The future of US sanctions on Iran

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One of the top foreign policy priorities for the Biden administration is to strike a new nuclear deal with Iran. The administration got one step closer to reaching this goal at the beginning of April when indirect talks began between the two parties in Vienna to negotiate a return to the Obama-era deal (JCPOA, see box), which was scrapped by former President Trump in 2018. However, a number of issues stand in the way of a lasting accord between the two countries and the removal of US sanctions against Iran.

Indirect talks, mediated by two working groups set up by the EU and the other stakeholders in the accord, began in Vienna on 6 April. The talks are solely focused on a possible return to the old nuclear deal, agreed during the Obama presidency, and do not take into account new sanctions that have been imposed on Iran, nor do they address new concerns that have emerged since the collapse of the old deal.

The Nuclear Deal with Iran

The Joint Comprehensive Plan of Action (JCPOA), otherwise known as the Iran nuclear deal, was an agreement between Iran, the P5+1 (five permanent members of the UN Security Council – China, France, Russia, UK, US – and Germany), and the EU, which limited Iran’s nuclear program in exchange for the removal of sanctions against Iran. It was signed in Vienna in July 2015. Many of the provisions of the deal, including limitations on the enrichment of uranium, and UN inspection of Iran’s nuclear facilities, were given a 15-year term, and were due to expire in 2030.

Former US President, Donald Trump pulled the US out of the deal in 2018, and reapplied the harsh US sanctions regime against Iran.

A heavy US sanctions regime on Iran is currently in place, which includes pre-JCPOA sanctions as well as additional sanctions that were introduced by the Trump administration. The original deal included China, France, Russia, UK, Germany, and the EU, who are all involved in revived negotiations. The European countries have been particularly vocal in their support for a return to an accord as the reimposition of US sanctions against Iran has resulted in legal complications for numerous European companies after EU sanctions fell out of harmony with those applied by the US.

A return to the JCPOA and the scaling back of the sanctions regime would have significant consequences for businesses planning to engage with Iran or Iranian companies. However, it would not retract all of the sanctions applied during the Trump-era, nor would it guarantee future adherence to the deal. Therefore, sanctions compliance management is likely to stay in focus when trading with Iran in the foreseeable future.

The US-Iran sanctions saga

Former President Obama achieved one of his flagship foreign policy goals in 2015 with the signing of the Joint Comprehensive Plan of Action (JCPOA). However, President Trump then, unceremoniously, pulled the US out of the deal in 2018, and initiated his “maximum pressure” campaign against Iran.

In response, the Iranian government announced it would no longer feel obliged to stick to the limitations set out within the JCPOA, and has since backtracked on a number of the commitments it made within the deal, in particular, the stock-piling of low-enriched uranium and the renewal of enrichment activities. In January 2021, the Iranian government announced it had restarted enriching uranium to 20 percent purity. Then, in April 2021, once fresh negotiations had already begun, Iran announced that it would boost uranium enrichment to 60 percent purity, which would bring it much closer to the 90 percent purity required for nuclear weapons.

Positive signs over a new deal

Even before assuming the presidency, Joe Biden and his team repeatedly signalled their willingness to come to an arrangement with the Iranian government over a new nuclear deal. Since taking office, Biden then took a number of steps to ease the process, including the appointment of a number of ‘pro-deal’ figures that could assist with the deal – most notably, Robert Malley as US special envoy for Iran. Malley is an experienced advisor on the Middle East who takes a facts-based approach to the relationship between the US and Iran. Biden also appointed Anthony Blinken as secretary of state, and William Burns as director of the CIA, both of whom were involved in the 2015 deal with Iran. Additionally, the new administration walked back some of the elements of Trump’s “maximum pressure” campaign, such as the travel restrictions imposed on Iranian diplomats to the UN in New York.

Iran also showed some willingness for compromise. In February, it came to a last-minute deal with the International Atomic Energy Agency (IAEA) to allow parts of the snap inspections of its nuclear facilities to continue – the snap inspections were part of the former deal, and Iran said it would stop them after the US pulled out of the deal. Iran said that it would extend the IAEA inspections for three months, which may represent a window of opportunity for the deal to get done.

The initiation of indirect negotiations in Vienna was announced at the beginning of April, with the stipulation that the talks would only cover a possible return to conditions within JCPOA. Iran had said that it would require the removal of all ‘Trump-era’ sanctions to revive the old deal, but also stated that the top priority was the removal of oil sanctions and sanctions against the finance sector. What is important to consider here is that the original deal allowed the US to continue to impose sanctions on Iran for non-nuclear reasons, which Trump did on the grounds of “terrorism” and “human rights.”

By the end of the second round of talks in mid-April, the US presented Iran with a list of sanctions that it would be willing to remove and a list it would not. The sanctions were grouped into three categories: those which could be lifted; those that could not be lifted; and, those that would need further assessment before they knew if they could be lifted or not.

That said, the talks appear to be progressing well, with the Iranian President, Hassan Rouhani, announcing on 20 April that 60-70 percent of the negotiations have been completed. In addition, a third working group has now been agreed to focus on the practical steps needed to restore the former accord.

Since the start of the talks, Iran said that the aim was to reach an agreement within two months, which would fit a convenient timeframe for the current president, as presidential elections are due to take place in June 2021. With all indications suggesting that a more conservative government is likely to be elected, the current government wants to have a deal in place before that might happen, so that a more hard-line government could not scupper negotiations.

The US’ wider agenda

As the two parties come closer to a return to the old deal, it is important to keep in consideration the US’ wider agenda in regards to Iran, and how this could impact the potential deal in the future.

Much of the talk before the negotiations began was about the US’ priorities for a new nuclear deal – not a return to the old deal. These included: extending the timeframe and scope of the original accord; significantly limiting Iran’s ballistic missile program; and, reducing Iran’s interference in regional affairs, in particular, ceasing its support for militias in the Middle East.

In regards Iran’s ballistic missile program, the main aim is to block Iran from developing intercontinental ballistic missiles (ICBM). Reports out of the UN in February stated that there has been cooperation between North Korea and Iran over its missile development program. North Korea could potentially assist Iran in developing ICBM’s. The US is likely to demand that this cooperation be stopped. An analyst in the media at the time noted that Iran will never completely cease its missile development programs, but that it could agree to limiting its missile range, thus cancelling ICBM development, and to dropping from its arsenal missiles that could carry nuclear warheads.

As far as Iranian support for regional militias, the Islamic Republic considers itself to be a significant actor in regional geopolitics. It even stated that no issue in the region can be resolved without Iran’s involvement. It’s the nature of that involvement that could play a role in future negotiations.

On the Iranian side, there is little appetite to deviate from the original deal. Trump applied extreme pressure to Iran, yet the country did not crumble, and might consider the last couple of years proof that the country can survive wide-reaching US sanctions, albeit at an economic cost. Therefore, if there is a return to the old deal, it is unlikely that Iran will be open to adaptations in the future.

An issue for the Iranians in regards the current negotiations is a lack of trust. The US pulled out of the former agreement after just three years, which undermined Iran’s faith that the US will keep its end of the bargain in any future dealings. Iran will be looking for assurances from the US that it will not pull out of the deal again in the future. However, with wider foreign policy aims that the US has in regards Iran, it is feasible that the US will try to renegotiate the deal in the future.

The role of sanctions

The current US sanctions against Iran are substantial and wide-reaching. They are applied to a significant portion of the Iranian economy and can result in heavy fines and reputational damage for any entity or individual caught in violation of the sanctions.

Between the direct sanctions (US companies and citizens) and the secondary sanctions (all companies that want to do business in the US) they cover any persons or entities that knowingly engage in transactions or commercial activities with any of the persons or entities covered within the sanctions’ regime, therefore, detracting any foreign investors or businesses from engaging with a major portion of the Iranian economy.

One of Trump’s final acts as president was to increase the sanctions coverage of Iran, first in November 2020, then in January 2021. As part of this extension, three Iranian charities, Bonyad Mostazafan, the Execution of Imam Khomeini’s Order (EIKO) and Astan Quds Razavi (AQR), were added to the US Department of the Treasury’s Office of Foreign Assets Control’s (OFAC) List of Specially Designated Nationals. This added a new dimension to sanctions due diligence requirements in Iran, as charities had previously been exempt.

There were suggestions that the enforcement of US sanctions against Iran would relax once Biden assumed the presidency. One Iranian oil trader said in February that there has been new business since Biden took office, as companies are no longer scared of sanctions. However, the US stated that it will continue to strictly enforce the sanctions, publicly threatening China with targeting sanctions violations in March after it was revealed that China had increased its oil imports from Iran. It is likely that the US will be as tough as ever in regards the sanctions to keep its leverage in the negotiations with Iran.

Another key topic is the EU angle to the sanctions. The EU has imposed distinctive sanctions from the US, but many EU companies also fall within the remit of US sanctions through the secondary sanctions stipulation. EU and US sanctions are usually somewhat harmonious; however, the EU fell out of step with the US sanctions on Iran after the US pulled out of the JCPOA. In addition, the EU has updated a regulation which aims to protect it from the extra-territorial application of third country laws. The regulation is known as the “blocking statute” and prohibits EU countries from following US secondary sanctions. Companies can apply for a waiver from the EU on the blocking statute, but it has proved to be very difficult to get waivers authorized.

In 2019, the EU created the Instrument in Support of Trade Exchanges (INSTEX) as a mechanism to revive foreign trade activities with Iran in the face of US sanctions. However, it has not been a widely-used or accessible tool, with the first transaction only taking place on INSTEX in March 2020, and lots of trades still stuck in the INSTEX pipeline.

Instrument in Support of Trade Exchanges (INSTEX)

 INSTEX acts as a clearing house to process the exchange of goods between Iranian and non-Iranian companies without direct transnational financial transactions, as a means to circumvent US sanctions. It was founded by the E3 (UK, France, and Germany) in 2019, and has since been joined by a large group of EU member states, as well as Norway. It was devised by the E3 in conjuncture with INSTEX’s Iranian counterpart STFI, which is the mirror company with which INSTEX completes the trades.

INSTEX trades for non-Iranian companies are restricted to humanitarian aid, medicines, medical products and agricultural goods.

Continued necessity for due diligence

Sanctions regimes remain in place against Iran, and, if anything, they have become even more complex. It takes expert analysis to understand all of the legal facets involved and to be sure that adequate sanctions due diligence has been performed. Not least, all of the applicable sanctions lists must be checked against all possible subjects, and an understanding of which jurisdictions are applicable to those lists must be gained.

Breaches of US sanctions tend to have wide-reaching consequences, as the US is serious about enforcing its sanctions regime, plus, it has no problem naming and shaming entities in violation of its sanctions. The current political manoeuvring by the US and Iran suggests that it is possible, if not likely, that US sanctions against Iran will change over the course of the next year, as a deal would be predicate on the peeling back of sanctions. However, this will not remove the need for due diligence and risk analysis, as a number of US sanctions are sure to remain against Iran regardless the result of the current negotiations, plus, future changes are likely due to the US’ wider foreign policy agenda.

If the two parties do agree a return to the former accord, there will be a rush of activity and opportunities for business with the country. Creating relative stability with a deal in place could go a long way to building workable business relationships.

Iran remains an economy with huge potential for growth. Quick movers to the Iranian market could benefit from the opportunities, whilst still facing the risk to see their investments become untenable should sanctions be reimposed. A measured approach to the situation seems like the wisest option, taking time to watch how the Biden administration interacts with the Iranian government, while keeping an eye on political developments within each country, and how such developments might impact on future business opportunities.

Sam Pothecary, Senior Analyst at Berlin Risk Advisory