Tricky Path for Iran Sanctions

U.S. officials will have to consider the consequences of new sanctions as they weigh how to address Iran’s regional policies without derailing implementation of the nuclear accord, says expert Richard Nephew.

September 22, 2015

Interview
To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

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Iran Nuclear Agreement

Iran

Sanctions

Nonproliferation, Arms Control, and Disarmament

The promise of sanctions relief helped bring Iran to negotiate over its nuclear program, yielding an accord due to be implemented in the coming months. Some members of the U.S. Congress are now calling for tightening sanctions linked to Iran’s regional and domestic behavior, but a number of experts say this could drive Iran to abandon its nuclear commitments. As the White House and Congress consider next steps, "what is required is prudence," says Richard Nephew, director of the Economic Statecraft, Sanctions, and Energy Markets program at Columbia University’s School of International and Public Affairs. Nephew, a former sanctions official at the U.S. State Department, says it will be important to balance the needs of ensuring a deal aimed at curbing Iran’s nuclear program with concerns about how to restrain Iran’s actions in the region.

Kerry and Zarif in Vienna British Foreign Secretary Philip Hammond, U.S. Secretary of State John Kerry and European Union High Representative for Foreign Affairs and Security Policy Federica Mogherini talk to Iranian Foreign Minister Mohammad Javad Zarif in Vienna, Austria, July 14, 2015. (Photo: Carlos Barria/Reuters)
 

Under the terms of the Joint Comprehensive Plan of Action (JCPOA) inked by Iran and major powers, Iran is expected to take steps to restrict its nuclear program before it receives sanctions relief. What major sanctions should we expect to see lifted when the IAEA had verified Iran’s compliance?

It will basically be all those sanctions that govern foreign trade with Iran. This covers the oil and gas sector, as well as financial, transportation, and other associated services. Ninety-five percent of [Iran’s] external economic activity will be covered by the sanctions relief.

There are important exceptions. Particular banks, for instance, will still be on [U.S.] sanctions lists, and some types of trade—for instance, with items that could be used in nuclear programs, but may not necessarily be—will also still be covered. Of course, the U.S. primary embargo involving all of those different things will remain fully in place.

Debate in Washington has turned to expanding existing nonnuclear sanctions, and perhaps imposing new ones, related to support for terrorism, destabilizing the region, missile proliferation, and human rights. What might those sanctions entail, and how will they be perceived by Tehran?

“If the United States tries to sanction the entirety of the Iranian financial system all over again using the excuse of terrorism, the Iranians will walk away.”

These nonnuclear sanctions have been enforced vigorously throughout the [interim] Joint Plan of Action, and the nonnuclear sanctions architecture has not only been preserved under the negotiations; it’s been enhanced. The Treasury Department, intelligence community, and State Department will keep looking for evidence of bad Iranian behavior, based on what’s presently in law. If you’re supporting Hezbollah, Hamas, the Houthis in Yemen, or [Syrian President Bashar al-] Assad, and you’re an Iranian, you are potentially subject to sanctions. If you are a facilitator of Iranian support for those bad actors, you are potentially subject to sanctions. That will continue across the fronts of human rights, terrorism, ballistic-missile proliferation. If you do business with Iranians who have been found to support terrorism, you’re potentially subject to sanctions.

If you are a bank in Europe and you do business transactions on behalf of the Iran Revolutionary Guard Corps, even if the EU delists the IRGC, U.S. sanctions will still mean that those banks that do that business are potentially courting penalties. That includes being cut off from the U.S. [financial system].

There is some interest in looking at where there will be potential gaps once UN arms embargo restrictions lapse [in five years], as well as the ballistic-missile-related restrictions [in eight years]. There could be efforts to impose sanctions on any transfer of conventional arms to or from Iran that wouldn’t otherwise be captured by the UN embargo.

The Iranians have as much interest in the nuclear deal being sustained as the United States, so I doubt that for one additional Iranian bank or one additional IRGC person being sanctioned they’re going to walk away from the deal. But if the United States tries to sanction the entirety of the Iranian financial system all over again using the excuse of terrorism, the Iranians will walk away.

What is required is prudence—to decide whether the penalties that would be imposed on Iranian bad actors are significant enough that it could stop their bad activity or impair their bad activity and that it’s worth risking a possible negative Iranian response. If we see Iranian bad actors doing things in violation of U.S. law, we ought to consider sanctioning them, even more so if we think our sanctions will have a positive impact. But if we’re just looking for ways to look tough, that’s a bad reason to take new measures.

When the UN arms and ballistic-missile embargoes lapse, could unilateral U.S. measures be as effective as multilateral measures they’d be replacing?

We’re all supposed to abide by the terms of UN Security Council resolutions. But let’s be blunt: the UN arms embargo has not stopped the Iranians from exporting arms to Assad, Hamas, and the Taliban, or from supporting the Houthis.

U.S. sanctions have been helpful in ensuring that if violations of the UN arms embargo are detected, a penalty can be imposed. There’s no veto that can block imposition of U.S. sanctions with regard to arms transfers, whereas in the UN system, there is. Unilateral U.S. action can have more teeth than UN action, even if it doesn’t have the imprimatur of UN support. The practical may always trump the rhetorical.

You’ve raised the possibility that Iran’s economy could remain stagnant for years to come—whether a residual effect of sanctions or because of unrelated structural problems—and President Hassan Rouhani’s promise of an economic dividend from the nuclear accord will ring hollow. Could that jeopardize the agreement?

Absolutely. There will be tremendous political pressure on Rouhani to make good on the expectations that he’s raised in his campaign rhetoric and what he’s said while negotiating the deal. If the economy stalls out, even if the sanctions relief from the deal is working just fine, there will tremendous pressure on the government to explain itself.

The easiest explanation that the Iranian government could come up with is “we struck a great deal, but sanctions—the West, those awful Great Satan Americans—have hindered our ability to advance ourselves, which was supposed to be part of the JCPOA.” You could see competitors to Rouhani in the 2017 elections or beyond that say "you shouldn’t reelect Rouhani because he hasn’t delivered the goods, whereas I can—and I’ll start by rejecting the nuclear deal."

The near-term risk of this kind of development is pretty low because everyone understands it’ll take some time for the economy to rebound. But four or five years down the line, that argument won’t work anymore.

Will the risk of sanctions snap back or uncertainty about U.S. intentions keep firms out of Iran?

A lot of companies will want to see that the deal is being implemented smoothly before they make major investments in Iran. That doesn’t mean they won’t do some quick-turnaround business that they could terminate quickly, but they’ll be nervous about doing a lot of long-lasting stuff.

The other factor is the U.S. political system. If we decide we’re not going to fulfill our part of the deal, then the deal will fall apart and a lot of European and Asian companies will be at risk. When you have a U.S. presidential debate in which many of the Republican candidates say they’re going to rip up the deal, a thoughtful European company is not going to make a major investment in Tehran until after we know who’s going to be president and what their approach to Iran is really going to be.

On the U.S. side, do you foresee any legislative measures threatening implementation of the agreement?

Some people [in Washington] are talking about trying to reimpose the oil embargo [that is set to be lifted under the JCPOA] as a part of strangling the Iranian economy. Nothing will help the Iranians walk away from a deal faster than that. If the idea is to stop terrorism, people should look at recent history: The Iranians have been under tremendous economic pressure in large part because of oil sanctions and they haven’t stopped their support for terrorism.

Secondly, a lot of sanctions advocates say that we ought to make sure that there is a good-conduct test to let Iranian banks off designation lists. Iranian banks are not going to be able to pass that test; they’re not going to provide assurances that they won’t provide funding for IRGC-related companies, since they’re a major part of the Iranian economy. The Iranian economy couldn’t support that, and the Iranian government will walk away.

The third major category is the piecemeal approach—this new idea [in Washington] of trying to ratchet over time sanctions associated with terrorism and whatnot to reengineer what we already had [for nuclear nonproliferation]. A lot of this is focused on trying to sanction every company that’s gotten near the IRGC. Again, that’s profoundly dangerous in terms of what the Iranians would do.

The United States and European Union maintain separate sanctions lists. Does that undermine their efficacy?

Not yet; our sanctions lists are quite in sync. Over time, some people and entities will come off, notably the IRGC, as well as others that the Europeans sanctioned for nuclear reasons even if we have them sanctioned for terrorism reasons. That will be a problem, legally as well as politically, come eight to ten years from now, when the sanctions are supposed to come off in Europe.

The bigger problem is if we continue to have differences of view with Europe about what is terrorism and support for terrorism. For example, we have been designating and sanctioning Hezbollah for a long time. The European Union only imposed sanctions on Hezbollah in 2013, and even then, only on its military wing.

What sanctions lessons should policymakers take from the experience of negotiating the nuclear accord?

Some people want to keep sanctions on Iran in place forever in response to things that weren’t part of the original discussion. We are going to undo our own global economic advantages and contribute to our inability to use sanctions in the future if we overuse them now.

That doesn’t mean we shouldn’t have tough sanctions on those we’ve defined as bad guys, but we ought to make sure that people understand we’re not doing it capriciously. That’s one risk I see in this Iran debate: A lot of people in the world think that we’re sanctions-happy—and because we are not going to deal with the consequences of it [because U.S. firms face a general trade embargo with Iran] and their companies are, that there’s no reason why we shouldn’t be. Over time, that mindset will lead people to say, "why are we going to rely on the U.S. financial system?" Or, "we’re going to diversify our business so we’re not at risk in the United States." That is a dangerous implication for our economy and our ability to use sanctions.

This interview has been condensed and edited.

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