Lifting Sanctions Key Element of Negotiations on Iranian Nuclear Agreement

Focus

The West wants to design a mechanism in which UN sanctions would be automatically re-imposed if Iran doesn’t respect its obligations

The question of sanctions has been one of the main contentions in the negotiations on the Iranian nuclear issue. Since 2006 a large number of sanctions have been voted against Iran. The UN sanctions have been specifically targeting the Iranian nuclear and ballistic programmes. Moreover, European and US bilateral sanctions have also been put in place against Iran. In the “Joint Plan of Action” agreed in November 2013 by the 5+1 and Iran in Geneva, which gave a framework for real negotiations between the two sides, it was decided that “The final step of a comprehensive solution …would comprehensively lift UN Security Council, multilateral and national nuclear-related sanctions”. On the Iranian side, this agreement was interpreted to mean that a final deal should include an immediate lifting of all nuclear-related sanctions. The Western side obviously interpreted it differently: the objective was to lift sanctions in a gradual manner as long as Iran implements the measures agreed to in the final deal. Besides, the West wants to design a mechanism in which UN sanctions would be automatically re-imposed if Iran doesn’t respect its obligations. France and the US have been particularly vocal on this issue. France’s strategy is largely due to two objectives—to “please” both Saudi Arabia (which has become an important trading partner, especially in defense) and Israel (with whom France has a strategic relationship).

Iran wanted the immediate lifting of all nuclear-related sanctions for several reasons. First, they considered that these sanctions, especially the European and US sanctions, are “illegitimate”, in the sense that they did not respect the principle of proportionality. Why did the disagreements between Iran and the international community on the nuclear issue lead to sanctions aimed at all aspects of the Iranian economy? The cost of the economic sanctions has been huge for Iran. The effects of the European Union oil embargo and the US financial sanctions led to an economic crisis in 2012: inflation reached 40 percent (50 percent for food) and real GDP decreased by 6 percent. Since the election of Hassan Rohani in July 2013, there has been a gradual improvement in the situation. His policy of trying to solve the nuclear issue through negotiations has led to some optimism among economic actors. This has strengthened the Iranian exchange rate on the “free” market and led to a slowdown of the runaway inflation which has now been tamed at 15 percent. Nevertheless, most of the sanctions are still hurting the Iranian economy: oil exports are still contained at 50 percent of their optimum potential and due to the extra-territoriality of the US financial sanctions there are very few banks in the world willing to work with Iran. Last but not least, oil prices have registered a huge decrease since mid-summer 2014. In this context, the recovery has been insufficient to tackle the absence of job prospects, the most pressing problem of most Iranians, especially the young and educated (the GDP growth decreased from 3 percent in 2013 to nearly 2 percent in 2014). Some estimates coming from official institutions put the unemployment rate at 20 percent. These are a few of the reasons why the Iranian government considers that a lifting of sanctions could give the country the opportunity to get out of “rokudtavaromi” (inflationary recession) that is affecting Iran. An increase in oil revenue, if sanctions are lifted, would give an opportunity to the government to increase expenditure on infrastructures which have been heavily constrained since 2012. Higher government revenue would also give the authorities the possibility to restructure and recapitalise the banking system, which has also been deeply affected by the sanctions. A lifting of sanctions would also pave the way for more foreign investments in the oil, gas, automotive and agro-business sectors. There is presently a lively debate in Iran on the type of economic policy to apply if the sanctions are lifted. The Iranian authorities in this respect face two challenges. The first is to consider the fact that lifting the sanctions equals a freedom to import and consume. Iran is still an oil economy with a productive sector which lacks competitiveness and has severely been affected by the sanctions. Too much import could lead to further de-industrialisation in Iran. The second challenge is that there are huge expectations in the population if sanctions are lifted. The Iranian government is trying to communicate to the people that all economic difficulties are not going to disappear overnight.

The nuclear agreement reached between Iran and the 5+1 on July 14 means that a compromise between France, the UK, the US and Iran has been found on this issue. The Joint Comprehensive Plan of Action (JCPA)1, which details this agreement, sets the guidelines that the Iranian nuclear industry will have to respect. To summarise it, during the next ten years Iran will have the right to enrich uranium at 3.67 percent, which will give the possibility to produce electricity. But Iran will not be able to enrich uranium at a higher level and will be subjected to extensive controls from the International Atomic Energy Agency According (IAEA). All economic and financial sanctions will be lifted as soon as the IAEA certifies that Iran has implemented the measures defined in the JCPA. The UN arms embargo against Iran, sanctioned due to the Iran nuclear program, will be lifted in 5 years. The UN restrictions on Iran ballistic programme will stay for 8 years. Nevertheless, there is also a caveat that would allow for automatic implementation of new sanctions if Iran failed to fully implement the agreement.

The calendar for the lifting of sanctions could be thus: First, due to Iran Nuclear Agreement Review Act voted by the Congress and approved by Obama, the US Congress will examine the deal. It will have 60 days to do so as the deal came after July 10 (30 day had it been before). The US Congress will then have the option to reject the deal. Nevertheless, the US President will have the power to veto such a rejection. An overriding of this veto by the Congress would require that a joint resolution disapproving the deal took place with a two-third majority, which seems unlikely. If the deal goes through the Congress, the IAEA will verify that Iran will implement what has been decided. This could take at least 6 months. If the IAEA certifies that Iranian obligations have been fulfilled, then, the US, EU and UN sanctions would be lifted. One can therefore hope that all the sanctions are lifted at the beginning of 2016.

Nevertheless, this does not mean that sanctions against Iran will have totally disappeared. First, the US president can only waive the nuclear-related sanctions which have been voted by the Congress. What this means is that a future US president may reapply the sanctions, even if this entails a huge loss of credibility for the US diplomacy. This point is important because the most effective financial sanctions come from the Congress. Besides, all sanctions related to Iran’s support for terrorism and abuses of human rights will stay. It means that the US government will have room to re-impose sanctions on Iran for any reason. This point is also important for the European companies which want to do business in Iran as soon as the sanctions are lifted. They will need solid guarantees from their respective governments that they will not be affected by future US sanctions. One could also consider the fact that a nuclear deal between Iran and the 5+1 will pave the way for increasing economic and political relationships between Iran and the US. This could attenuate the risk of the US government’s likely suspension of waiver of the US financial sanctions in the future.

Nevertheless, the fact that these US sanctions will still exist should be a wake-up call for the EU’s Iranian policy. The EU being the first trade partner of Iran, the European cooperation has been the most important factor explaining the destructive impact of sanctions on the Iranian economy. First, the EU decided to impose bilateral sanctions against Iran from 2007 to 2012, especially the oil embargo. At the same time, European governments did nothing but encourage the US pressure on the European banks even as the US government wanted to apply US sanctions on any foreign bank dealing with Iran. This was a huge u-turn in EU’s sanctions policy. In 1996, the European governments threatened the US government and protested in the WTO as the US government wanted to impose sanctions on European oil companies which had invested in Iran2. And until 2007, European sanctions had to be proportionate to the issue at stake and the respect for human rights. The application of an oil embargo on Iran has had the effect of collective punition on Iranian society, as oil revenue represents an average of more than 50 percent of the government’s revenue. Moreover, these sanctions, as it was earlier stated, contributed to a severe deterioration of the Iranian economic environment, leading to an inflation of nearly 50 percent (for food products) at the beginning of 2013, and to an abject impoverishment of the poorer classes. Significantly, these sanctions led to a shortage of at least 300 drugs in Iran. How then can these sanctions be said to have respected human rights?

How can we explain this change of attitude on the European side? First, there was the idea among the European governments at the time that it would be impossible to negotiate with the Iranian government led by Mahmoud Ahmadinejad on the nuclear issue due to his radicalism. At the same time, there was a growing concern in Europe that Israel might decide to attack Iran to destroy the Iranian nuclear facilities. Besides, the French (under the presidency of Nicolas Sarkozy from 2007 to 2012) and German governments (Angela Merkel became the chancellor in 2005) were supporting an “Atlanticist” view of Europe at the time. Last but not least, Nicolas Sarkozy had then considered Iran a threat to the international community. True, these sanctions had a destructive impact on the Iranian economy. But, have they been successful in pushing Iran towards negotiations? The answer is ‘no’. The most important factor behind the negotiations has been the mutual willingness of the US and Iranian governments to start talking to each other. One can suppose that if Mitt Romney had been elected president of the US in 2012, these negotiations would not have happened. These sanctions have been counterproductive in that they have reinforced the most radical socio-political groups in Iran, like the Pasdaran, which have the necessary political support and the networks to get around the sanctions. These groups, for instance, could easily get finance from the banks they controlled where a manager of a private SME could not. One can even say that some of these groups benefited from the sanctions because they manage smuggling networks.

One could argue that the European policy of blindly following the US has neglected the European strategic interests. The European companies have paid a heavy price by being forced to retreat from this market. Predictably, the Asian companies have filled the void. Even now, although there is the possibility of an agreement on the Iranian nuclear issue that would put an end to all related sanctions, it seems that the US government will still have the opportunity in the future to impose new sanctions on Iran. This instrument could be used to exclude European companies from the Iranian market. In 2012, Peugeot decided to stop its operations in Iran, following pressure from its partner General Motors, then owned by the US government. Around that time, Peugeot had the largest market share in Iran selling 450,000 cars in 2011; GM had just about begun to market its own models in Iran.

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Author

Thierry Coville

Thierry Coville is Research Fellow at IRIS (French research centre for international and strategic studies) and Professor of economics in Novancia, a Business School belonging to the Paris Chamber of Commerce.

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    References

    1 http://www.documentcloud.org/documents/2165388-iran-deal-text.html

    2 The Iran and Libya Sanctions Act (1996) forbids foreign investments of more than $20 million in Iran’s oil and gas sectors.

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