TSG IntelBrief: The Potential Unraveling of the Iran Nuclear Deal
August 3, 2017

The Potential Unraveling of the Iran Nuclear Deal

 

Bottom Line Up Front:

• There are indications that the Trump administration may take the once-unthinkable step of ending U.S. implementation of the landmark 2015 multilateral nuclear agreement with Iran.

• If it decides to pull out of the deal, the administration is likely to declare Iran in non-compliance, with or without clear justification.

• A U.S. pullout from the accord, and the re-imposition of U.S. secondary sanctions on Iran, would strain U.S. relations with its allies in Europe and Asia without materially blunting Iran’s regional influence.

• An effort by Iran and other parties to the agreement to keep the accord in place without the United States would be unsustainable and would likely prompt Iran to abandon its nuclear commitments.

 

On July 17, President Trump, with reported reluctance, issued his second 90-day certification that Iran is complying with its commitments under the July 2015 landmark multilateral nuclear agreement, the Joint Comprehensive Plan of Action (JCPOA). The president reportedly has ordered senior aides to develop an option for him to declare Iran in non-compliance at the next certification deadline in mid-October, regardless of whether or not Iran is clearly violating its nuclear commitments. One tactic the administration reportedly is considering involves provoking Iran to violate the accord by conducting “challenge inspections” of Iranian military facilities. Under the JCPOA, Iran is required to allow the International Atomic Energy Agency (IAEA), the oversight agency for Iranian compliance, to inspect such facilities when there is reason to believe prohibited nuclear activities are occurring at such sites. Iranian leaders have long sought to keep Iran’s military bases “off limits” to such inspections and would be expected to balk at such a challenge. Under the JCPOA review law passed by Congress in 2015, a decision by the Trump administration to declare Iran non-compliant would almost certainly be followed soon by congressional action to re-impose U.S. secondary sanctions on Iran that have been suspended under the deal. 

A U.S. pullout would not immediately kill the agreement. The JCPOA was a multilateral agreement between Iran and the so-called ‘P5+1’—the United States, Germany, and the four other permanent members of the U.N. Security Council (Britain, France, Russia and China). All of the other parties to the JCPOA are strongly committed to its continuation and currently assert that Iran is upholding the deal. Many major non-U.S. companies have re-entered the Iranian market since sanctions against doing so were lifted in January 2016. The other P5+1 countries are likely to, at least initially, continue implementing the accord, and they could provide guidance to their companies not to comply with re-imposed U.S. secondary sanctions. The U.S. move could cause a trade rift with Europe and other countries, for example, in the form of a formal complaint against the United States at the World Trade Organization or the imposition of trade restrictions on U.S. goods. A rift over the JCPOA could complicate U.S. efforts to obtain multilateral cooperation to curb North Korea’s nuclear and missile programs, especially if it is perceived that the United States undermined a successful nuclear accord without adequate justification. 

No matter the reaction of other P5+1 governments, implementation of the JCPOA cannot be sustained without U.S. participation. Most European and Asian governments do not exercise control over their major corporations, and multinational companies in these countries have substantial business interests in the United States. The United States has a $17 trillion economy and companies would not risk their positions in the U.S. market to pursue business in the infinitely smaller $500 billion Iranian economy. The re-imposition of U.S. secondary sanctions on Iran would therefore cause European and Asian companies to either pull out of the Iran market again (as they did in 2010) or to refrain from re-entering that market. As oil importers in P5+1 countries seek to comply with U.S. sanctions, Iranian oil exports would almost certainly fall to the low levels they were at during the height of the sanctions regime (about 1 million barrels per day during 2011-2016, down from 2.5 million barrels per day currently), causing the Iranian economy to re-enter a significant economic recession. There is no question that Iran’s Supreme Leader, Grand Ayatollah Ali Khamenei, would accuse the P5+1 of breaching the JCPOA and compel Iranian officials to implement Iran’s standing threat to abandon the JCPOA’s nuclear restraints in response. 

The Trump administration appears to believe that the re-imposition of U.S. sanctions will cripple Iran’s economy to the point where Iran is forced to retrench its extensive destabilizing influence in the region. This outcome is unlikely, however, insofar as Iran was fully able to support its regional allies and proxies even at the height of the international sanctions regime. The increase in Iran’s regional writ since the early 2016 lifting of sanctions has had little to do with the improvement in Iran’s economy, and everything to do with the numerous regional conflicts that give Iran the opportunity to expand its influence. A U.S. pullout from the JCPOA would result in a loss of restraint on Iran’s nuclear program without weakening Iran strategically in the region. 

 

 

For tailored research and analysis, please contact: info@soufangroup.com

 

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