May 10, 2018

Nixed: US withdraw from Iran nuclear deal

It was already clear by the time President Trump addressed the assembled White House press corps on Tuesday 8th May that the US was going to put some sort of dent in the Joint Comprehensive Plan of Action (JCPOA), the clunkily named nuclear deal reached between the P5+1 (the permanent 5 UN Security Council members plus Germany) and Iran. But any doubt as to the extent of the damage he was prepared to do to the deal was emphatically blown away as the President announced the re-introduction of what he termed the "highest level of economic sanctions".

The Iran deal was always a creature of compromise.  Aside from its utilitarian moniker, it was dependent for its survival on continued waivers of US secondary sanctions by the US President (a function of the congressional approval of the deal in the first place).  It was also limited – quite deliberately – in the scope of its ambition: it did not seek to settle disputes concerning Iranian intervention in regional conflicts, Iran's human rights record or its ballistic missile program.  And, much to the chagrin of Iran hawks in the US and elsewhere, the sunset clauses place no restriction on Iran's uranium enrichment after the first 15 years of the deal.  From the Iranian side, whilst it provided relief against EU sanctions and US extraterritorial secondary sanctions, it offered Iran no access to the US economy or, crucially, the US dollar denominated financial system.

But, imperfect as it was, it did result in the destruction of Iran's stockpile of enriched uranium and afforded the International Atomic Energy Association (IAEA) access to Iran's nuclear sites to verify continued Iranian compliance.  And it has allowed Iran access to major European investment in Iran; including high profile deals struck with Airbus and French oil major Total.   

In any event, some of the lingering congenital defects would not have mattered as much, or at all, were it not for other extraneous events.  For example, it was always intended by the Obama administration that the JCPOA would be a starting point for further discussions and deals on other areas of difference once the nuclear boil was lanced; negotiating the nuclear settlement was lengthy enough without complicating the negotiations further by involving issues such as Syria and ballistic missiles.  And continued sanctions waivers were never thought to be seriously in doubt, even as the Trump campaign gained momentum throughout 2016.  The State and Treasury Department reach out sessions following Implementation Day emphasised that the political consequences of a US lead snapback would be so serious that the next President would balk at tearing it up, even if that President was a candidate who described the deal as the "worst ever".  

Fix it or nix it

Even after further criticism of the deal from the newly inaugurated President Trump, that conclusion seemed to hold good.  Early forays into extending sanctions against Iran with SDN designations in February 2017 were limited in scope.  They did not designate Iranian financial institutions or state owned enterprises.  Indeed, they were no different in character to some of the late Obama administration's post Implementation Day Iran designations.  Many concluded that moderate voices within the administration had managed to constrain the President's more hawkish impulses.   

But the President has continued to be a vocal critic of the deal and has been ramping up his rhetoric in recent months, and the lack of much perceived benefit from the deal in Iran has meant that the defects began to matter much more.  The appointment of two key Iran sceptics, John Bolton (National Security Advisor) and Mike Pompeo (Secretary of State) effectively sealed the fate of the Iran deal, providing President Trump with a core of foreign policy advisors who shared his dim view of Iran deal and wanted it "nixed".

The initial fear was that President Trump would refuse to renew the next set of waivers that were due to expire.  The complex manner in which the US sanctions were imposed - piecemeal through a number of Congressional acts and Executive Orders - and in which the waivers were put in place meant that different sets of sanctions expired at different times.  The waiver of the secondary sanctions providing for penalties against foreign financial institutions that engage in significant financial transactions with Iran's central bank were due  to expire on 12th May.  Other secondary sanctions targeting broader economic activities were due to expire in July 2018. 

However, President Trump chose to announce the reintroduction of the whole gamut of US secondary sanctions, and withdraw various general licences issued pursuant to the JCPOA, without waiting for the waivers to expire.  When "wind down" periods of 90 and 180 days (dependent on the types of sanctions concerned) are taken into account, this means that US secondary sanctions will effectively come back into effect on 6th August 2018 and 4th November 2018. 

In particular, after 6th August 2018, the US will re-impose sanctions on:

  • the purchase or acquisition of U.S. dollar banknotes by the Government of Iran;
  • Iran’s trade in gold or precious metals;
  • the direct or indirect sale, supply, or transfer to or from Iran of graphite, raw, or semi-finished metals such as aluminium and steel, coal, and software for integrating industrial processes;
  • significant transactions related to the purchase or sale of Iranian rials, or the maintenance of significant funds or accounts outside the territory of Iran denominated in the Iranian rial;
  • the purchase, subscription to, or facilitation of the issuance of Iranian sovereign debt; and
  • Iran’s automotive sector.

Moreover, after 4th November, the US will re-impose sanctions on:

  • Iran’s port operators, and shipping and shipbuilding sectors, including on the Islamic Republic of Iran Shipping Lines (IRISL), South Shipping Line Iran, or their affiliates;
  • petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran;
  • transactions by foreign financial institutions with the Central Bank of Iran and designated Iranian financial institutions;
  • the provision of specialized financial messaging services to the Central Bank of Iran and Iranian financial institutions;
  • the provision of underwriting services, insurance, or reinsurance; and
  • Iran’s energy sector.

General licences allowing foreign subsidiaries of US companies to engage in transactions with Iran in specified circumstances are also being withdrawn and Iranian financial institutions and government of Iran entities will be added to the SDN list, with secondary sanctions consequences for non-US persons who deal with them.  The President's announcement is of nothing less than a wholesale reintroduction of the pre-implementation day US secondary sanctions regime.

Caught in the middle

All of this concerns the EU greatly.  The EU sees the JCPOA as the most effective way to stop Iran obtaining a nuclear weapon, and precipitating a nuclear arms race in the Middle East that will potentially involve Gulf Arab states, Turkey, Egypt as well as Israel.  As the EU points out, the IAEA has repeatedly confirmed substantial Iranian compliance with the terms of the deal. 

The immediate reaction to President Trump's announcement from the UK, France and Germany was "regret and concern" at the US action and an expression of a continuing commitment to the deal.  The UK's Office of Financial Sanctions Implementation has emphasised that the UK Government continues to fully support expanding Britain's trade relationship with Iran and encourages UK businesses to take advantage of the commercial opportunities that arise.  However, it went on to highlight that the re-imposition of US sanctions may have implications for UK businesses and individuals dealing with Iran. 

And there is the rub.  The President's announcement will see European companies that have chosen to engage with Iran since Implementation Day exposed to US secondary sanctions after 6th August and 4th November; the first time there has been a significant divergence on Iran policy between the US and EU on what EU companies can do.

The US did not relax its own self-denying sanctions preventing US persons dealing with Iran after Implementation Day; only the secondary sanctions affecting non-US persons.  By contrast the EU lifted most of its general restrictions on trade with Iran except for those on controlled good or remaining designated persons.  As a result, European companies that have been able to find means of getting paid (not an easy task when US dollar transactions are still proscribed) have engaged with Iran more enthusiastically – a fact that is no doubt not lost on a President currently jostling with the EU over aluminium tariffs.  The unilateral re-imposition of US secondary sanctions will impact these European companies. The recent application of US secondary sanctions against certain Russian companies and oligarchs illustrates some of the problems that this can cause. 

Historically the threat of a divergence between the US and EU over Iran has never been a problem.  The two have managed to proceed in concert with each other so that US sanctions which unilaterally sought to regulate or restrict trade and investment activities carried out by persons outside the US were mirrored by the EU's own regulations and restrictions on what EU persons are able to do.  But there are earlier precedents for transatlantic fallings out over the extraterritoriality of US sanctions. 

In the 1980s the US imposed sanctions on companies doing business on a Russian pipeline in Eastern Europe, provoking a diplomatic falling out.  And in 1996 the Helms-Burton Act, which, amongst other things, imposed penalties upon non-US persons "trafficking" in Cuban property formerly owned by US persons, provoked a furious response from the EC which launched blocking legislation and a WTO panel investigation alleging that the extraterritorial restriction of trade between the EC and Cuba breached various provisions of the GATT and GATS.  The US countered that it was prepared to rely on the rarely used national security exemption in the GATT. The dispute was only withdrawn after high level political compromise. 

But the prospect of a large scale transatlantic trade dispute over Iran developing at the same time as a US / EU dispute over US aluminium tariffs and extraterritorial Russia sanctions is deeply concerning for the EU. 

The tough decision for many EU companies – and one that they never had to consider before Implementation Day because the activities were directly sanctioned by the EU in any event – is whether they can risk continuing engagement with Iran without infringing the renewed US secondary sanctions, which are sometimes couched in much less specific terms than the old EU prohibitions.  The penalties for breaching US secondary sanctions are not fines or custodial sentences but they can be severe; they include the denial of access to the US financial system and potentially being designated as a SDN.  It may be a decision that is taken out their hands, however, if banks and other financial institutions that they rely on insist that all forms of trade with Iran are ceased in light of the reintroduction of US secondary sanctions.

What happens to the JCPOA?

What, then, is the status of the JCPOA now that one (but so far only one) of the parties to it has abrogated its terms? 

The JCPOA obliges the US not only to cease the application of its secondary sanctions program but to "continue to do so".  The triggering of the re-introduction of sanctions on 6th August is, therefore, a breach by the US of the terms of the agreement.  But the agreement, for what it is worth, remains in force between the other parties.  President Rouhani of Iran has expressed a hope that the agreement can continue to remain in force if the EU maintains its own sanctions relief (Russia and China did not impose unilateral sanctions against Iran prior to Implementation Day and so the question of their continued relief is irrelevant).  And a senior Trump administration official was quoted immediately after the President's announcement indicating that the US will not seek to trigger the snapback of UN sanctions under the mechanism provided for in JCPOA and UN resolution 2231.

Iran could, in theory, refer the issue of the US breach to the JCPOA dispute settlement mechanism where the question of US compliance could be considered by the Joint Commission established under Annex IV of the JCPOA.  But that process cannot prevent the reintroduction of US sanctions.  Even if the US does not participate in the Joint Commission (and presumably it will not in circumstances where the President has positively ended participation in the JCPOA) the only possible outcome from the almost month long process is the automatic snap back of UN sanctions, which Iran has no interest in fomenting.

The deal could, in theory, limp on for some time with the EU and Iranians keeping to their respective sides of the agreement, and with tentative Iranian business being pursued by businesses in the EU, Asia and elsewhere outside the US.  However, it is likely that such business will be more limited now, particularly given the already risk averse approach of financial institutions generally.  The question is how long Iran's own hard liners, already opposed to the deal in principle, are willing to continue with such a compromise.  They may see the US move as just the opportunity Iran needs to commence uranium enrichment again, free from any guilt for abrogating the deal itself.  The EU will find it difficult or impossible to continue their own support for the deal and provide continued sanctions relief in those circumstances.