Issue 86 | May 2019 | Iran's Reckless Ultimatum

Iran’s reckless ultimatum

Iran has seen a raw deal from the JCPOA. After strict compliance in its nuclear programme, the deal has not delivered the financial and economic reintegration it promised. On the contrary, the obstacles facing Iranian businesses are returning to the levels of the pre-JCPOA peak. But even without US involvement, the deal still represents the best medium- to long- term solution for Iran. It would be foolish to burn the international goodwill Iran has earned by reneging on its terms.

Tehran’s decision to erode its commitment to the JCPOA has come as a great disappointment to the Iranian business community. There is sympathy for the government’s position from many in Iran. The country’s continued compliance with the terms of the nuclear deal has been met with antagonism by the US Trump administration and a painfully slow, albeit supportive, response from the European Union. But despite the sense of unfairness, businesses are concerned about the implications of Iran’s new posture. Already in the midst of a deep recession, non-compliance with the terms of the JCPOA almost certainly means further economic isolation to come. The Iranian rial has lost more than 60 percent of its value in the past year – even worse in the black market, whilst food prices have jumped 85 percent. Meanwhile government debt has soared, projected to reach about 17 percent of GDP by 2020, and the economy is predicted to shrink by 6 percent this year.

The Rouhani government’s move is calculated to pressurise Europe to stand up to US economic pressure, and fast. The announcement closely followed the recent US decision to ratchet up its sanctions measures. The US administration announced a removal of the oil sanctions waivers it had granted to Iran’s biggest buyers, as well as new sanctions targeting Iran’s iron, steel, aluminium and copper exports – the country’s biggest non-oil export category. President Rouhani criticised the remaining parties to the JCPOA deal (the UK, France, Germany, China and Russia) for not doing enough to keep up their end of the bargain.

With a 60-day ultimatum, expiring on the 4^th July, Iran has demanded the EU3 implement its JCPOA commitments, particularly in the banking and oil sectors. Various Iranian spokespeople have signalled that they are looking for significant European measures to deliver the economic gains implied by the JCPOA deal. The Iranian Ambassador to the UK, Hamid Baeidinejad, said Europe should help Iran facilitate higher oil exports and transfer its revenues back to Iranian banks.

If Europe fails to meet these demands, Iran will begin to unwind its commitments to the JCPOA. The government has already announced a suspension of its sales of surplus enriched uranium and heavy water for the duration of the 60 day period, the stockpiles of which will gradually accumulate to breach the limits agreed by the nuclear deal. If that happens, it could permanently undermine the goodwill that European signatories to the JCPOA have tried so hard to maintain since the US withdrew from the deal in 2018. It will certainly diminish the appetite of European businesses to take risks in the Iranian market.

The Rouhani administration and the Iranian population have every right to feel let down by the JCPOA. Iran has verifiably complied with the terms of the agreement, curbing the scope of its nuclear programme, but it has not seen the economic integration and financial inclusion that were promised in return. The persuasiveness of US sanctions enforcement teams caught many by surprise. From business to business, country to country, the US authorities have been effective in dissuading large corporations from doing business with Iran, with the threat of losing access to the US dollar and the US market. European governments promised to do everything they could to keep the trade and financial channels with Iran open. To their credit, the EU has consistently spoken out against US measures and has successfully put the complex infrastructure in place to facilitate transactions with Iranian entities for legitimate trade. But progress has been glacial whilst the Iranian economy has deteriorated. The mechanism is designed to facilitate trade in legitimate humanitarian products in the first instance, so will not support high value oil transactions for a while, yet, and no European companies have come forward thus far to engage with it. Iranian businesses are still waiting for tangible signs of business and financial opportunities in Europe.

But Tehran’s demands are unrealistic and risk derailing efforts by non-US JCPOA signatories to play the longer game for Iran’s peaceful reintegration into the global economy. The EU is passionately in favour of maintaining the agreement, but the truth is its room for manoeuvre in the current legal context is limited. There is a common misconception in Iran of the control EU governments have over European enterprises. EU governments cannot simply compel private enterprises to do business with Iranian partners.  Those decisions will always be taken from a private perspective, based on the balance of risk and reward. Iran breaching the terms of the JCPOA would only damage that equation further.

It is undoubtedly flawed and inadequate, but the JCPOA and the EU’s INSTEX payment vehicle remain Iran’s best option for medium- to long-term economic recovery. As the UK Foreign Minister described the JCPOA, it is “the only game in town” for Iran. If the Iranian government can find the political space to maintain its compliance with the nuclear conditions, it will avert the rising risk of conflict and isolation that non-compliance could bring. Iran needs to buy more time. A US election in little more than 18 months could significantly shift the international landscape. In the meantime, Iran should leverage its relationship with other willing trade partners that are relatively resilient to US sanctions. China, for example, with its escalating trade dispute with the US, is in no mood for cooperation with US measures and its heavy reliance on Iranian oil means it will remain a vital strategic trading partner. Iran is experienced in selling large volumes of oil and moving money, despite international pressures. It would be far smarter and more responsible to do that with the cooperation of powerful international partners than to take steps to cut itself off from the world on the 4^th July.