Data Is Power
Washington Needs to Craft New Rules for the Digital Age
U.S. President Donald Trump appears to be on the brink of withdrawing the United States from the Joint Comprehensive Plan of Action (JCPOA), the landmark 2015 nuclear agreement with Iran. He faces a May 12 deadline to renew waivers of key U.S. sanctions on Iran, and despite pressure from French President Emmanuel Macron and German Chancellor Angela Merkel to do so, Trump seems set to deliver on his January threat to stop waiving sanctions and to kill the deal.
JCPOA critics inside and outside the administration assume that the simple act of letting U.S. sanctions waivers lapse will result in crippling economic pressure on Iran. This pressure, they argue, will give Washington leverage to renegotiate the deal’s limits on Iran’s nuclear program and to press Tehran to curb its support for Syrian Hezbollah and other malign activities throughout the Middle East.
The reality of how sanctions work, however, is far more complicated. It took the combined efforts of Congress and two U.S. presidents—George W. Bush and Barack Obama—nearly a decade to cripple Iran’s economy. Rebuilding economic pressure after Washington pulls out from the JCPOA would be an even greater challenge, given international opposition to the U.S. withdrawal and scant international support for renewed sanctions. The result could be a “win-win” situation for Iran, in which it is both freed from the JCPOA’s constraints on its nuclear activity and able to retain at least part of the sanctions relief for which it bargained.
Trump would face formidable challenges after withdrawing from the JCPOA. The first would be to establish a legal structure to reinstate sanctions against Iran. Sanctions imposed by the United States on Iran prior to the JCPOA were one of the most complex sets in U.S. history, comprising multiple statutes, roughly a dozen executive orders, and hundreds of pages of federal regulations. In implementing the JCPOA, the Obama administration rewrote federal regulations, removed more than 400 Iranian officials, companies, and government entities from U.S.-targeted sanctions lists, and published dozens of pages of detailed guidance explaining the JCPOA to foreign governments and the private sector.
Although allowing waivers to lapse would bring some U.S. sanctions back into force in a legal sense, doing so without amending U.S. regulations to reflect renewed sanctions and without publishing detailed implementation guidance would be a recipe for chaos. Large, sophisticated multinational banks and firms that have significant U.S. operations (and fear U.S. regulators) might voluntarily choose to come into compliance with the renewed sanctions. Many smaller companies, as well as ones with less direct exposure to the United States, however, would simply continue dealing with Iran in the absence of specific direction and pressure to stop. The fact that only some sanctions waivers expire on May 12, including the waiver of critical sanctions on Iran’s Central Bank, while others are not set to expire until early July, would compound the confusion.
The Trump administration will face an equally important regulatory challenge in determining whether and how to revive targeted sanctions on the Iranian officials, businesses, and government ministries that were removed from U.S. sanctions lists as part of the JCPOA. These included most of Iran’s major banks and energy companies, as well as a host of lesser-known enterprises. The targeted sanctions isolated these companies from the global financial system and from global commerce, and because of the role that these companies play in connecting Iran and the world, they were a critical pillar of U.S. and international pressure on Tehran. A serious campaign to once again impose economic pressure on Iran would have to include renewed sanctions on many of these firms.
The Bush and Obama administrations originally sanctioned many of these targeted companies on the basis that they were connected to Iran’s nuclear program or provided financial support for Iran’s nuclear ambitions. Yet, as even Trump administration officials acknowledge, Iran has complied with its JCPOA nuclear obligations since early 2016, making it unlikely that Washington could show that any of the firms removed from U.S. sanctions lists have recently been complicit in Iranian nuclear activities. Instead, Trump will have to identify a new legal basis for designating businesses the United States wants to sanction. Although the Treasury Department has broad discretion to impose sanctions and likely would be able to find a legal basis for doing so, the process would be a labor- and time-intensive task.
The final regulatory hurdle Trump would face in imposing sanctions on Iran is ensuring that renewed sanctions do not cut off Iran’s access to the telecommunications equipment and services that help Iranian citizens communicate and hold their government to account.
Following popular protests in Iran in late 2017, U.S. Treasury Secretary Steven Mnuchin reaffirmed that “the United States is committed to empowering Iranians to engage with the world, express themselves, and hold the Iranian regime accountable for its actions.” The Treasury Department reiterated its support for licenses issued in 2014 that authorize U.S. and foreign companies to provide smartphones, tablets, communications software, and Internet services in Iran. Although withdrawing from the JCPOA would not legally void these licenses, it would make it much more difficult for IT companies to sell products and services in Iran absent aggressive regulatory and policy efforts by the administration.
These legal and regulatory challenges, although significant, will pale in comparison with the diplomatic challenges Trump could face in convincing foreign governments and companies to actually cut their business with Tehran. Between 2006 and 2015, the Bush and Obama administrations engaged in a sophisticated, multipart diplomatic campaign to convince foreign governments and companies to join the United States in imposing sanctions on Iran. Dozens of countries around the world enacted their own sanctions, reinforcing U.S. pressure by restricting the business their companies and citizens could do in Iran. Even in cases where governments did not formally enact their own sanctions, foreign government officials were often willing to discreetly press their countries’ businesses to comply with U.S. sanctions because they shared the U.S. government’s concern about Iran’s nuclear program. The Trump administration would not find a similar spirit of cooperation from governments alienated by a U.S. withdrawal from the JCPOA.
Perhaps the biggest diplomatic challenge Trump would face in reinstituting sanctions on Iran is convincing buyers of Iranian oil to reduce their purchases. Between 2012 and 2013, the Obama administration convinced buyers to cut their imports of Iranian crude by roughly 50 percent, dramatically hurting Iranian government revenues. Europe effectively eliminated its imports of Iranian oil, while other major buyers such as China, India, Japan, and South Korea slashed their purchases by hundreds of thousands of barrels per day. Countries that continued to import oil agreed to keep payments in escrow accounts, restricting Iran’s access to the proceeds of its remaining oil sales.
Since sanctions were suspended in early 2016, however, Iran’s oil exports have rebounded, reaching approximately two million barrels per day in 2017. China and India are the largest importers, with South Korea, Japan, and several European states also buying significant quantities of Iranian crude. China appears particularly unlikely to reduce its purchases of Iranian crude, given heightened tensions between Beijing and Washington over bilateral trade and investment issues.
Trump will also face significant diplomatic hurdles in Europe, where trade with Iran has surged since the JCPOA went into force. From 2015 to 2017, European imports from Iran rose by nearly 800 percent (primarily driven by renewed European imports of Iranian oil), while European exports to Iran rose by more than four billion euros ($5 billion) annually over the same period. Major European companies have also resumed investing in Iran: France’s Total, for example, has announced plans to invest $1 billion in one of Iran’s largest offshore gas fields. Although European governments broadly supported sanctions on Iran between 2010 and 2016, governments today would resist pressure to curb oil imports and trade with Iran given anger at Trump for withdrawing from the JCPOA and ongoing U.S.-EU tensions over trade policy. A determined Europe could take steps to undermine the impact of U.S. unilateral sanctions, such as routing Iran-related financial transactions through the European Central Bank.
Applying economic pressure on Iran would also require diplomacy with two countries that are already causing significant challenges for the United States: Russia and Turkey. The Trump administration would need to convince Russia to halt its announced plans to invest potentially tens of billions of dollars in Iran’s oil and gas sector despite heightened tensions between Washington and Moscow. Turkey, meanwhile, served as a hub of Iranian sanctions evasion prior to the JCPOA, facilitating billions of dollars of Iranian gold smuggling and financial sanctions evasion between 2012 and 2014. Washington’s strained ties with Ankara make it far from clear that Turkey would cooperate with renewed U.S. pressure on Iran.
Finally, should Trump withdraw from the JCPOA, he will have a difficult time persuading countries to cut commercial ties with Tehran in the absence of any international legal basis for doing so. Although U.S. sanctions on Iran were always stronger than United Nations sanctions, the latter created an important international framework that the United States and other countries could expand on. Most of these sanctions were repealed with the passage of UN Security Council Resolution 2231 (2015), which endorsed the JCPOA. As a strictly legal matter, the “snapback” mechanism in UNSCR 2231 would enable the United States to unilaterally require the restoration of UN sanctions on Iran under international law. But given that the UN’s nuclear watchdog has repeatedly confirmed Iran’s compliance with the JCPOA’s nuclear terms, Washington would find no political support for doing so, and the diplomatic costs of unilaterally requiring UN sanctions’ reactivation would likely outweigh any benefits.
The legal and diplomatic challenges Trump would face in reinstituting sanctions make it hard to see how he could rebuild effective international economic pressure on Iran. That said, there are several steps the administration could take to facilitate the process.
First, if Trump withdraws from the JCPOA, he should nevertheless signal that he remains open to negotiations with Iran. The odds of the United States, Iran, and the other countries party to the JCPOA reaching a new agreement after a U.S. withdrawal appear remote, but Trump should not take negotiations off the table.
If the Trump administration is serious about imposing sanctions on Iran anew, it should publish detailed new regulations, FAQs, and other interpretive guidance as soon as the first waivers lapse.
Second, if the Trump administration is serious about imposing sanctions on Iran anew, it should publish detailed new regulations, FAQs, and other interpretive guidance as soon as the first waivers lapse. Such regulations and guidance would need to lay out the specific sanctions the administration plans to revive, a detailed timetable for their implementation, and answers to a host of related questions that governments and the private sector will have.
Finally, Trump should make clear that his administration will give companies a significant amount of time to wind down current business in Iran before facing sanctions. U.S. commitments under the JCPOA included a commitment to give companies a period of time to withdraw from Iran if the JCPOA collapsed, and Trump should honor that commitment to minimize market chaos and reduce the international backlash to renewed U.S. sanctions. The White House should address specific sanctions problems in a flexible manner as they arise, much as it has sought to address unintended consequences of recent U.S. sanctions on Russia. Trump should also consider a phased reimposition of sanctions, giving companies additional time to adapt.
Even taking all these steps, however, would not change the fact that withdrawing from the JCPOA would be a strategic mistake for Washington. It would allow Iran to resume its nuclear program and raise the risk of a future military conflict with Tehran. And in all likelihood it would not even fully impose the kind of economic pressure that forced Iran to agree to the JCPOA in the first place. The result would be a major setback for U.S. strategic interests.