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May 8, 2018 | 23:31 GMT

7 mins read

What the U.S. Withdrawal Will Do to the Iran Nuclear Deal

U.S. President Donald Trump announces his decision on the Iran nuclear deal in the Diplomatic Reception Room at the White House, May 8.
(SAUL LOEB/AFP/Getty Images)
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After months of threats, speculation and rumors, U.S. President Donald Trump has finally pulled the plug on the nuclear deal with Iran. On May 8, he announced the U.S. "withdrawal" from the agreement — known as the Joint Comprehensive Plan of Action (JCPOA) — over concerns that the deal was not comprehensive enough and did not target Iran's destabilizing regional activities. The move is a significant reversal of U.S. policy on Iran and raises a number of questions about a situation that will require close monitoring in the months to come.

The Big Picture

As we wrote in Stratfor's 2018 Second-Quarter Forecast, Washington's gaze will be squarely on the Islamic Republic of Iran this quarter. The United States' withdrawal from the nuclear deal will reaffirm Tehran's desire for a robust defense policy that includes the very activities fueling U.S. fears: ballistic missile development, covert operations and support for regional militias. When it comes to international diplomacy, however, Iran will now have little choice but to make its case to friendly partners in Europe, such as France and Germany.

All Sanctions Coming Back

In his announcement, Trump outlined a plan to reimpose all suspended primary and secondary sanctions on strategic sectors of Iran's economy, including the vital oil and financial sectors. The plan also includes placing a number of people and entities back on the Specially Designated Nationals and Blocked Persons List. That inventory is kept by the U.S. Treasury Department's Office of Foreign Assets Control, which released directions noting that the sanctions would take force after a period of 90 or 180 days and start on either Aug. 6 or Nov. 4, depending on the specific sanction. Ultimately, by Nov. 4, the United States will reinstate all the sanctions that it had imposed on Iran before the JCPOA. However, none of the sanctions that the European Union or U.N. Security Council removed after the signing of the nuclear deal will return.

European Union Likely to Push Back

The Iran nuclear deal led to the lifting of secondary sanctions that had limited foreign companies, including European and Asian firms, from doing business with Iran. Most transactions between U.S. companies and Iran, however, had remained illegal and limited by primary sanctions unrelated to the JCPOA. While the U.S. withdrawal from the JCPOA effectively ends the multilateral agreement, the European Union immediately noted that it still views the agreement as critical for ensuring regional and global security and that it remains committed to the deal — including the provision for sanctions relief for the Islamic republic. Brussels could pass legislation that helps European companies do business with Iran in spite of the U.S. sanctions, and it could also attempt to block Washington and challenge the United States at the World Trade Organization. Iran will depend heavily on the European signatories of the JCPOA to continue doing business as it navigates a much tougher U.S. sanctions environment, but the legal uncertainty and risk of running afoul of Washington's sanctions will compel many European companies to comply with certain U.S. sanctions regardless of Brussels' pushback.

A graphical representation of the web of sanctions built to ensure Iranian compliance with Western demands.

Questions for the Oil Markets

The success of sanctions will depend on how much they affect Iran's oil exports. The penalties that affect purchases of Iranian oil will take effect at the end of the 180-day period, on Nov. 4. Any country that wants an exemption can get one so long as its oil purchases from Iran are significantly reduced. The U.S State and Treasury departments, along with the Director of National Intelligence (DNI), will determine whether each country has cut imports of Iranian oil by the end of the period and include the ending of contracts, lower volumes and any percent reduction in their determinations. Based on the policy of the administration under President Barack Obama, the cutoff necessary for an exemption was a decline of 18 to 20 percent. With Iran exporting roughly 2.5 million barrels per day, this works out to a drop of about 500,000 bpd if the sanctions are highly effective, far less than the 1 million bpd that Iran's exports declined by in 2012 due to sanctions. However, this time the European Union won't put in place a full embargo on Iran's imports, which alone led to a 600,000 bpd drop. A decline of 1 million bpd is unlikely if Tehran stays a party to the deal and does not ramp up its nuclear program. In any case, the Gulf Cooperation Council and Russia have plenty of spare capacity to make up for any fall in Iranian oil exports. 

Options for Iran's Response

Iranian President Hassan Rouhani said that his country considers the JCPOA a deal between Iran and five other countries — China, France, Germany, Russia and the United Kingdom — and that he has ordered Foreign Minister Javad Zarif to talk to these countries about ways to continue the agreement. But should those talks fail, Rouhani said that the Atomic Energy Organization of Iran should be ready to start increasing enrichment levels for its uranium.

Because the United States is no longer a party to the agreement, bringing up the issue in the JCPOA joint commission is a pointless strategy. Beyond talks with the European Union, Iran largely has three strategies. They involve immediately pulling out of the JCPOA and restarting parts of its nuclear program; removing the additional protocol that gives inspectors from the International Atomic Energy Agency easier access to its nuclear sites; and withdrawing from the Nuclear Non-Proliferation Treaty.

In the past, Iran has threatened to use each of these, but they represent a serious escalation for Tehran because they might irreparably damage its relationship with the European Union and lead the bloc to align with the United States on economic measures. Therefore, Iran is more likely to exhaust diplomatic options first in hopes of building up international backing to push against the United States before taking that path. But if talks fail, Iran may have no choice but to react more strongly. 

The Risk to Iran's Economy

In the wake of Trump's announcement, questions swirled around the subject of Iran's economy. Such challenges aren't new and even helped ignite protests at the start of the year. The Islamic republic has long struggled to create jobs for its youth. Many Iranians complained that the JCPOA had failed to provide the country with any tangible economic benefits. The Iranian rial fell from 36,000 to the U.S. dollar in September 2017 to 60,000 in April due to speculation that the United States could reimpose sanctions. Although the Iranian Central Bank cracked down on currency traders, forcing them to apply the official rate of 42,000 rials to the dollar, the black-market rate has plunged to 70,000 rials. The currency's fluctuating exchange rate, rising prices of bread and chicken, and further protests will be critical indicators of the sanctions' impact.

In the wake of Trump's announcement, Iran's economy groaned.

To counter Trump, Iran will emphasize its resistance-economy strategy, which entails less dependence on imports and better relations with other countries willing to navigate — and risk — U.S. sanctions. These moves will increase opportunities for Iran's domestic heavy industries, but it is uncertain what effects they will have on Iran's economic assault on the Islamic Revolutionary Guard Corps. The government will also try to mitigate the sanctions by reducing economic ties to places that are likely to buckle under to U.S. pressure or take steps toward more friendly partners such as China, Russia, Qatar and India.

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