Détente Under Threat: The new administration and the Iran nuclear deal

Tehran skyline – Photo © Alexander Mazurkevich/ Shutterstock.com

SUMMARY

The new U.S. president could renege on the Iranian nuclear deal. This article assesses the likelihood of a unilateral U.S. withdrawal from the deal and the challenges this would pose to overseas business interests.

INTRODUCTION

On 20 January 2017 former businessman Donald Trump formally became president of the United States after a bitterly fought electoral season. Trump ran a nationalistic campaign largely based around the theme of reasserting U.S. power abroad. During campaigning, Trump consistently and publicly labelled the Joint Comprehensive Plan of Action (JCPOA), under which Iran gave up its alleged ambitions for a nuclear weapons programme in exchange for reintegration into the global economy, as the ‘worst deal ever negotiated’.

The JCPOA, signed by the five members of the United Nations Security Council (UNSC) and Germany, was implemented on 16 January 2016. The JCPOA sets out Iranian commitments to eliminate its stockpile of highly enriched uranium, a necessary component in the production of nuclear weapons. Iran is now restricted to producing small amounts of low-enriched uranium, which is appropriate for powering civil reactors, with a maximum permitted stockpile of 300kg of the material.

Under the deal, Iran will submit to an inspection regime overseen by the International Atomic Energy Agency (IAEA), the body which regulates national nuclear programmes. Iran to date has been compliant with the terms of the JCPOA, for example by transferring its excess heavy water to Oman in November 2016. Under JCPOA Iran is only permitted a specific amount of heavy water used in nuclear reactors and required to remove any additional amounts.

In return the UNSC, European Union and U.S. eliminated sanctions relating to Iran’s nuclear programme. The U.S. nonetheless currently maintains several unilateral sanctions against Iran, primarily concentrated against missile technology capability and the country’s parallel military force, the Islamic Revolutionary Guard Corps (IRGC). The U.S. Department of State maintains a list of continuing sanctions under the Iran Sanctions Act.

LIKELIHOOD OF WITHDRAWAL

The current U.S. government has not been in office long enough to reveal its policy direction, which in turn complicates analyses of the cabinet’s political positions. However, confirmation hearings of Trump’s new government team before the U.S. Senate give useful and revealing insights into their political views. For example, Rex Tillerson, the current nominee for U.S. Secretary of State, called for a ‘review’ of JCPOA, but did not advocate unilateral withdrawal from the deal. James Mattis, the new secretary of defence, has said that JCPOA, despite being an ‘imperfect arms control agreement’, was an example of the U.S. ‘giv[ing] her word’ and that the Trump administration was bound to ‘live up to’ the provisions of the deal. The nominated director of the U.S.’s primary foreign intelligence service, the Central Intelligence Agency, stated during his own confirmation hearing that the Trump government must be ‘rigorously fair and objective in assessing’ the JCPOA.

[D]espite statements of support from JCPOA from high-level political figures, U.S. presidents have broad executive authority over foreign policy, and Trump has demonstrated a willingness to avoid specialist advice and act independently

A2 records that these individuals have in the past offered contradictory statements regarding the JCPOA, including independently describing Iran as a strategic threat to the U.S. In April 2015, for example, Mattis told an international affairs think tank that the ‘Iranian regime’ was a threat to regional ‘stability and peace’. Nonetheless, given the dearth of detailed policy from the Trump administration, confirmation statements present an excellent opportunity to analyse their policy positions and their political approach to the Iran deal.

However, despite statements of support from JCPOA from high-level political figures, U.S. presidents have broad executive authority over foreign policy, and Trump has demonstrated a willingness to avoid specialist advice and act independently. Internal opposition from his own senior government team will not necessarily prevent him from unilaterally withdrawing the U.S. from the JCPOA.

The president will have broad political support for such a position. For example, the U.S. legislature on 1 December 2016 passed a law extending current sanctions on Iran for another 10 years. The Senate passed the law 99-0 and the lower house by 419-1. This is a major indicator that Trump, even if he allowed the U.S. legislature to debate the issues rather than utilised his executive powers, would almost certainly be able to quickly remove the U.S. from the deal. As a result A2 assesses the chances of a U.S. unilateral withdrawal from JCPOA as high within the one-year outlook.

BUSINESS RISKS

Existing sanctions

Investment in Iran is complicated for U.S.-based businesses. Companies are, for example, prevented from using the U.S. financial and banking system for Iran-related payments. Further, several entities and individuals in Iran, primarily those linked to the IRGC, remain under U.S. sanctions. While other nations and international actors have more permissive regulatory regimes, there remain several limitations, such as the E.U.’s continuing arms embargo on Iran. A2’s previous report on Iran expands upon the financial and legal consequences of breaching these sanctions. Companies considering creating or increasing commercial relationships in Iran are strongly advised to undertake thorough due diligence on local partners to ensure they are not designated entities on pre-existing sanctions lists. The challenges in doing so are extensive and are examined in the report linked above.

New sanctions

If Trump withdraws from JCPOA it is likely that U.S. unilateral sanctions will be rapidly reapplied by his administration. These sanctions were extremely restrictive, amounting to almost a full economic blockade of Iran. The U.S., for example, banned Iranian-origin imports and prevented U.S. companies from doing virtually any business with Iran. If future sanctions are reinstated at comparable levels, U.S. companies would be effectively ‘locked out’ of Iranian markets.

This would pose major risks to such companies as U.S.-based aerospace manufacturer Boeing, which has already signed contracts with Iran. If the U.S. reinstitutes sanctions on Iran, companies that have already made commercial deals with the regime, such as Boeing, could find themselves torn between either breaching legal contracts or facing regulatory reprisals within the U.S. If companies choose the former, Iran could seek legal recourse through international and business arbitration mechanisms. If the latter, companies could find themselves at odds with the U.S. administration and, in all likelihood, their shareholders. Further strains could be added if U.S. companies in such a predicament sought to mitigate their losses by seeking compensation from Washington.

Uncertainty

Sanctions relief has led to increased foreign direct investment (FDI) in Iran, which has risen from a net inflow of around USD2 billion in the entirety of 2015 to FDI of around USD9 billion in January-July 2016 alone. However, under the Trump administration commercial uncertainty is likely to substantially increase and stall full economic integration. The president has already demonstrated his willingness to take rapid unilateral action to disengage the U.S. from treaties and international agreements he considers unfair, as demonstrated by his 23 January executive order indicating the U.S.’s intention to leave the Trans-Pacific Partnership (TPP).

This has not entirely discouraged commercial interest in Iran however. In December 2016, the multinational oil company Royal Dutch Shell signed a provisional agreement with the National Iranian Oil Company (NIOC) that could potentially pave the way for investment in the country’s south-western Azadegan and Yadavaran oilfields. However, ability to withstand political pressure from the U.S. administration is atypical of most companies. Shell, as one of the world’s foremost energy companies, has the financial capacity and technical capabilities to create payment structures that circumvent potential U.S. sanctions, and the political influence to lobby for exemptions and caveats to ensure any sanctions permit their own operations. Boeing, which has similar substantial resources, will be more constrained given its position as a major defence contractor to the U.S. government. However, it is significant that Shell’s agreement with the NIOC is a memorandum of understanding rather than a fully fledged contract, suggesting the company remains concerned about fully committing to business ventures it might be unable to realise.

It is the smaller companies looking to enter the Iranian market in such areas as support services or specialist retailers which are at greater risk from the reimposition of sanctions as they lack the resources to resist political pressure from the U.S. or create alternative payment structures. Further, they are far more vulnerable to pressure from the White House or the U.S. government. Trump’s tendency to use social media to publicly criticise companies he perceives as acting against what he considers to be the best interests of the U.S. will also increase the concerns among small-to-medium enterprises over any effort to develop commercial relations with Iran.

Iranian backlash

Any attempt by the U.S. to modify or renege on the JCPOA will prompt a major political backlash in Iran. President Hassan Rouhani, who championed the deal, has publicly stated that the JCPOA cannot be amended. The president as essentially staked his political credibility on the deal, which was deeply unpopular amongst hard-line elements within the Iranian political and military establishment. If the U.S. attempts to unilaterally alter or end JCPOA it is likely that Tehran’s response will include hostile actions against U.S.-based or Western companies in Iran, regardless of the self-inflicted harm this would cause the country’s own economy. Such measures could include legislation preventing or complicating foreign commercial operations, political pressure to withdraw from Iran and even harassment and detention of foreign or local company staff by the security forces.

This is not a hypothetical risk. In 2011, the British embassy in Tehran was attacked by a mob that stormed the building and ransacked offices. The incident followed London’s decision to ban U.K.-domiciled financial institutions from doing business in Iran. While Iranian state media and officials blamed students for the incident, few doubted that the unrest was either orchestrated, or at the least tacitly authorised, by the Iranian government, given its ability to suppress popular dissent.

Similar events are probable in the event of a U.S. withdrawal from JCPOA and the introduction of a new sanctions regime. These would pose a major security risk to U.S or local employees and corporate property and assets. A2 advises managers to ensure contingency and evacuation plans are in place to immediately protect and evacuate staff if it became evident that security conditions were set to deteriorate.

Other preventative measures, such as strengthening physical access and the removal of sensitive documentation, should be assessed. However, A2 notes that any additional security measures should be strictly defensive, as any acts of defiance or response against protestors or more extreme attackers are likely to lead to severe reprisals from both the local civilian population and the Iranian security forces.

ASSESSMENT

Although the prospect of the U.S. reimposing full-scale sanctions complicates the investment climate, it does not necessarily preclude foreign commercial operations in Iran. In January 2017, the International Group of Protection & Indemnity Clubs (IGP&I), a combine of 13 underwriting associations that concentrate on marine insurance, announced that as of 20 February 2017 U.S.-domiciled reinsurers will be excluded from participation. This will allow IGP&I to provide comprehensive cover on Iranian cargoes while avoiding U.S. regulatory jurisdiction. This demonstrates that among some elements of the international business community the desire to develop commercial relations in Iran outweigh any potential risks emanating from the U.S.

In particular, companies with limited exposure to U.S. financial markets, such as businesses domiciled in Russia or China, will be able to develop commercial relations largely unimpeded by unilateral U.S. sanctions. Further, European states, while normally close allies of the U.S., are likely to consider any damage to relations with the U.S. is sufficiently offset by the commercial benefits of access to Iranian markets to maintain JCPOA. On 12 January 2017 French-based aerospace company Airbus’s first A321 airliner landed at Iran’s Mehrabad International Airport. This was the first of over 100 aircraft the national IranAir carrier had ordered from the company, which is also Boeing’s main commercial rival. The head of IranAir specifically thanked the French government for its co-operation in the deal, a useful indicator of European support for Iranian economic integration.

Another indication of European intentions to open commercial relations with Iran came in April 2016, when Italy’s then-prime minister Matteo Renzi visited Tehran with a large national and private business delegation. The Italian government signed major deals with Iran during the visit, including a memorandum of understanding over co-operation in natural gas infrastructure construction.

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