Why Iran Waits

Shortly after U.S. President Donald Trump withdrew from the Iran nuclear deal, Supreme Leader Ayatollah Ali Khamenei pledged that Iran would not tolerate the simultaneous restriction of its economy and its nuclear program. “This bad dream will never come true,” Khamenei said in June 2018.

Yet Iran has accepted exactly that. Iran has continued to comply with the restrictions on its nuclear program under the Joint Comprehensive Plan of Action (JCPOA), which was implemented three years ago this month. And Trump reimposed unilateral sanctions in August and November 2018, which means that Tehran is also bearing severe economic costs. Iran has never before endured this combination of economic sanctions and nuclear restrictions. As policymakers and analysts debate how and whether to keep Iran in the JCPOA, it is important to understand why Iran has stayed put in the first place—and will likely continue to do so this year.

We should not begin by imagining that Iran will stay in the nuclear agreement regardless of the cost—or that its leaders are counting on simply waiting out Trump. In fact, withdrawing from the agreement, or taking small measures to violate it, could help Iran build leverage against the United States for future talks, even while distracting the country’s population by reinforcing the government’s mantra of resistance. Nor does Tehran need to fear that withdrawal will necessarily lead to war: Iran could take small steps to violate the agreement that would not meaningfully affect its breakout time—the time required to produce enough nuclear material for a bomb—and then argue that the steps are easily reversible should the United States return to negotiations.

Rather, the Iranian leadership, through its complex and opaque national security decision-making process, has apparently conducted a cost-benefit analysis and decided to stay. The decision is likely based primarily on economics, but is also driven by strategic considerations and the diplomatic benefits of staying in the deal.

MONEY TALKS

The most salient factor in Iranian calculations is economic. Since U.S. sanctions were reimposed in November, two observations have become unavoidable. First, while U.S. sanctions are potent, they are not as effective as the previous multilateral measures. Second, for Iran, the economic downside of leaving the deal would be considerable.

Iran’s oil sales and Europe’s efforts to bypass U.S. sanctions buttress these conclusions. The threat of U.S. sanctions triggered a sharp decline in Iranian oil exports: from 2.4 million barrels per day (bpd) in May to approximately 1.25 million bpd in November. But exports are likely to rebound to 1.5 million bpd early this year, making the overall decline smaller than political and market analysts predicted. Driven by concerns about domestic gasoline prices, Washington has shown a surprising degree of flexibility, issuing exemptions that allow eight countries to continue buying Iranian crude and condensate.

The situation for Iran is far from ideal. Iran must sell oil at a discount, pay for the shipping and insurance, and bear storage costs. Its revenues are locked up in special escrow accounts in purchasing countries. But the volume of oil sold is still substantial—and well above one million bpd, which is Tehran’s psychological and financial threshold. If Iran violated or withdrew from the JCPOA, it would jeopardize some of these sales. Among Iran’s top buyers, Japan and South Korea would be the most likely to halt purchases if Iran stopped complying with the deal. Such a loss would be unacceptable for Tehran, especially for the condensate industry, which relies on exports to South Korea.

A similar logic applies in Europe. France, Germany, and the United Kingdom are working with the European Union to establish a payment mechanism to bypass U.S. sanctions. The so-called special purpose vehicle would almost certainly not handle large-scale trade, such as with oil. But it could provide companies and banks a channel for legal, humanitarian trade with Iran. Establishing a pipeline for humanitarian goods will become increasingly important in the coming months as medical shortages intensify. European countries would most likely sever this connection if Iran stopped complying with the JCPOA.

STRATEGIC PATIENCE

Staying in the nuclear agreement benefits Iran’s regional policy. Preoccupied with saving the nuclear deal and wary of antagonizing Iran, world leaders have largely overlooked the country’s nonnuclear activities. The situation is ironic, given that the Trump administration justified withdrawing from the JCPOA in part to allow the world to better address the “totality” of Iranian activity. Instead, by endangering the accord, the U.S. administration has ensured that international—and especially European—attention focuses exclusively on preserving it.

Preoccupied with saving the nuclear deal and wary of antagonizing Iran, world leaders have largely overlooked the country’s nonnuclear activities.

Iran continues to develop and test ballistic missiles unabated. In the past, the United States and Europe built an international consensus about the missile threat—and, indeed, the United States and European allies were negotiating the potential for new ballistic missile sanctions early last year. But those talks evaporated once the United States withdrew from the deal. Iran’s ballistic missile test in December barely elicited an international response, let alone sanctions or other measures. Secretary of State Mike Pompeo’s warning earlier this month about Iran’s testing of space launch vehicles similarly fell on deaf ears.

Meanwhile, Tehran’s alleged efforts to eliminate dissidents and separatists in Europe have gone largely unanswered. European intelligence services blamed Iranian agents for attempting to bomb an opposition conference in France and assassinate Arab separatists in Denmark last year. The European Union on January 8 issued several sanctions designations in retaliation, but they amounted to little more than a slap on the wrist.

Iran is also rapidly changing the delicate rules of the game with Israel in Lebanon. In recent months, Israel has accused Iran of constructing small factories in Lebanon to allow Hezbollah to indigenously produce precision missiles. For Iran, this strategy reduces the risk of transferring missile components from Syria to Lebanon in convoys that Israel routinely bombs. Regardless of the Trump administration’s eventual decision about troop levels in Syria, Iran’s Lebanon strategy will pose an increasing risk to Israel, which has tried in vain to bring this development to international attention. If Tehran withdraws from the JCPOA, international concern about its regional activities will likely grow and will limit its maneuverability. Staying in the deal is an attractive alternative.

INTERNATIONAL SUPPORT

Finally, Iran has enjoyed a diplomatic boost by continuing to implement the agreement. Over the past five years, President Hassan Rouhani and Foreign Minister Javad Zarif have labored to improve Iran’s international reputation. The nuclear deal was the pinnacle of this effort. Trump’s verbal assaults on Tehran and departure from the deal have led other world powers to give Iran a diplomatic bear hug. Nowhere has this been more evident than at the United Nations Security Council. In September and again in December, the United States stood alone in condemning the nuclear agreement, while delegates from Europe, China, Russia, and elsewhere uniformly praised its importance and Iran’s compliance.

Claiming the so-called moral high ground has helped Iran expand trade and diplomatic relationships. And its compliance, routinely affirmed by international inspectors, has blunted calls from the United States and Israel to dig deeper into Iran’s past nuclear activities. Still, retaining the high ground is relatively less important than the economic benefits of staying in the agreement. The high ground does not pay the bills.

EXIT STRATEGY

Contrary to its leaders’ public posturing, Iran will likely spend 2019 inside the nuclear deal while muddling through a severe economic contraction. But Iran’s calculations will begin to change if the deal stops yielding economic benefits or if the international community begins cracking down on its regional activity.

The next U.S. decision on oil waivers in May could mark a turning point. Washington is confident that with increased global oil supply, combined with slowing international demand, the U.S. will have the leverage to further depress Iranian exports, perhaps lower than one million bpd. If this happens, observers should not be surprised if Khamenei makes good on his pledge.