Why Iran Sanctions May Still Matter

For the P5+1 countries, failing to achieve a comprehensive agreement at this stage of the nuclear deal negotiations with Iran would be very regrettable. But even if that were to happen, diplomacy will not collapse, and talks are likely to continue — as they have several times in the past after diplomatic efforts failed to produce a satisfactory compromise with Iran. Which is why, if an agreement is not reached by the July 7 deadline, maintaining efficient sanctions will be as critical as ever to providing the P5+1 with the strong leverage they need to achieve the diplomatic outcomes they want.

In the event things do not go well this week, extreme alternatives, such as an Iranian breakout of its NPT obligations or a sudden escalation, to continuing the talks are improbable, even if they are sometimes entertained as fearmongering tactics to push both sides to show more flexibility. Should the P5+1 and Iran fail to resolve their lingering differences over implementing the framework reached in Lausanne in April, Iran would neither rush toward developing a nuclear weapon nor would the West suddenly turn toward a military option.

The first option would generate harsh consequences for Iran’s security, as it would likely force the United States to contemplate military strikes on Iran’s nuclear facilities. It would also contradict Tehran’s decade-long narrative that it has not, in fact, been attempting to build a nuclear weapon. The second option, on the other hand, would be unnecessary at this stage, as a range of nonmilitary options would still be available to adequately deal with a status quo. It would also be likely to have destabilizing effects in a region that is already experiencing so much upheaval.

More likely, both sides would continue to implement the confidence-building measures of the 2013 Joint Plan of Action — maintaining the current “freeze” of Iran’s program and the limited sanctions relief — and avoid unintended escalation. Talks could resume again in the fall. A good deal — one that would build on the Lausanne parameters and fully flesh out their technical implementation — could still be possible at a later stage.

And so, in this broader “what if” scenario, ensuring that sanctions continue to provide that strong incentive for Iran to finalize a deal would be key. Were less efficient sanctions to be employed, it would leave the West with greatly diminished leverage and limited chances to actually achieve a better deal later on. Maintaining an effective sanctions regime in the face of failed negotiations will be a challenge — but not an insurmountable one.

Obviously, sanctions won’t collapse in a day. Large Western and non-Western companies, particularly in the financial domain, will tread very carefully if a deal is done — but they will do so even more if it is not. There is an undeniable appetite for doing business with Iran in both the European and American business communities. The 2013 interim Joint Plan of Action has opened a window to explore business opportunities. Both European and American companies are currently exploring them as rational businessmen would do. But these opportunities will not be turned into contracts if the negotiations fail.

Banks in the West, and beyond, remain very reluctant today to finance legal trade with Iran, even when this trade is labeled in non-dollar currencies, like the euro, which would not make these transactions vulnerable to U.S. sanctions. The deterrent effect of U.S. law enforcement and the ambiguous legal ramifications of U.S. primary and secondary sanctions, combined with the harsh legal constraints imposed by EU sanctions, has indeed created a web of uncertainty that isn’t compatible with what big companies are looking for, i.e., predictability and secure legal environments in which to conduct their business. This web, about which I used to hear a lot of European companies complain, will de facto remain in place. In addition, it will be up to Western governments to make it crystal clear that they, to paraphrase U.S. President Barack Obama, will “come down like a ton of bricks” on those that do not comply anymore with sanctions against Iran.

However, Iran may still believe that it can save its damaged economy without agreeing to strong restrictions on its nuclear program, simply because it thinks sanctions would slowly unravel. And Iran may not be completely wrong — the existing sanctions have weaknesses.

The challenges of keeping effective economic motivation for Iran in place are twofold. On one hand, the international sanctions imposed against Iran are damaging Iran’s economy less today than they were in 2013, when the United States and Iran engaged in bilateral negotiations to complement those conducted within the P5+1 framework. In December 2013, David Cohen, former Treasury undersecretary for terrorism and financial intelligence, predicted that Iran would “be even deeper in the hole six months from now.” Unfortunately, even if Iran isn’t yet the emerging and fast-growing economy its large and well-educated population should enable it to be, its economy may have grown 3 percent in the last fiscal year after two years of tough recession in 2012 and 2013. Iran’s economy is therefore slowly recovering from international sanctions.

This positive evolution — for Iran, not for the sanctions — is a result of a combination of factors. President Hassan Rouhani is implementing more efficient economic policies than his predecessor, Mahmoud Ahmadinejad. Expectations about the future of Iran’s economy are more optimistic and fueled by the hope that the 2013 interim Joint Plan of Action can be turned into a comprehensive agreement enabling the lifting of sanctions. What’s more, Iran continues to develop ever more complicated tactics to circumvent international sanctions and takes advantage of new technologies, such as online trade platforms or new means of payment, to do that.

On the other hand, the situation could become worse if international audiences perceive the failure of talks to be an opportunity wasted by a too-demanding P5+1. U.S. Secretary of State John Kerry recently warned that sanctions could collapse if the United States looked to run away from an acceptable compromise. He said that the “sanctions will not hold, because those other people who deem the plan to be reasonable will walk away.”

Though the P5+1 negotiators’ case as to why they haven’t been too-demanding is strong, as they were highly flexible during the negotiations over the past 18 months, a particular concern regarding the efficiency of continued sanctions would be that governments and companies would adhere less to sanctions and implement them less stringently. This risk could materialize even in countries that have strongly enforced sanctions so far, including in the United States, in Europe, or in like-minded countries like Japan or South Korea. Meanwhile, those countries that have been opposed to Western sanctions against Iran — like China and Russia — will expand their business with Iran, thereby reducing the efficiency of international sanctions.

Smaller companies, in particular in Europe and Asia, could pose a different challenge, as their businesses are usually less exposed to U.S. law enforcement mechanisms and markets. Intense communication between governments and the small-business community and professional organizations will remain critical to explain and increase awareness about the political and legal environments in which business with Iran will continue to proceed. Likewise, enforcing agencies, either in the United States or in EU member states, will need to continue enforcing sanctions against companies circumventing them, so as to deter others from doing the same.

While being constructive and faithful partners within the P5+1 group, China and Russia will not help to maintain strong pressure against Iran. But the truth is that they never really did so, beyond not objecting to the adoption by the United Nations Security Council of significant nuclear nonproliferation sanctions. Those sanctions have been key in constraining Iran in procuring nuclear and ballistic-related goods and technology, but less critical to creating economic pressure and pushing Iran into negotiations. Russian and Chinese adherence to international economic pressure against Iran will remain a challenge but not necessarily one that would become significantly more problematic if talks fail. The West should therefore continue to push Moscow and Beijing to show restraint — and when necessary, penalize those who fail to comply, just as, in 2012, the United States sanctioned the China-based Bank of Kunlun for supporting Iranian banks.

Considering those challenges, those who believe that sanctions have reached their high-water mark and can only erode from now on are, therefore, right to say that the current opportunity to finalize a deal should not be missed. But sanctions can remain efficient by creating pressure on Iran if Western countries have the political will to enforce and adapt them to these challenges. It will be in their interests to do so, if they intend to continue negotiating with Iran from the position of the strength that has been theirs, thanks to sanctions, in the past few years.

Ultimately, the United States and its European allies should review their options and consult to increase pressure, if the situation requires it, by both adopting complementing sanctions against Iran and fixing the vulnerabilities within the existing sanctions regime. It will require, among other things, continued adaptations to the legal challenges posed to the EU’s list of sanctioned Iranian banks. Fighting more strongly against Iran’s highly efficient sanctions circumvention networks will also be key.

Hopefully, none of this will be necessary if a comprehensive deal can be reached in Vienna over the next couple of days. Despite its weaknesses, a comprehensive agreement built on the parameters seemingly consented to in Lausanne on April 2 is in the West’s interests, as it shall prevent Iran from acquiring a nuclear weapon, at least for the decade to come.

But the chances of finalizing such deal today would be bolstered if negotiators were confident — as they should be — that sanctions are sustainable. And likewise, Iran will be more likely to show flexibility at this critical juncture if it believes that its plan B — weakening international support for sanctions over time without making the necessary concessions at the negotiating table — isn’t going to succeed.

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