Will Iran’s patience on nuclear deal pay off?
Despite renewed US sanctions on Iran’s most critical industries, the JCPOA has not collapsed. Instead, there is a sense of optimism in Tehran that adhering to the terms of the deal makes sense for now.
The reinstatement of US sanctions against Iran this month – following the announcement of its intention to withdraw from the Joint Comprehensive Plan of Action (JCPOA) in May – was widely expected to mark the end of the nuclear deal. And yet, despite the renewed sanctions on Iran’s most critical industries – banking, energy and shipping – the JCPOA has not collapsed. Instead, there seems to be a renewed sense of optimism that the JCPOA can be kept on life support, and that the US may one day change its policy and return to the accord.
The endurance of this deal is mainly thanks to serious political and economic efforts by the other signatories, as well as Iran’s surprisingly patient policy of maintained compliance. European governments are pursuing a range of measures designed to counter US pressure on Iran and to provide assurances that its compliance with the JCPOA will continue to pay off economically. But they have also made it clear to Iran that any violation of JCPOA limits will require them to re-impose their own sanctions.
Iran’s economy set to suffer, but not collapse
Iranian President Hassan Rouhani had initially responded to the US announcement of its intention to withdraw by warning that if the terms of the JCPOA could not be swiftly guaranteed, Iran would begin to rebuild its nuclear capacity and, therefore, breach the terms of the accord. But today there is a newfound sense of optimism in Tehran about the JCPOA, which is rooted in the support it has received from Europe, as well as a confidence that it has already suffered the worst of the economic damage in the lead-up to these new sanctions, and that its previous experiences of managing under sanctions mean that it is well-equipped to deal with new ones.
The Iranian economy has endured tougher sanctions regimes imposed by a united international community – 2012 marked a particularly difficult juncture, as Iran’s oil exports halved and it was completely isolated from the international banking system. Iranian Foreign Minister Javad Zarif chose to deliver a message of resilience in a 5 November speech to the Majlis, asserting that Iran could survive pre-2015 conditions, and that the US had failed to ‘create a consensus against Iran’.
While the threat and re-imposition of US sanctions have indeed hurt Iran’s economy this year (the rial lost more than 70% of its value, causing multiple ripple effects, including reduced oil exports, lack of access to US dollars, and other domestic problems), the US policy is not likely to deliver its main objective of bringing Iran to its knees, forcing it to accept all of its demands or stimulating regime change.
The US has instead found itself more isolated, as Iran partners with key US allies and other countries to oppose its policy and circumvent its sanctions. This reality has revealed that Iran is more complex and resilient than perceived in Washington.
Rather than a rapid collapse of the economy, a gradual shrinkage is more likely, depending on how Tehran wields its policy levers and how well it is able to absorb the shock of sanctions. But if the economic ramifications do prove to be more drastic than Tehran anticipates, pressure will build on Rouhani’s government to reconsider its JCPOA compliance. Another likely consequence is that Iran’s more hardline faction will gain momentum.
EU autonomy rests on preservation of the JCPOA
European governments set out to save the deal even before the US had announced its withdrawal, providing assurances to Iran that they would leverage mechanisms such as blocking regulations. Sceptics voiced their doubts about Europe’s ability to part ways with the US on this issue, given the risks of losing trade with the US in return for trade with the much smaller Iranian economy.
But in the face of such realities, European officials have continued to seek creative means to maintain trade and business with Iran, including the Special Payment Vehicle (SPV), and new legal entities that could circumvent US sanctions. The most talked about mechanism is the SPV, in which Europe would be able to maintain its economic ties with Iran through a barter system, whereby exports can be traded for Iranian oil without a financial transaction taking place. This could be open to both European and non-European states.
In response to the 5 November sanctions, the EU’s High Representative for Foreign Affairs and Security Policy Federica Mogherini, joined by the foreign and finance ministers of France, Germany and the United Kingdom, issued a statement opposing the US measures and stating that the EU would continue its efforts to establish the SPV. By withdrawing from the JCPOA, the US has effectively turned its back on the multilateralism that defines the EU’s identity and mission. This makes it that much more critical for Europe to preserve the deal as a symbol of its own autonomy.
Russia, India and China are also signalling their intent to maintain strong trade ties with Iran. Russian Foreign Minister Sergey Lavrov has denounced the US sanctions against Iran as ‘absolutely illegitimate’, and recent statements from Moscow confirm its continued support of the JCPOA – with or without the US. Along similar lines to the SPV, Russia has also begun to explore an ‘oil-for-goods’ deal. Russia utilised this mechanism to circumvent the 2012 sanctions.
The implications of the collapse of the JCPOA are profound, and European leaders have noted the importance of this agreement to the future of Nuclear Non-Proliferation Treatyand to global security more broadly.
While rhetorical support by other parties for the JCPOA provides diplomatic, political and psychological benefits to Iran, its optimism should be grounded in reality considering the serious challenges that it now faces. No European country has volunteered to host the SPV thus far – Austria recently decided not to. France, Britain and Germany are now likely to pressure Luxembourg to host, given its past experience in hosting similar instruments.
But it is important to bear in mind that the EU is not monolithic and not all countries within it are willing to go out on a limb to save the JCPOA. The EU and other signatories could fail to deliver on their promises and sanctions could hit harder than Tehran expects, thus strengthening those forces in Iran that favour a different approach towards the JCPOA.