The Trump administration seems poised to scuttle the Iran nuclear agreement, the Joint Comprehensive Plan of Agreement (JCPOA). If it does, this decision will be a triumph for the deal’s critics, who have aggressively undersold the JCPOA’s achievements in limiting the country’s nuclear program and oversold the economic relief it gave Iran. Indeed, the discrepancy between what critics have said and what actually occurred should be a warning that assumptions circulated in the press about the economic benefits for Iran associated with the deal, and the supposed power that new unilateral U.S. sanctions could have on Iran, may be more political than empirical. American policymakers should ensure that these wrong assumptions do not inform U.S. foreign policy going forward.

JCPOA critics have emphasized that Iran was receiving too much in return for a deal that did not permanently eradicate Iran’s enrichment plans or address the country’s support for terrorism or its missile program. Tehran, critics argued, would benefit upfront from suspending its nuclear program while the sanctioning countries would lose their ability to keep pressuring it for its other infractions. Iran did garner limited international political value from the deal in demonstrating itself reasonable enough to enter into a serious, tightly-monitored, international agreement. But the upfront economic benefits—the so-called “windfall”—from unfreezing certain Iranian assets fell short of expectations while the country’s gains from reintegration into the global financial system have been gradual at best.

Post-Sanctions Relief

Among critics of the JCPOA, the unfreezing of Iranian assets held in overseas banks as a result of the deal gained an exalted status. Much commentary touted $150 billion in cash that Iran could access immediately. Critics speculated about how much Iran would immediately channel toward nefarious activities including ballistic missile procurement and funding of Hezbollah and Shia proxy militias in Iraq and Syria. However, the truth proved more modest. Official U.S. sources gave a range of $100 to $125 billion in frozen assets overseas. Within this range, though, only about $50 billion constituted liquid assets.

Even these lower numbers are too generous. Iran did not immediately gain access to the entirety of the frozen money following the implementation of the JCPOA. Much of that money—nearly $60 billion—was owed to overseas creditors, like China. The remaining approximately $55 billion needs to be put in context. Certainly, funding low-intensity conflict can be inexpensive. But a missile program, funding the Iranian military and its Islamic Revolutionary Guard Corps are not. Iran’s total declared military budget is $14 billion.

Furthermore, military expenditure is just one aspect of Iran’s overall budget picture. Emerging from years of crippling sanctions, the country requires expensive infrastructure and reconstruction needs—an estimated $100 billion per year between 2015 and 2025. Iran also has had no choice but to use its newly accessed funds to defend its currency and manage its trade balance to keep commerce flowing, especially as sanctions-related uncertainty has continued through 2016 into 2017. The official exchange rate has swung sharply—particularly following the election of Donald Trump—and access to finance and inflation are still identified by economic analysts as the two top concerns for the economy going forward.

These nonmilitary expenditures are a necessity. Spending money on rebuilding the economy, defending the currency, and expanding trade, jobs and investment is a fundamental priority for the government. President Hassan Rouhani was elected with a popular mandate to deliver in these areas, and while he appears to be doing so, much remains to be done. Iran saw a 64 percent increase in foreign direct investment (FDI) inflows in 2016. Inflation, which stood at 40 percent when Rouhani took office in 2013, fell to single digits although it has recently inched back up back up to over 10 percent. Labor force participation has also increased under Rouhani—a reason for optimism—although the country’s unemployment rate concurrently reached a three-year high (12.7 percent) during the second quarter of 2016. The $55 billion, plus the $3.37 billion dollars of FDI inflow for 2016, still falls well short of the projected figure of $100 billion a year solely in new infrastructure needed to help jumpstart the Iranian economy. As a whole, these mixed to positive indicators suggest the little leeway Iranian leaders have to focus solely on military expenditures as long as the recovery remains so tenuous.

Iran and Global Banking

The partial return of frozen assets is also only one part of the “windfall” argument. Deal critics—and hopeful Iranians—also expected Tehran to profit greatly from its re-entry into the global financial system. After U.S. and EU sanctions had effectively severed the connection between Iran and the world markets, including the barring of dollar-denominated transactions by revoking the U-Turn transaction loophole in 2008, the benefits from sanctions relief, they hoped, would go a long way to restoring the productivity of the Iranian economy. Instead, remaining sanctions and continued prohibitions on use of the dollar, combined with domestic economic problems, have limited the scope of the relief. These limitations belie the claim that Iran got an immediate and irreversible economic benefit from the U.S. decision to sign the deal.

Iran’s relationship with the Financial Action Task Force (FATF), the global standard setting organization for anti-money laundering and counterterrorist finance, shows how the combination of domestic issues and international pressure has kept the heat on Tehran. The country, two years after the deal, remains on FATF’s “blacklist” along with North Korea, as a result of Iran’s lack of transparency and continued funding of terrorism. While FATF has suspended some draconian measures on Iran (although keeping it on the blacklist), banks are still embracing “wait and see” approach toward reengagement with Tehran, and the blacklisting continues to serve as a strong deterrent against reestablishing links. This gradual FATF process points to the reality of a return to global financial networks that is far slower and more fraught than suggested by deal critics who have focused on a “windfall.”

The numbers bear out the story of Iran’s partial reintegration into the global financial system. In 2006, Iran had correspondent banking relationships with 633 international banks. By 2014, the number had declined to fifty. At the end of 2016, while the trend was positive, there were still only 238. As of March 20, 2017, there were reportedly only about 704 relationships with 249 foreign banks. While an increase, it is still far below what would be expected of a country with the size of Iran’s economy. By way of comparison, Panama, a country whose GDP was almost seven times smaller than Iran’s in 2016, had about 463 correspondent banking relationships between 2015 and 2016. Correspondent banking relationships are key to reintegrating into the global financial system because they facilitate the global transfer of money and provide cross-border services like wire transfers and letters of credit. Even more importantly, none of the relationships Iran had reestablished included large international institutions. Relationships with large institutions are fundamental because they have the large financing capacity necessary to foster trade and investment, rather than offering smaller-scale financing and personal banking services.

The chilling effect on trade of Iran’s partial reengagement with the global financial system is clear. While total trade in goods between the European Union and Iran in 2016 was more than double the amount at its low point in 2013, it was only 55 percent of the average bilateral trade between 2006 and 2011.

Activity in the oil sector has obscured Iran’s sustained poor macroeconomic reality. Production rebounded in 2016 to 3.7 million barrels per day, a 17 percent increase over the 2014 low, but still below 2012 levels. Petroleum exports increased almost 80 percent between 2015 and 2016, although, due to the global decline in oil prices, revenues from exports increased only by 51 percent.

Because of the dynamism in the energy sector, a headline GDP growth figure of 7.4 percent in the first half of 2016–2017 obscured the fact that only 0.9 percent was attributable to non-oil sector activity. The IMF has pinned this lackluster growth outside of the hydrocarbon sector on both structural weaknesses, such as the outsized and intrusive role of the state and excessive red tape, as well as lack of access to finance dictated in part by the absence of large international financial institutions in the Iranian economy.

Individual decisions on whether to reengage with Iran by some of the largest international players point to the difficulties of conducting business with Tehran. In March 2017, the Bank of England did not grant Iranian banks special clearing accounts that could have improved their ability to make and receive payments in pounds. Internationally, large banks have refrained from providing services to Iranian firms out of fear of losing access to the U.S. financial system for inadvertently violating U.S. sanctions linked to Iran’s support of terrorism, human rights violations, and missile program. After all, any upside from offering services to Iranian firms pales next to the downside risks for big financial institutions from being barred from using dollars or participating in the U.S. financial system as a result of violating U.S. sanctions. Large banks have also balked at participating in deals in Iran. Banks are worried about following the law, a concern driven home by the memory of major fines, as well as the continued requirements of deferred prosecution agreements (DPAs). DPAs reached by international banks with U.S. prosecutors impose expensive internal monitoring requirements as punishment for past sanctions infractions, limit banks’ scope of action in certain countries, and contain large penalties for failure to comply.

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.

Sanctions can be a powerful tool for U.S. foreign policy goals, but only if the programs are carefully tailored to the economic circumstances of the target, offer a series of benefits over time in exchange for verifiable “good” behavior, and are viewed as credible by U.S. allies and partners.

Erroneous expectations of sanctions relief skewed the debate around the JCPOA when it was first agreed, and threatens to serve as the basis for a serious policy mistake for the United States in its Iran policy now. This policy mistake could in the future deprive U.S. policymakers of sanctions pressure, one of the best foreign policy tools at their disposal.

Bhatiya is a Research Associate and Saravalle is a Researcher for the Energy, Economics, and Security Program at the Center for a New American Security

Edoardo Saravalle is a Researcher at the Energy, Economics, & Security Program at the Center for a New American Security.

Image: U.S. President Donald Trump signs an executive order to impose tighter vetting of travelers entering the United States, at the Pentagon in Washington, U.S., January 27, 2017. The executive order signed by Trump imposes a four-month travel ban on refugees entering the United States and a 90-day hold on travelers from Syria, Iran and five other Muslim-majority countries. Picture taken January 27, 2017. REUTERS/Carlos Barria

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