An Economist’s Fix to the Iran Deal

June 10, 2018 Topic: Security Region: Middle East Tags: iranJCPOAoilSanctionsIran Deal

An Economist’s Fix to the Iran Deal

The new sanctions regime would give much less leeway for Iran to act like a rogue state.

In his speech at the Heritage Foundation, the U.S. Secretary of State Mike Pompeo set out clear conditions under which the United States would lift its sanctions against Iran. After the withdrawal from the Joint Comprehensive Plan of Action (JCPOA), the thrust of U.S. strategy seems to consist of building up the pressure of re-imposed sanctions to change Iran's behavior. It seems unlikely that will happen anytime soon. Fortunately, there is a better alternative, which does not require the United States to engage with Iran's regime directly but to strike a grand bargain with other permanent members of the UN Security Council (UNSC).

But first, here is what’s wrong with the 2015 ‘Iran Deal’. Once the JCPOA’s restrictions on uranium enrichment and deployment of advanced centrifuges expired, the crisis was bound to re-emerge in a radically worsened form. With advanced centrifuges, Iran would be able to re-enrich its stockpile of uranium to weapons-grade levels in no time, reaching the brink of a nuclear breakout. Moreover, as the world learned painfully in Syria, the agreement did nothing to keep Iran’s regional ambitions in check, nor did it limit the country’s ballistic missile program, which would provide the means of delivery for a future nuclear arsenal.

The United States is now restoring sanctions established by the Iran Sanctions Act of 1996 and expanded later, including by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. Those include a ban against almost any activities by American and non-U.S. persons who facilitate foreign business with Iran, by providing shipping services, insurance, opening lines of credit, and processing payments.

The re-imposition of sanctions has prompted a strong adverse reaction from Europe. The European Union (EU) is now reactivating a "blocking statute" that aims to shield EU businesses from U.S. sanctions. In addition, the EU is enacting a measure to involve EU governments indirectly transferring money to the Central Bank of Iran, so that any U.S. sanctions against the processing of payments would necessarily have to be enforced against sovereign European states. That is unfortunate since Europeans and Americans agree that a change in Iran's behavior, as outlined by Secretary Pompeo, is desirable. Here's how that agreement can be translated into a common transatlantic strategy.

The United States could offer to recommit to the JCPOA in exchange for the P5+1 support for a U.S.-advanced resolution to the UN Security Council (UNSC). That resolution would lift of the bulk of U.S. unilateral sanctions against Iran's economy and simultaneously set up a UN fund as the sole recipient of all proceeds of Iranian oil exports – call it the United Nations Fund for the Iranian Observance of International Law, or the OIL Fund.


The OIL Fund would have the following three characteristics.

First, there would be a limit on weekly repatriation of proceeds from Iran’s oil exports that would be set in advance on the principle of revenue neutrality. The repatriation rate would offset the estimated positive effect of the lifting of U.S. sanctions on the income of Iran’s government from domestic sources, resulting from an upward jump in long-term economic growth rates. As a result, the relief from the sanctions would be felt by Iran’s economy at large, but not by Iran’s government. The remaining proceeds would be invested in the international capital markets, following investment guidelines used by sovereign wealth funds.

Second, the OIL Fund would act as a deterrent mechanism. The UNSC would claim the power to suspend the repatriation of funds whenever and for as long as Iran refused to comply with any of its resolutions – past or future – including those concerning Iran's missile program, which has been hitherto unenforceable.

Third, the OIL Fund would change incentives facing Iran's government. The initially set repatriation rates could be increased by the UNSC, with the consent of the United States. That would provide the U.S. government with an additional mechanism to extract concessions from Iran on nuclear and non-nuclear issues through bilateral negotiations. In the future, the rising financial burden of Iran's unfunded liabilities would provide a strong motivating force to meet U.S. demands in exchange for additional funds.

Although the Security Council would have the power to shut the OIL Fund down, its existence would be open-ended, unlike the JCPOA. Of course, as soon as Iran became a reliable, "normal" country and not a source of regional instability and aggressive revisionism, the need for the OIL Fund would disappear.

Until then, the new regime would be de facto permanent without the need for renegotiating the JCPOA, since in the aftermath of the sunset of any JCPOA provisions, if Iran came closer than the current twelve months to a nuclear breakout, the UNSC could simply pass a resolution and require Iran to change course. Under the threat of a sharp punishment against Iran's oil-dependent treasury, Iran would practically have no choice but to comply. The same new deterrent could be used to change Iran's behavior on any issue – nuclear-related or not. Symmetrically, the possibility of increasing the repatriation rate as a reward for Iran's constructive behavior would act as a lever that was absent in the case of the ‘Iran Deal', which provided all sanctions relief ex-ante.