FPI Bulletin: Conditional Iran Sanctions Can Strengthen Nuclear Deal

December 12, 2013

Secretary of State John Kerry recently acknowledged that the U.S.-led international sanctions regime “has proven essential” in bringing Iran back to the negotiating table.  Yet the interim six-month nuclear deal that the United States and other world powers signed with Iran last month in Geneva could paradoxically end up undermining that leverage.  In return for only limited Iranian nuclear concessions, the Geneva pact may end up enabling Iran to enjoy economic benefits far beyond what U.S. negotiators had intended.

There’s no doubt that U.S.-led international sanctions have significantly blocked the Iranian government’s key sources of revenue in recent years.

  • As Under Secretary of the Treasury for Terrorism and Financial Intelligence David Cohen recently wrote:  “[Iran’s] economy contracted last year by more than 5%, and it is on pace to contract again this year.  Its annual inflation rate now stands at about 40%.  Iran’s currency, the rial, has lost around 60% of its value against the dollar since 2011.” 
  • Israeli officials estimate the sanctions regime, in effect, has more than tripled the cost of Iran’s nuclear program to over $170 billion.
  • An October 2013 report published by Roubini Global Economics and the Foundation for Defense of Democracies (FDD) estimated that U.S.-led financial sanctions have reduced Iranian foreign exchange reserves to roughly $80 billion, adding that “the Iranian government has unencumbered access to only $20 billion of those funds.”

Yet just as U.S.-led international sanctions have put Iran’s economy on the ropes, Secretary Kerry told House lawmakers this week that the Geneva pact’s package of sanctions relief could give Iran access to “somewhere in the vicinity of $7 billion total.”  Sanctions experts like FDD's Mark Dubowitz, however, have warned the deal’s sanctions relief could yield Iran as much as $20 billion or more—or roughly one quarter of what the regime currently holds in total foreign exchange reserves.  A recent Israeli news report also suggests that senior U.S. officials “have conceded over the past few days in conversations with colleagues in Israel that the value of the economic sanctions relief to Iran could be much higher than originally thought in Washington....  ‘In any case, it’s about 20 or 25 billion dollars.  Even the Americans understand this,’ the sources said.”

The Geneva pact could also lead to more lax enforcement of U.S.-led international sanctions on Iran.  For example, the Treasury Department continually works to designate and financially isolate front companies that Iran has created to help it circumvent economic sanctions and earn money.  What’s troubling, however, is that, according to a November 2013 news report by The Daily Beast’s Eli Lake and Josh Rogin, the Obama administration has “all but stopped the financial blacklisting of entities and people that help Iran evade international sanctions since the election of its president, Hassan Rouhani, in June.”  The less that sanctions against Iran are vigilantly enforced, the less likely they are to be effective.

Any cracks—or even perceived cracks—in the U.S.-led international sanctions regime could be difficult to repair, in part, because the United States will have forfeited its credibility as a sanctions enforcer.  As FDD’s Mark Dubowitz told Congress in November 2013:  “If the United States allowed sanctionable activities to occur without consequence, the floodgates could open.  Companies that had chosen to cease activity in Iran rather than risk U.S. actions would re-enter the Iranian energy, shipping, and financial sectors.  This would yield a massive financial windfall for Iran.”

The perception of reduced sanctions has already begun to alleviate financial pressure on Iran.  As Bloomberg reported this week, “The Tehran Stock Exchange’s Tedpix index has surged 9 percent since it was signed on Nov. 24, and the rial gained about 2 percent on unofficial markets.”  Iran also has begun courting Western energy companies interested in future investment opportunities.  Iranian Oil Minister Bijan Namdar Zangeneh met last week with the CEO of ENI, Italy’s largest oil company, and recently said that Iranian energy officials will meet with international energy companies in London in March.  It’s important to note that new Western investments into Iran’s energy sector will make it more difficult to escalate economic pressure if the Iranian government fails to live up to the Geneva pact and other international obligations.

In turn, key U.S. lawmakers have criticized the Geneva pact for giving Iran a disproportionately large amount of sanctions relief in return for a narrow set of Iranian nuclear concessions, and moved to fill the shortfall.  Senators Robert Menendez (D-NJ) and Mark Kirk (R-IL) are reportedly close to unveiling a package of new conditional sanctions that would target Iranian oil exports, foreign exchange reserves, and strategic industries either if Iran cheats on the interim Geneva pact, or if negotiations for a comprehensive agreement go nowhere.  Senate Republicans are also moving to add an Iran sanctions amendment to the pending National Defense Authorization Act for Fiscal Year 2014.  With strong bipartisan and bicameral support for the imposition of further conditional sanctions on Iran’s nuclear program, Congress should move forward with these measures even despite the Executive Branch’s disapproval, just as it has in the past. 

Whatever the Geneva pact’s imperfections, the Obama administration claims the interim deal could very well provide a stepping stone to a comprehensive agreement that truly ends the growing dangers posed by Iran’s rapid nuclear weapons-making capability.  U.S. lawmakers and the wider public must insist not only that any comprehensive agreement with Iran meet this high standard, but also that the United States and its international partners fully enforce standing sanctions on Iran’s controversial nuclear program in the interim period.

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