For all these reasons, banks that specialize in trade finance, manage the financial banking of major infrastructure projects, and provide retail services in the region like Standard Chartered and HSBC have stayed clear of Iran. Former U.S. Treasury official and HSBC Chief Legal Officer Stuart Levey has stated that as long as the United States adopted a confrontational stance toward Iran, HSBC could not be convinced to do business with the country. Even French energy company Total, which attracted praise from Iranian Oil Minister Bijan Zanganeh as “forerunner” for signing a major natural gas development deal with Iran, has had to rely on smaller European banks for its financing needs in Iran.
Iranians still struggle to find international banks to support trade and investment and find only second and third tier options that may be less well capitalized, less secure and less efficient. Iranians and their international bankers are skittish about disclosing their relationships, afraid to attract negative attention and scrutiny even when they believe their dealings to be entirely legal. This arrangement is not conducive to transparency, confidence or enthusiastic economic growth. Indebted Iranian firms turn to Iranian banking where rates are as high as 25 percent and which the IMF described as need “urgent” reform. Slow repayment on those loans means mounting debts on Iranian banks’ books: $346.5 billion by March 2017. Condemned to organic growth and with no large foreign capital injections in sight, Iran’s economy will run on limited horsepower for the foreseeable future.
All these difficulties in reintegrating into the global financial systems refute the “windfall” argument presented by deal critics. Certainly, there have been “overnight” examples of reintegration. Giving Iranian banks access to SWIFT, the global banking communications system, was somewhat akin to the light-switch image of immediate results offered by deal critics. In truth, though, Iran will receive most of the relief gradually, subject to its financial overhaul and adherence to international banking and capital standards, and under constant evaluation by the international community.
In this process, the United States, as the pace setter on global standards and comptroller of the most powerful global currency, will continue to hold a great deal of leverage over Iran, even within the framework of the JCPOA.
Policy Lessons Going Forward
Critics’ inaccurate conclusions about the JCPOA’s economic effects for Iran have not only distorted the debate about Tehran’s adherence to the deal, they are also skewing the debate going forward about what kind of policy the United States should pursue to pressure Iran. Most importantly, these assumptions have inflated expectations of success for the reimposition of sanctions on Iran. By suggesting that the country has immensely profited from the lifting of sanctions, critics promote the impression that the United States can—again—immediately inflict serious damage on the Iranian economy by abandoning the JCPOA framework and reimposing sanctions. The muted impact of relief should make clear that any back-treading would also result in limited additional pain on Iran. Most worrisome, however, is the risk that the reimposition of sanctions on Iran will result in uneven implementation internationally weakening sanctions as a whole, one of the most innovative and effective tools of U.S. foreign policy over the past decade.
A reimposition would create a worst of all possible worlds outcome. The sectors where the United States can affect the most immediate unilateral change are also those that have experienced the least relief since the JCPOA. Thus, banks may unwind again some of their correspondent banking relationships, although, as noted above, they are still below their pre-sanctions levels and have been established with small institutions with more limited financing capabilities. Alternatively, some banks may decide that the back-and-forth nature of U.S. sanctions policy makes predictability impossible and create alternative banking and financial networks based around China or other countries unlikely to use compliance with U.S. foreign policy a prerequisite for transaction clearing services.
These policies carry serious risks for U.S. foreign policy over the medium- and long-terms. The reimposition of sanctions would make the United States a less trusted interlocutor during negotiations with Iran as well as with other countries currently facing sanctions, including Russia and Venezuela. U.S. sanctions programs in the future will lack credibility if those targeted do not believe that compliance with the terms of an agreement will be honored in good faith. If, despite the dispute resolution mechanisms enshrined in the JCPOA, the United States leaves the agreement, it will raise serious questions about U.S. credibility.
Even if the United States managed to maintain its status as a trusted interlocutor with Iran and others, the sanctions tool would suffer following U.S. reimposition on Iran. The threat to cut off rogue countries, and eventually reconnect them to the global financial system following policy change, is one of the strongest weapons in the U.S. sanctions playbook. The crippling of Iran’s—and to a lesser extent Russia’s—economy testifies to this power. However, if banks, after the Iran experience, determine that U.S. relief will not appear and decide not to reestablish links with formerly sanctioned countries going forward, U.S. policy leaders will no longer be able to offer sanctioned countries the “carrot” of reintegration in the course of negotiations.
Even more concerning, reimposition may make the “carrot” moot altogether. If enough banks decide to build alternative financial networks based around China, or elsewhere, the United States will experience a diminishment of the centrality of the U.S. financial system that powers sanctions’ success. Former U.S. Secretary of the Treasury Jack Lew warned of this risk in 2016 noting that if sanctions made the business environment “too complicated—or unpredictable, or if they excessively interfere[d] with the flow of funds worldwide,” transactions would completely avoid the United States, limiting U.S. sanctions’ effectiveness going forward. Each additional short-sighted use of sanctions by U.S. policymakers hastens this scenario.
In the areas where the United States requires international buy-in, U.S. leaders will face uncooperative foreign partners if they unilaterally reimpose sanctions. Because most trade between Iran and the United States has faced restrictions since the Iranian revolution in 1979 and has been outright banned since 1995, most of the enforcement of any new restrictions would necessarily rely on cooperative partners. The differences in trade relations with Iran between the United States and the European Union are large on both an absolute and a relative basis. EU-Iran trade in goods is more than sixty-times greater than U.S.-Iran trade. Furthermore, the United States and the European Union play massively different roles in putting pressure on the Iranian economy. Between 2011 and 2013, Europe decreased its trade in goods with Iran by almost €22 billion, a 78 percent fall. By comparison, U.S.-Iran trade grew by $76 million, a 32 percent increase over the same period. Such a disparity suggests that new sanctions to successfully pressure Iran will require cooperation from states with much closer relations with Tehran than the United States.
Without adequate buy-in, the United States could create a leaky, ineffective sanctions regime if it tried to impose new unilateral sanctions on Iran. If the United States reimposed sanctions on Iran’s energy industry, it would have to answer very difficult questions about the status of deals already struck between Iran and foreign companies. U.S. policymakers would face lobbying for carve-outs or waivers, and they would likely confront companies pushing ahead with projects regardless of the sanctions threat. If the United States granted any significant exceptions, it would then weaken the overall effectiveness of the program.
There is a precedent for such a stillborn sanctions efforts. In 1997, Total, Russian energy giant Gazprom, and Malaysia’s national energy company Petronas participated in a $2 billion deal in Iran’s South Pars field. The two national oil companies along with pressure from the European Union deterred the United States from aggressively enforcing the Iran and Libya Sanctions Act (ILSA), an early U.S. attempt to sanction the Iranian energy industry, and contributed to making the ILSA effort ineffectual overall. The current deals offer an even larger deterrent. Total, in addition to its new South Pars deal, has made Iran a part of its future success, a decision that will ensure a strong defense from France and the European Union. Additionally, Total’s current South Pars deal also includes China National Petroleum Corporation (CNPC), a national oil company that will serve as an even bigger counterweight to U.S. sanctions than its Russian or Malaysian counterparts did twenty years ago. Also, CNPC may be able to help finance the deal and shield Total from some exposure to the U.S. financial system and sanctions. These parallels between the failure of ILSA and the potential reimposition of sanctions in 2017 suggest that similarly any new economic measures may yield disappointing economic pressure on Iran.
The economic pressure on Iran of reimposed sanctions may be lackluster, but the reimposition’s negative effect on U.S. policymaking will be significant. If countries believe that they can avoid sanctions by splitting international partners, they will fear U.S. sanctions less. The sanctions on Iran that led to the JCPOA were as much a triumph of diplomacy as of financial and economic engineering. If the snapback by the United States results in pushback, it will make the coalition-building that enables the continued Russia sanctions regimes difficult.