States dealt a heavy blow to multilateral diplomacy. Approved by UN Security Council Resolution 2231 Resolution 2231 (2015) adopted by the UN Security Council at its 7488th meeting on July 20, 2015, the deal was drafted with the active contribution of the European Union, as well as the P5 countries. It had special significance for Brussels, considering the EU’s commitment to multilateral diplomacy.

US President Donald Trump announced his decision to withdraw from the Iranian nuclear deal on May 8, 2018 Frequently Asked Questions Regarding the Re-Imposition of Sanctions Pursuant to the May 8, 2018 National Security Presidential Memorandum Relating to the Joint Comprehensive Plan of Action (JCPOA). May 8, 2018, and followed up on this decision by signing Executive Order 13846 of August 6, 2018 Reimposing Certain Sanctions With Respect to Iran Executive Order 13846 of August 6, 2018. Reimposing Certain Sanctions With Respect to Iran.. The Trump administration gave all companies that could be affected by the US restrictions six months to leave the Iranian market, and these decisions came fully into force on November 5, 2018.

As expected, the reaction among other parties to the deal, including Iran, was negative. The US found itself in isolation, which logically cast doubt on the effectiveness of the new sanctions. After all, it was the US that had made a bid for multilateral efforts to pressure Iran on the nuclear issue. In fact, Washington had a long track record of imposing sanctions against Tehran. While this unilateral pressure did hurt the Iranian economy, it was not enough to force it to divert from its political course. It is for this reason that beginning in the late 1990s the US became amenable to countering Iran as part of a coalition, relying both on its European allies and UN sanctions. Facing consolidated pressure from the UN, the EU and the US, Tehran was forced to negotiate, leading to a compromise in the form of the JCPOA. Taking into account all these considerations, Washington’s decision in May 2018 to withdraw from the deal came as a surprise. What were Donald Trump and his administration hoping to achieve? Was the US seriously expecting unilateral measures to succeed and Tehran to cave in on all or at least some of the 12 points from the so-called Pompeo ultimatum?

From a research perspective, we can hardly expect the new round of US sanctions to pressure Iran into complying with Washington’s demands.  That being said, the US policy follows a logic of its own, since sanctions are thought to be able to cause substantial damage to Iran and bring about unrest within its borders, if the prerequisite conditions are in place. The new sanctions consist of banning Iranian oil exports and fuel deliveries and create a financial blockade, as well as introduce restrictions in the automotive, shipping, shipbuilding and port sectors. Financial sanctions will be especially painful considering the dominant role of the US dollar in international settlements, since Iran will be excluded from regular international trade. Moreover, the US made these sanctions extraterritorial, which means that US regulators will come after those who fail to abide by these sanctions both within and outside of the US.

The Trump administration seems to be proceeding from the following premises:

1.     Faced with the re-imposed sanctions, Tehran would have two alternatives. The first is to withdraw from the JCPOA and revive its nuclear program. In this case, however, Iran is sure to face isolation. At the very least, this would prompt the UN and the EU to re-impose sanctions, but the implications can go as far as give the US a legitimate pretext to suggest carrying out military strikes against Iran as a way to force it to halt its nuclear program. Washington probably assumes that having curtailed its nuclear program Iran would be unable to obtain a nuclear weapon quickly. Consequently, it would not be able to follow in the footsteps of North Korea. Having developed nuclear warheads and means of delivery, the DPRK can negotiate from the position of strength. The fear of isolation or aggression would keep Tehran from leaving the JCPOA. In other words, the US does not lose anything as far as the nuclear issue is concerned, and Iran maintains its status quo. Still, the US decided to impose new restrictions and requirements. In fact, this is what the Republicans where calling for even before the JCPOA. Barack Obama confronted Congress during his presidency and had to go to great lengths to get the deal through. With Donald Trump, the position defended by Obama’s opponents who denied any concessions for Iran was placed back on the agenda. They believe in stepping up pressure on Tehran in order to gain new concessions or impoverish the country to an extent where people would take to the streets.

2.    Research on the way sanctions affect domestic politics in target countries shows that economic restrictions do not necessarily result in riots, coups or bring about democracy.   Yes, the middle class and vulnerable social groups may suffer, there may be fewer resources, economic decline and deteriorating quality of life. Nevertheless, sanctions do not necessarily lead to a political transition, and the correlation between the two is non-linear at best. It is not uncommon for sanctions to consolidate political systems and boost the legitimacy of their governments. There is an important aspect in Iran’s case, however. Sanctions are more painful when they cause more damage than expected, or when a period of growing prosperity gives way to a painful decline. In this situation, there can be a stronger correlation between sanctions and social protests. In any case, nothing prevents the US from testing this hypothesis once again in Iran.

3.    JCPOA’s success in 2015 was attributable, at least to some extent, to the fact that sanctions had already caused Iranian oil exports to decline. The US dented Iranian oil revenues by offering waivers to importers, while refraining from direct prohibitions. The key importers obtained waivers from sanctions, but had to scale down oil imports from Iran in exchange. This approach proved to be quite effective, since importers in the EU, Japan and India reduced their deliveries considerably. In 2018, the US tried to replicate this success through unilateral sanctions, by offering waivers to eight major importers of Iranian oil. It could be argued that the US sees two alternatives for these countries. The first one was to continue importing Iranian oil at a discount with the potential of being subjected to US sanctions, which can be very costly. The second option was to find new suppliers. This second option could seem more attractive, especially since there is no deficit on the oil market and other oil exporting countries are ready to increase production volumes. In this case, Iran could simply lose its market share. Later, Washington cancelled the exemptions altogether, thus even more strengthening the blockade of Iranian oil exports.

4.    Even though the European Union criticized the US for withdrawing from the JCPOA and revived the 1996 Blocking Statute, major companies are expected to abide by the US sanctions and leave Iran. Over the past 15 to 20 years, the United States has created a powerful tool in the form of secondary sanctions that mostly consist of imposing fines on companies in breach of the US sanctions. Although these fines are mostly imposed on US companies, a number of EU companies were also affected. Banks and financial institutions are especially vulnerable. Non-US companies are faced with a choice of either staying on the Iranian market and risk US fines that vastly exceed profits or even being designated on the SDN list, or leave Iran and incur losses, while retaining the possibility of working on the US market and operating within the USD financial system. The choice for major companies is obvious. Moreover, it is still early days for INSTEX, an alternative settlement system with Iran created by the EU, so it is unlikely to change anything for Iran in the near future.

However, there is also a flip side of the coin.

First, the withdrawal from the JCPOA undermined trust in US diplomacy. In particular, the Iranian case is extremely important for Moscow, showing that it would be undesirable to compromise with the US by making concessions in exchange for easing or lifting sanctions, especially if these concessions cannot be reversed. There is no guarantee that the next administration would not revert to the policy of sanctions. The US retains a powerful tool for inflicting economic damage on the target country with fewer opportunities to use it for achieving diplomatic goals.

Second, the breakdown of the JCPOA undermines non-proliferation efforts. North Korea is a case in point proving that while failing to remove sanctions, possessing nuclear weapons provides some leverage in negotiations. At the same time, giving up nuclear weapons leads to the re-imposition of sanctions under new pretexts.

Third, every new round of sanctions forces target countries to adapt and find new ways to carry on, which produces a learning curve effect. Moreover, countries that the US regards as its competitors or rivals can openly or covertly create adaptation mechanisms in advance, in anticipation of sanctions. They can also act as a “black knight”, helping target countries stay afloat or at least refusing to assist the US.

Fourth, even if sanctions result in large-scale protests and a new revolution, it remains to be seen what the new political system will look like. Will Washington be able to keep this process under its control? Or maybe the regime that emerges will be much more hostile and impulsive?

Ignoring these risks can have dire consequences. In any case, the new sanctions war against Iran has been unleashed, and there is no way of stopping it.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.