US sanctions on Iran
On 24 April, US President Donald Trump suggested that he is open to a proposal by the French President Emmanuel Macron on a 'new deal' with the US on Iran, which preserves the Iran nuclear agreement (Joint Comprehensive Plan of Action - JCPOA). However, following this comment, French President Emmanuel Macron stated his opinion on 25 April that the US will likely pull out of the JCPOA.
- Iran's regional successes at the expense of the US and its allies are driving the US assessment that the US must reverse course and more aggressively confront Iran. But the US has few politically acceptable options in compelling Iran to make concessions outside resorting to sanctions targeting Iran's major revenue sources, currently waived under the JCPOA.
- The US is increasingly likely to introduce sanctions on Iran affecting trade and investment in Iran's energy, financial, petrochemical, and automotive sectors to pressure the Islamic Republic to redirect its resources internally.
- Reaching a 'new' agreement with Iran will likely prove difficult, with the overall objective likely to shift toward weakening and destabilizing Iran internally, particularly given several ongoing internal stressors, with the eventual goal of regime change without reliance on major US military action.
Iran's ongoing regional political and military gains in Iraq, Lebanon, Syria, and Yemen at the expense of US interests and allies are forcing the US to pursue a policy of containing and eventually reversing Iran's gains. This is likely to be a significant factor in determining US calculation of whether the costs of preserving the JCPOA, which constrains the US's ability to impose sanctions targeting Iran's strategic financial and energy sectors, particularly crude oil exports and Iran Central Bank, outweigh the JCPOA's main benefit, namely, temporarily scaling back Iran's nuclear program until between 2026 and 2031. Notably, then-Secretary of State designee Mike Pompeo said on 12 April, in a testimony to US Congress, that Iran will not 'race to a nuke' if the JCPOA collapsed, indicating the US assessment, correctly in our view, that the US can likely deter Iran from pursuing nuclear breakout via the credible threat of military action against nuclear sites, reducing the overall value of the JCPOA for the US.
Although Trump has expressed openness to the European proposal for addressing Trump's January ultimatum regarding the JCPOA via a 'new deal', such a course of action faces substantial hurdles; Iran's current political leadership has indicated that it is very unlikely to accept restrictions to its regional strategic depth by withdrawing support for its regional allies. Nor has Iran relayed that it is willing to accept significant restrictions on its ballistic missile program, which it considers as key to its national security given Iran's weak air force. Moreover, Iran's regional successes means that it lacks the motivation for offering concessions, and it remains unclear whether a re-imposition of US sanctions on Iran's financial and energy sectors would fundamentally or rapidly change this calculus. Nevertheless, the ongoing negotiations with European powers may well delay Trump's re-imposition of sanctions (or formally withdrawing from the JCPOA) until after 12 May 2018, not least given the assessment by at least a contingent of the Trump administration to prioritize the North Korea nuclear negotiations, with a summit planned for early June 2018. However, Macron said on 25 April that Trump will likely withdraw from the JCPOA due to domestic political constraints and the need to keep a campaign promise (see Iran: 17 January 2018: US president's statement on Iran sanctions waivers increases risk of snapback, undermining JCPOA's longevity).
JCPOA survival
New or reimposed US sanctions on Iran's energy, banking, petrochemicals, and automotive sectors would not necessarily collapse the JCPOA, even if they violate key US obligations. Technically, the JCPOA collapses if the US (or another permanent member of the UNSC) initiates a veto-proof resolution at the UNSC over Iranian "significant non-performance" on its JCPOA obligations. As such, the US is likely to reimpose its sanctions, leaving the burden of JCPOA collapse on follow-on Iranian actions.
For its part,we assess that Iran is likely to show restraint, despite Iranian statements to the contrary, broadly continuing its nuclear compliance to keep the JCPOA legally alive via UNSC Resolution 2231, in an effort to evaluate the level of sanctions relief Iran can sustain from the EU, China, and Russia, and given the legitimacy that the UNSC-endorsed JCPOA confers on Iran's nuclear ambitions. Moreover, UNSC Resolution 2231 removes UNSC restrictions on Iran's purchase of conventional weapons in 2020 and on its ballistic missile program in 2023. Statements by Iranian officials that Iran can enrich faster, or even withdraw from the Non-proliferation Treaty (NPT), should the US violate the JCPOA are likely intended to dissuade the US from sanctions imposition.
US objectives
Financial and energy sanctions on Iran, likely including restrictions on non-US transactions with Iran's Central Bank and the import of Iranian petroleum, would be intended to increase pressure on the Iranian government, constraining its ability to support proxies in various regional conflict theaters, and create new options for the US to weaken Iran internally. The economically driven anti-government protests since December 2017 in Iran's more religiously conservative areas (the Islamic Republic's core constituency) indicate broader dissatisfaction with the Islamic Republic's mismanagement of natural resources and the economy. Reflecting the severity of the problem, hundreds of farmers in Isfahan protested against the government's water distribution policies by disrupting Friday prayers on 16 March and turning their backs to the prayer leader (Imam). Moreover, the US likely assesses that the financial sanctions would be imposed on Iran at a moment of particular Iranian susceptibility to such sanctions, given the recent devaluation of Iran's rial currency since January 2018.
Together, these Iranian internal stressors would likely factor into a US policy of reimposing sanctions and exploiting any emerging opportunities to destabilize Iran further and weaken its proxies.
Outlook and implications
We asses that there is an increased likelihood that the US will reimpose or introduce new sanctions in the one-year outlook to target Iran's strategic sectors (energy, financial, petrochemical, and automotive), with Trump having the opportunity to begin doing so by refusing to renew JCPOA sanctions waivers on Iranian oil exports on 12 May 2018. Trump may well delay such a course of action pending ongoing negotiations with the European powers. Nevertheless, we assess that even in the unlikely event of a 'supplemental agreement' between the US and European powers, Iran is unlikely to comply with additional restrictions on its nuclear programme, nor offer concessions on its regional gains. This dynamic drives the overall increased likelihood of US sanctions on Iran in the one-year outlook, not least to increase US leverage vis-à-vis Iran.
The US likely calculates that financial pressure on the Iranian government, particularly at a time of notable internal unrest, increases US leverage on Iran by denying it much-needed financial resources, particularly given Iran's likely higher regional expenses. Should Iranian security forces adopt lethal measures against protesters, this would increase the likelihood of the US adopting a policy of supporting protesters, including via political support, provision of technology to evade Iranian state internet restrictions, and cyber attacks intended to expose elite corruption or additional escalatory cyber attacks targeting critical infrastructure, with the objective of weakening and eventually toppling the Islamic Republic.
Should Iran withdraw from the JCPOA and resume its nuclear program with the objective of narrowing its breakout window, currently extended to one-year under the JCPOA, this would significantly increase the risk of US/Israeli military action against Iranian nuclear sites. Iran resuming enrichment in the underground Fordow facility and/or expelling international inspectors would indicate Iran pursuing this latter course of action, intended to increase its leverage ahead of another round of negotiations. We assess, however, that Iran is currently likely to avoid such nuclear escalation, as well as other military escalatory measures in the region targeting the US directly, to avoid drawing US military action while Iran prioritizes expanding the political representation of its allies given the upcoming 12 May Iraqi elections and follow-on negotiations over government formation.