Although Iran has not been clearly behind or involved in a major attack on Persian Gulf oil and gas infrastructure (or on a non-oil target) since the Sept. 14 drone and missile attacks on Saudi Arabia's Abqaiq and Khurais oil production facilities, the risk of further escalation remains as the United States maintains its "maximum pressure" sanctions campaign against Iran and the status quo continues. In fact, there will be ample opportunity over the next six weeks for matters to get worse, starting with Iran's expected announcement on Nov. 7 that it is taking additional steps away from its commitments under the 2015 Joint Comprehensive Plan of Action (JCPOA) nuclear deal.
One year ago, the United States ratcheted up sanctions on Iran's oil exports as part of its exit from the Joint Comprehensive Plan of Action nuclear deal. Since then, the Trump administration has continued to increase the pressure. In response, Iran adopted an aggressive strategy to raise the cost of the U.S. sanctions campaign, targeting the oil exports and facilities of Washington's closest Middle Eastern allies.
U.S. Sanctions Strategy Continues to Expand
Since the Sept. 14 attacks, the United States has significantly increased sanctions pressure on Iran, further hampering its ability to import food, medicine and other humanitarian-related goods. First, on Sept. 20, the United States directly responded to the attacks on Saudi Arabia by sanctioning the Central Bank of Iran and the National Development Fund of Iran under Executive Order 13224 for providing financial support to Hezbollah and the Islamic Revolutionary Guards Corps' (IRGC) Quds Force, both of which are designated as terrorist groups under the same executive order.
The announcement was not the first time the United States had sanctioned Iran's central bank. Previously, secondary sanctions had targeted the central bank but the United States had carved out exceptions through licenses for humanitarian trade involving the bank. The new layer of sanctions under Executive Order 13224 has no clear carve-outs and the guidance that the U.S. Treasury Department's Office of Foreign Asset Controls (OFAC) provided has not clearly delineated a process to allow for such trade. As a result, foreign financial institutions have been effectively cut off from processing humanitarian-related trade through Iran's central bank, which is a crucial part of Iran's banking sector given the dominance of the state in the country's economy.
Second, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) announced Oct. 25 that it had identified Iran as a "jurisdiction of primary money laundering concern" under Section 311 of the USA Patriot Act. More importantly, FinCEN issued a final rule on the matter, which had been proposed by the administration of former President Barack Obama but had stalled during the JCPOA negotiation process. This decision will require U.S. banks to increase scrutiny when dealing with foreign financial institutions that also hold Iranian accounts. Because of additional compliance costs, the U.S. financial system and foreign banks generally purge accounts hit with Section 311 concerns.
European financial institutions and others effectively will close most if not all of their Iranian accounts in response to the U.S. action, cutting off Iran's ability to conduct financial transactions for humanitarian trade even through banks other than its central bank, or even when an Iranian exporter holds an account in a foreign country. Already, this effect has become a political issue elsewhere. For example, Malaysian banks, worried that U.S. banks would close Malaysian accounts if they did not comply with the U.S. sanctions, have begun closing the accounts of Iranian individuals and companies. Each sanction move increases the domestic impact on Iran. An Oct. 29 Human Rights Watch report, for example, detailed some of the difficulties accessing food and medicine in Iran even though the United States argues that its sanctions don't cover such transactions. And now nongovernmental organizations operating in Iran are struggling to move money and goods into the country to alleviate the problems.
Much like its designation in April of the IRGC as a terrorist group, the U.S. Section 311 decision adds another layer of complexity to any future talks between Iran and the United States on removing sanctions. Now that the Treasury Department has issued a final rule, Iran would be expected to make significant reforms — including passing stalled bills on adherence to Financial Action Task Force (FATF) guidelines on anti-money laundering and counterterrorism financing — for FinCEN to reverse its decision. More importantly, a reversal may not even be enough to convince foreign financial institutions to quickly reopen Iranian accounts, limiting the economic benefits for Iran to join a deal with the United States.
A Month of Opportunity for Iran
The new U.S. moves will make it even more difficult for the Europeans to set up humanitarian trade-focused financial mechanisms, like the Instrument in Support of Trade Exchanges (INSTEX). Already Iranian officials may have dealt INSTEX a death blow when they said they likely would not pass more bills to comply with FATF rules, which had been a European demand for even setting up INSTEX, though the Europeans have been moving forward with initial INSTEX transactions regardless. Iran has until mid-February to meet required FATF anti-money laundering and counterterrorism financing standards. If it fails to do so, the FATF almost certainly will allow its countermeasures for Iran, which it has suspended since 2016, to take effect.
Signs point to Iran likely continuing its aggressive response strategy, and several events over the next six weeks could trigger Iranian belligerence.
All of these signs point to Iran likely continuing its aggressive response strategy, and several events over the next six weeks could trigger Iranian belligerence. First, Iran's fourth 60-day deadline to the Europeans to protect Tehran's interests in the JCPOA ends Nov. 7 and Iran is expected to announce further reductions of its JCPOA nuclear commitments in response. There has been speculation from Iranian hard-liners that Tehran could try to restrict International Atomic Energy Agency (IAEA) access to Iran's nuclear sites. Such an aggressive move could provoke a significant response by the United States and the IAEA, which will be led by a more hawkish director-general starting in December. Iran instead could take a less aggressive stance by installing more centrifuges used to enrich uranium while being careful not to achieve the level or rate of enrichment past the point that could trigger the JCPOA's dispute settlement process. The settlement process, in turn, could lead to U.N. Security Council sanctions on Iran that neither Russia nor China could veto.
Perhaps more concerning for the United States, Europe and Saudi Arabia is that Iran could try to carry out another attack against Saudi oil facilities (or another target in the region). December's OPEC meetings or Saudi Arabia's initial public offering for the state-owned Saudi Arabian Oil Co., which expected to begin trading on the kingdom's domestic stock market in December, could provide Iran with an opportune time to attack regional oil and gas infrastructure. Of course, Saudi Arabia and the United States have been boosting defenses around Saudi facilities, and a large-scale attack like the one in September may fail. And Iran's attacks on Saudi Arabia have prompted several European countries to take a more hard-line approach to Iran's missile program. Tehran may assess that the Sept. 14 attacks on Saudi Arabia were too aggressive, with further attacks possibly pushing Europe closer to the U.S. position.
Nevertheless, as Saudi Arabia looks toward the Saudi Aramco IPO and the United States continues to up its sanctions pressure on Iran, the risk of escalation remains present. And that risk is most certainly making Saudi Arabia and its neighbors nervous.