Although the implementation of the Iran nuclear agreement, known as the Joint Comprehensive Plan of Action (JCPOA), in January lifted some international sanctions on Iran, many non-nuclear sanctions remain in place. As a result, the return of international investment to the country has been slower than expected, raising temperatures in Tehran. Former Treasury Department official Adam Smith sat down in a Q&A with The Cipher Brief to explain why remaining U.S. sanctions continue to pose a risk for non-U.S. entities and how this could be a problem that the private sector must solve itself.
The Cipher Brief: Concerning the JCPOA – how did it change sanctions environment in Iran?
Adam Smith: As a legal matter it changed the sanctions environment quite significantly. Leaving aside the United States for a moment, the vast majority of sanctions that were imposed by the EU and the UN were essentially lifted after the implementation of the JCPOA, which meant that if you were a non-US entity you could reenter Iran in an almost unfettered fashion. There are still some sanctions in place, even on the EU and the UN side, but from the perspective of commercial operators most of them are not particularly relevant.
Of course, on the U.S. side, sanctions changed as well but not nearly as much as most people imagined they would. That’s because the vast majority of the sanctions that the U.S. changed were secondary sanctions, which are sanctions the U.S. had imposed on entities outside the United States. In other words, sanctions limiting European Banks and companies from engaging with Iran. Now those were largely lifted, but the sanctions that still limit U.S. persons and U.S. banks from engaging with Iran remain essentially unchanged. So the JCPOA is both rather significant and somewhat insignificant depending on your perspective.
TCB: How do remaining US sanctions affect foreign companies and banks, especially when it comes to Iran’s ability to use U.S. dollar-clearing house?
AS: That’s a very big issue. There are two ways I would say U.S. sanctions still implicate non-U.S. parties. One is practical, in that people dealing with Iran who try to use U.S. dollars and engage with the U.S. clearing system are still going to have issues because U.S. clearing banks are still U.S. entities and, therefore, their ability to engage with Iran is very limited.
So that’s the legal, or operational, limitation but then there are reputational concerns that go even beyond the ability to engage with the U.S. financial system. There are also still concerns that the U.S. will potentially change its mind and renew previously lifted secondary sanctions. So this has led many entities to be very concerned about engaging in even non-U.S. nexus trade with Iran, just because of the threat that sanctions relief might be reversed.
TCB: You are referring to the snapback sanctions?
AS: Not even snapback sanctions to be honest. Snapback would be the most extreme version. You have to remember that, although secondary sanctions have been lifted broadly, there are still entities subject to secondary sanctions. For instance, the Iranian bank Saderat is still subject to secondary sanctions. So European banks that engage with Bank Saderat could theoretically face U.S. consequences, even for transactions that have nothing to do with the United States. It’s possible that the U.S. could increase the number of sanctioned entities, thus exposing non-U.S. parties to secondary sanctions even without the context of a pure snapback. You’ve got to remember that the U.S. has only said it will release sanctions associated with the nuclear program. Saderat is associated with terrorism. So there are many entities that theoretically could be sanctioned for terrorism, for regional destabilization, for missile development, or something else. Yes, snapback is an issue, but I think that the increase of more limited sanctions is just as important.
TCB: On that issue, how do you judge Secretary of State John Kerry’s trip to Europe to reassure international companies and banks?
AS: I think that the discussion was welcome. In some respects, Kerry’s voice is important, but there are many other players here. The real player from the federal government perspective is the Treasury Department, not the State Department. The Treasury is the agency that implements and enforces sanctions. So Treasury would be the more important voice in some respects.
The other component, of course, that people are starting to recognize is that there are many other players, even outside of the executive, that have a role here in limiting the ability of interested entities to go to Iran. In the bureaucracy, you can have legislative action, you have the judiciary – now with a Supreme Court decision that basically allowed the detachment of Iranian funds for the use of terrorism victims – and you’ve also got the states. Arguably one of the biggest concerns that many entities have is what the states are going to do. In other words, what will state banking regulators and state investors, many of which have Iran prohibitions or Iran regulations on their books, do? So there are many, many players here. Secretary Kerry’s voice is just one of many that needs to be heard if banks and others are going to take the U.S. up on their offer and engage with Iran in any sort of real way.
TCB: So legally, these assurances don’t really have much weight?
AS: It’s not a legal assurance at all. It’s a diplomatic assurance, and I’m guessing Secretary Kerry would agree with that. The legal assurance would be if the Treasury and others were to provide a legal guarantee that these would not be sanctioned if x, y, and z happened. I’m not convinced that Treasury could or would be interested in providing such a guarantee.
TCB: Moving past Europe and the U.S., how has the JCPOA affected investments from other countries – Asia and elsewhere? Has there been an increase?
AS: The important thing to remember about all of the “announcements” of trade deals and all the rest is to sort of peel back one or two layers and see what’s really there. I’m not suggesting the trade deals aren’t real. I think they are. But they only become operational once the private sector decides to take governments up on their offer. What we’ve noticed is that even though a large number of deals have been signed, even just on the private sector side, you scratch a little bit behind the surface and a joint venture that’s been announced is really just a letter of intent. A deal to sell x is really just a memorandum of understanding to do so. So there’s really not much there yet.
There are certainly big announcements. For instance, the Indians announced a deal to invest $500 million in the Iranian port of Chabahar. So that’s great, but let’s wait and see if the shovels actually hit the ground. In some respects, talk is cheap. It’s not meaningless, but it is cheap until you actually move ahead. The concern I would have is the issues that many institutions are having with U.S. sanctions. These concerns will cause problems for trade deals with Asian countries just as much as the Europeans.
TCB: And these risk factors extend to international oil companies?
AS: Absolutely. In some respects, their risk tolerance is slightly higher than many other sectors because of the business therein, and I imagine you will see some investment. But even if you can start digging wells, if you can’t move your money into Iran and you can’t find a bank that’s willing to touch it that’s going to put a damper on the investment. The fact that oil prices are so low doesn’t help either.
TCB: So what is the way forward? What is Iran’s path to normality?
AS: It’s interesting. I’m not sure the Iranians have as much control over the situation as they would like. The reality is that until the U.S. is willing to provide assurances, I’m not sure much will happen. I think the reality is that essentially something will happen, because there’s going to be too much money left on the table, and so the path forward is going to be the closure or realization of some of these engagement deals, energy deals, or what have you. In other words, when people are able to complete them without being sanctioned, I think that will open the others’ eyes. At that point, any of these institutions that don’t want to be first, would potentially be willing to be second, third, or fourth. I think that’s the way forward. It’s a matter of time and waiting for some of the announced deals to become real. Over time some of them will. I don’t think waiting for the U.S. to provide that comfort is really going to be a fruitful activity here. I don’t think that’s going to happen, especially in an election year. Over time the private sector will take care of it but that may be a longer time frame than the U.S. or even the Iranians were projecting when the JPCOA was finalized.
TCB: Is there a risk that delays in reaping the economic rewards of the JCPOA will empower hardliners in Iran?
AS: It’s certainly possible. At the end of the day, most people in Iran – hardliners, moderates, what have you – have a lot to lose if the deal fails, perhaps a lot more to lose than to gain if they were to go back to their ways prior to the deal. The incentives here are aligned on both sides. The U.S., and the Europeans of course, want this deal to stick, and the Iranians realize that if it doesn’t stick, they are in a worse state as well.
But at some point there is a political conundrum that the Iranians would face vis-a-vis the moderates vs. the hardliners or even the vis-à-vis the bazaari class outside the government. Iranians have given up some element of their national pride with respect to the nuclear program, regardless of what it was for. And if they haven’t gotten anything in return, or at least if they’ve gotten something in return that’s not worth it or not what they agreed to, there could be some real challenges. That being said, I think things would have to go significantly awry for either side of the deal to officially pull out. That’s why I hesitated when you talked about snapback. Snapback is not likely, as people in the press like to think, but it’s certainly a possibility.
