The Central Pillar Supporting the Iran Deal Has a Big Crack In It

Emanuele Ottolenghi

Emanuele Ottolenghi

Senior Fellow, Foundation for Defense of Democracies

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~ Also in this issue ~

~ Also by Emanuele Ottolenghi ~

From the Blog

If the emerging deal is “not based on trust,” as John Kerry says, then it has to be based on the credible threat of re-imposed sanctions. And that’s a huge problem.

There is a key flaw in the emerging nuclear deal with Iran that is likely to quickly turn this historic agreement into a monumental failure.

The most important thing Iran gets from a deal, we are told, is the lifting of crippling international sanctions that have been imposed over the years, many of which will be lifted fairly soon after a deal is reached. But this means that the entire success of the deal over time rests on the likelihood that the United States and its allies will quickly re-impose sanctions (known as “snap-back”) if Tehran fails to fulfill its obligations. If Iran cannot be trusted, as the Secretary of State has assured us, then it must be afraid of the consequences of breaking the deal.

But the problem with relying on snap-back sanctions to ensure Tehran’s compliance is that no one seriously believes it will happen.

Since November 2013, when the Obama administration—largely on its own—negotiated an interim deal with Iran that suspended key sanctions provisions immediately, made a commitment not to pass new sanctions during negotiations, and promised to remove sanctions once a deal was reached, U.S. proclamations about sanctions have gradually lost credibility. Tehran does not believe the Obama administration can re-impose sanctions. America’s allies do not believe Washington will even try to roll back the business stampede that the demise of sanctions will unleash. And with signals from both Tehran and European capitals that sanctions are unlikely to ever be reinstated, global business corporations don’t believe it either.

There are good reasons for Iran, the Europeans, and the global business community to doubt the viability of the snap-back mechanism. After all, it took years of patient and tenacious U.S. diplomacy to prod a reluctant international community into agreeing and then enacting the complicated sanctions regime in place since March 2007, when the United Nations Security Council approved Resolution 1737. In particular, getting the United Nations Security Council’s stamp of approval for non-proliferation sanctions proved extremely difficult. Though this approach eventually bore fruit—six binding resolutions under Chapter 7 of the UN Charter were approved between July 2006 and June 2010—it also showed its limits.

President Barack Obama chairs a United Nations Security Council meeting at UN headquarters in New York, September 24, 2009. Photo: Pete Souza / White House / Wikimedia

President Barack Obama chairs a United Nations Security Council meeting at UN headquarters in New York, September 24, 2009. Photo: Pete Souza / White House / Wikimedia

Since the Security Council passed the last of these resolutions, Russia and China have shown no desire to expand sanctions further. As a result, the measures that are most credited for bringing Iran into serious negotiations—the banking and financial restrictions passed between 2010 and 2012—were mainly autonomous U.S. and European Union sanctions. Globally, large corporations and financial institutions grudgingly went along with them. In addition, the painful fines inflicted on HSBC, BNP Paribas, and Standard Chartered had a chilling effect on the business world. Few dared question, let alone challenge the administration’s willingness to use economic pressure as its principal tool of coercive diplomacy. Who wants a $8.9 billion fine, after all?

Global compliance left Iran cut off from financial markets. Its energy sector rusted, while its oil sales plunged to a quarter of its production abilities. Its economy teetered on the brink of the abyss. But these achievements rested largely on three assumptions: The Obama administration was determined to enforce sanctions, come what may; America’s allies mostly supported or at least acquiesced to Washington’s punitive actions; and Iran had no effective recourse. Today, on the eve of a nuclear agreement, none of this is true any longer.

To the president’s credit, what the Obama administration did prior to November 2013 to undermine the Iranian economy was unprecedented. By September 2012, Iran’s currency was in free fall. Its foreign currency reserves were depleted. Inflation and unemployment spun out of control. Iran’s fleet of tankers was turned into floating storage for oil Tehran could not sell, but had to continue to extract in order to sustain the viability of its oil fields. Its ability to trade and transact business was crippled. With such swift and devastating results, Washington was in a position to dictate terms of surrender, and could credibly threaten more economic pain should Iran prove unwilling to comply with Security Council resolutions.

Instead of capitalizing on these remarkable achievements, however, the Obama administration took a different course of action. Overnight, Iran’s economic bust became a boost. The Joint Plan of Action that was adopted by Iran and the six world powers in November 2013 is comparable to a marathon in which the lead runner stops 100 meters from the finish line to wait for his opponents. The underlying logic of punitive economic measures, after all, was to enhance Western leverage. The overarching goal was to force Iranian concessions that, without sufficient leverage, Tehran would be unwilling to make. Yet as soon as the interim nuclear agreement was reached, Washington insisted—in defense of its premature suspension of key sanctions against Iran’s automotive sector and petrochemical exports—that the goal of sanctions was to return Iran to negotiations, not to extract a set of non-negotiable parameters for a deal. The Obama administration has been equivocating about the purpose of its sanctions ever since, with the result that it is undermining its own leverage even as it negotiates away the last elements of the looming agreement.

Instead of capitalizing on the remarkable achievements of the sanctions regime, the Obama administration took a different course of action. Overnight, Iran’s economic bust became a boost.

In fact, the whole purpose of sanctions was to give the Iranian regime a stark choice—keep the Ayatollahs’ nuclear weapons program at the risk of economic collapse, or survive in exchange for dismantling it. Iran’s economic predicament on the eve of the interim agreement shows that Tehran was dangerously close to that moment of truth, and sanctions relief in exchange for reversible concessions gave the Islamic Republic the kind of breathing space it had been denied until then. Considering how hard it was to get to that point, this was the worst possible unforced error that diplomacy could make.

This premature gift to the ayatollahs was repeatedly downplayed because, the administration insisted, the value and scope of sanctions relief were minimal; the negotiating period was but a brief interlude before either a deal or a return to pressuring Iran; and remaining sanctions would be robustly enforced. The international and global business communities, as well as the Iranians themselves, would know this, because the Obama administration would relentlessly drive the message home.

Nobody can fault the Obama administration’s public diplomacy efforts. Washington assiduously messaged that Tehran was not open for business. As with so many other aspects of the administration’s foreign policy, however, the problem was that even an effective PR campaign is no substitute for policy itself. As a result, twenty months of sanctions relief, coupled with the anticipation of the sanctions’ ultimate demise, resulted in a resumption of trade, a modest economic recovery, and a surge in interest among Western companies keen to invest in Iran’s economy once sanctions are lifted.

Exhibit one is the Iranian economy itself, which grew by three percent over the past fiscal year. According to my colleague Saeed Ghasseminejad, all sectors experienced growth, but the automotive and petrochemical sectors—which benefited from sanctions relief—did not merely recover, they boomed. Car sales registered a staggering 71 percent increase, while petrochemical sales grew 18 percent. Given that the bulk of Iran’s car sales are for the domestic market, such growth reflects an element that transcends mere numbers. It shows growth in consumer confidence, which is in and of itself a sign of a newfound economic optimism among the Iranian middle class. There is more to be optimistic about regarding Iran’s economy: as my colleague reported, inflation was halved, while oil production and sales went up. Considering the prominent role played by Iran’s Islamic Revolutionary Guards Corps (IRGC) in these sectors of the economy, it is surprising that Washington agreed to suspend sanctions before knowing the full measure of Iran’s concessions. After all, the IRGC is the custodian of Tehran’s nuclear secrets.

A car factory in Iran. The Iranian automotive industry grew 71 percent in 2014. Photo: moaierry / flickr

A car factory in Iran. The Iranian automotive industry grew 71 percent in 2014. Photo: moaierry / flickr

The Obama administration may be quick to respond that the IRGC is still under sanctions and may never be “un-sanctioned,” which brings us to exhibit two: Since November 2013, there has not been a single designation against an IRGC-controlled commercial entity. This is not for lack of available intelligence. Evidence from Iranian corporate filings is easily accessible through the internet and corporate ownership of publicly traded companies is in the public domain. The evidence shows that the IRGC, alongside other branches of Iran’s armed forces, controls over 20 percent of the Tehran Stock Exchange. Yet the Obama administration has largely refrained from going after these assets.

Administration officials will retort that this criticism is simply not fair: State and Treasury Department designations against Iranian entities involved in sanctions evasion and proliferation activities have continued apace, with dozens of new entries added to the already impressive roster of Iranian individuals, companies, and proxies sanctioned in recent years.

These actions have no doubt caused considerable diplomatic friction between the U.S. and Iranian delegations at the nuclear talks. But they do not in and of themselves prove that U.S. sanctions still bite and the administration’s resolve has not diminished. They could just as easily be construed as a rearguard skirmish, fought more to save face than to hold the castle.

The recent transfer of nine used Airbus aircraft to U.S.-sanctioned Mahan Air is a good example of the administration’s credibility gap. On May 8, 2015, Mahan took delivery of eight Airbus A340-642s and one Airbus A321. The eight larger planes, all ferried from Iraq to Iran under cover of night, were bought in Europe through Al-Naser Airlines, an Iraqi intermediary that acted on Mahan’s behalf in violation of U.S. sanctions that prohibit the sale of aircraft to Iranian airlines.

A Mahan Air plane takes off from Düsseldorf Airport, the third-largest airport in Germany. Photo: Eric Salard / flickr

A Mahan Air plane takes off from Düsseldorf Airport, the third-largest airport in Germany. Photo: Eric Salard / flickr

That this happened under the nose of U.S. negotiators was telling enough. But to make matters worse, Reuters revealed that “the acquisition violated international sanctions and went ahead despite a tip-off from Israel.” Aviation chat rooms, moreover, appear to have taken it for granted that Al-Naser—a small private carrier whose scheduled flights were all local and was hardly in need of the A340s range of 7,900 nautical miles—might be fronting for Mahan. And the European suppliers were large, prominent companies. If this deal was a matter of public knowledge for months, why did the administration ignore warnings from an ally and rush to close the stables only after the proverbial horses had escaped?

For an administration that claims to have absolute knowledge of Iran’s clandestine nuclear activities, this was an embarrassing incident. This is likely why, even though designations usually take months, if not years to pass every evidentiary hurdle and interagency process before they are cleared, the U.S. Treasury Department designated some—but not all—intermediaries and culprits within days.

Yet more than a month later, the U.S. has yet to name and fine the European suppliers of the eight aircraft, whose identity is easily established by a brief perusal of civil aviation registries and corporate filings. Mahan’s new aircraft have been duly designated, but this is a classic case of too little, too late—exhibit three of the Obama administration’s credibility gap.

Nor is this an isolated case. Fronts for Mahan Air and company officials were sanctioned in February 2014, alongside other Iranian businessmen involved in evading sanctions on behalf of the regime. The White House will no doubt cite such actions as proof of its steely resolve. Unfortunately, three of the businessmen hit by sanctions in February 2014 had most of their operation up and running again by April 2014 under new names. The Obama administration knows all this and more, but to date, no follow-up action has been taken to punish the transgressors.

America’s allies know full well that Washington has thrown in the sanctions towel. A key element of the UN sanctions regime was a panel of experts established to assist the Sanctions Committee created by Security Council Resolution 1737. The panel was in charge of verifying compliance with UN sanctions by member states. Though the panel had few enforcement powers, it had a strong mandate to investigate and publicize non-compliance. It did so assiduously, with periodic reports. Its latest, released on June 2, 2015, notes the complete absence of reporting from member states about Iranian non-compliance for the previous year.

It explains the lull in diplomatic terms, saying, “The current situation with reporting could reflect a general reduction of procurement activities by the Iranian side or a political decision by some member states to refrain from reporting to avoid any possible negative impact on ongoing negotiations between the Islamic Republic of Iran and the EU3+3.” The concurrent explanations may be compromise language, but the report then adds, “Some Member States informed the Panel that, according to their assessment, the Islamic Republic of Iran’s procurement trends and circumvention technique remain basically unchanged and that the Islamic Republic of Iran was continuing to procure below control threshold items.”

There are good reasons to believe this sudden veneer of compliance is due to a desire by member states to avoid spoiling the ongoing negotiations, rather than Iran’s good behavior. The same report copiously documents Iranian violations of Security Council resolutions in the realm of arms shipments and ballistic missiles. The panel established, for example, that Iranian arms shipments to Houthi rebels in Yemen go back to at least 2009 and that Mahan Air continues to use Iraqi airspace to ferry arms between Tehran and Damascus.

A UN panel tasked with verifying Iranian sanctions noted the complete absence of reporting from member states about Iranian non-compliance for the previous year, theorizing that member states refrained from doing so to avoid jeopardizing the nuclear negotiations.

Meanwhile, the U.S. has repeatedly sanctioned Iranian networks for doing what no member state—including the U.S., presumably—has bothered to report to the UN Sanctions Committee. The Iranians, in other words, are still proliferating, while the international community is looking the other way. After all, sanctions enforcement is a cumbersome process. It costs money and takes time. It hinders trade. It was never very popular. Why would members of the international community rush to report Iranian cheating, when they suddenly get no reward for doing so? Why would they invest in obstructing Iran, given that the sanctions regime is about to crumble? As the panel of experts’ report notes in its introduction, “The Security Council, in a new resolution, will endorse a final agreement and will have to address existing Security Council sanctions which have been at the center of recent negotiations.” The international community expects that deal to dismantle sanctions. After the U.S. Ambassador at the UN duly raises her hand, who will believe the Obama administration’s snap-back rhetoric?

Just this week, strong evidence emerged to prove this point. In February 2014, the U.S. Treasury shut down an Iranian network based in Tbilisi, Georgia, whose main asset, a local bank, aided Iran in evading financial sanctions. Under U.S. pressure, Georgian authorities wrested ownership of the bank away from the Iranians months before. Ever since then, the Iranians have been trying to recover their assets. But as Kira Zalan revealed in a scoop at, they have mounted a legal challenge, which their lawyer Giorgi Usupashvili, the brother of David Usupashvili, the Speaker of Georgia’s parliament, filed in June 2014. Either Washington is no longer exerting pressure or its pressure is no longer effective. Either way, it is clear that governments once beholden to the U.S. Treasury Department’s injunctions no longer believe American threats.

Major business corporations have also taken notice of Washington’s increasing reluctance to implement sanctions. They have taken the full measure of this administration’s readiness to sacrifice a diplomatic prize for the sake of principle and concluded that the prize will override the principle. It is true that the dam has not breached yet. But there are significant cracks already. No major company has openly challenged U.S. sanctions, but the stampede will begin the day after Iran and the world powers sign their deal.

Economic indicators clearly contradict the White House line that “Tehran is not open for business.” Take trade with China, which is a partner in the nuclear talks. Iran’s exports to China increased by 28 percent following the interim nuclear deal period, while imports rose by 37 percent. And don’t forget about Russia, which is also a party to the negotiations. Earlier this month, Moscow and Tehran began implementing a deal to buy Iranian oil in exchange for Russian commodities such as food. It is reportedly worth $20 billion. Russia—itself an oil producer—has likely acceded to this arrangement in order to help Iran sell more oil than is currently permitted under the interim agreement. The White House expressed concern when it got wind of the deal in January of last year, and indicated that it might trigger sanctions. Yet the deal is on, and it is unfathomable that Washington will sanction Russia over grain so close to the end of final status negotiations on Iran’s nuclear program. Then again, Russia also slapped the Obama administration when it revived a deal to sell Iran the powerful S-300 air defense system, and the administration turned the other cheek.

Russia and China may not be the best examples, given their traditional role as Iran’s trade partners. Besides, Iran is far more interested in regaining access to Western banking and technology, neither of which Moscow or Beijing can really offer. Take Germany, then, which is not just a U.S. negotiating partner, but a key European and NATO ally. German exports to Iran jumped 30 percent in 2014. Iran has reportedly bought property in Berlin to open a trade bureau, which is expected to become operational this summer.

The South Pars natural gas field in the Persian Gulf. International investment in Iran's energy industry is expected to skyrocket when sanctions are eased. Photo: Alireza824 / Wikimedia

The South Pars natural gas field in the Persian Gulf. International investment in Iran’s energy industry is expected to skyrocket when sanctions are eased. Photo: Alireza824 / Wikimedia

This upward trend is bound to soar after the deal is signed. Fear of repercussions is largely gone. The prospect of renewed ties is being actively explored. Since the interim deal was signed, the foreign ministers of Australia, Austria, Greece, Italy, Hungary, Latvia, Poland, Spain, and Sweden, among others, have all visited Tehran. They were joined by high-profile parliamentary and business delegations, chambers of commerce, and even The Elders, the NGO led by semi-retired foreign dignitaries such as Kofi Annan and Jimmy Carter. Great Britain is actively exploring the possibility of reopening its embassy after it was ransacked by an angry mob in November 2011.

Where diplomacy goes, business follows. The Financial Times reported that Royal Dutch Shell executives recently visited Tehran to discuss investment opportunities in Iran’s energy sector. Earlier this month, Iranian transport minister Abbas Akhundi visited the Paris air show, announcing his country’s readiness to spend $20 billion to modernize its commercial fleet. Considering how effective U.S. sanctions were in preventing Mahan Air from buying aircraft in May, it is hard to believe no one will sell come July.

Increasingly, it looks like the starting line in an Oklahoma land rush. When it’s high noon, it will be hard to stop the horses.

Ultimately, it matters less whether everyone wants to trade with the Ayatollahs than whether they believe Washington’s threats.

It is not that the Ayatollahs do not take U.S. sanctions seriously. They took them seriously enough to engage in genuine negotiations for the first time in years. It’s that, in general, they look at America and no longer see a threat. Their hatred of America was once balanced with a healthy dose of awe and respect for the pain it was both capable of and willing to inflict on its enemies. But in 2015, Tehran knows that a president who said “Assad must go” in 2011 can no longer be believed. The ayatollahs look at the president who threatened a military response to the use of chemical weapons in Syria and then blinked. What they see are empty threats.

So does the region. So do allies and enemies. They will treat the U.S. threat of snap-back sanctions with the same utter contempt.

Banner Photo: Bastian / flickr