The US-Iran Nuclear Deal and the Effectiveness of Economic Sanctions

July 28, 2015 4:00 PM

The agreement announced on July 14 by the United States, Iran, and five other world powers has provoked a debate in Congress over whether too many concessions were made for too few steps by Iran to curb its nuclear program activities. The accord, officially known as the Joint Comprehensive Plan of Action (JCPOA), would grant Iran immediate but partial—and reversible—sanctions relief, including oil and financial sanctions,1 in return for commitments to scale back a specified set of nuclear activities coupled with international monitoring and compliance oversight.2 This post is not intended to discuss Iran’s nuclear commitments. Rather the purpose here is to examine two critical issues raised about the agreement: the complicated timetable for the sanctions relief and the possibility of sanctions “snapback” if Iran reneges on its commitments.

Three Lessons from Past Practice

For decades, political and economic relations between Iran and the United States have been defined by trade and financial sanctions.3 While the goals of sanctions targeting Iran have evolved since the 1950s,4 collectively they have had limited success in either persuading Iran to renounce support of terrorism or give up its pursuit of nuclear weapons—the two driving policy aims. The JCPOA result reflects the fact that the sanctions regime, particularly those imposed over the last five years, achieved some success in pressuring Iran for three major reasons.5

First, unlike traditional US sanctions that were imposed more than three decades ago, the most recent sanctions have been more onerous with strict financial measures combined with a partial oil export embargo since 2010. Europe almost totally discontinued its purchase of Iranian oil, while large Asian buyers (India, China, Japan, and Korea) agreed to cap their purchases at or below historic levels. Both the oil and financial sanctions went beyond the slow “incrementalism” of past sanctions policy. The financial sanctions sharply increased the economic costs for Iran in conducting both import and export transactions through normal banking channels. Instead, Iran had to resort to barter trade or surreptitious gold shipments. Oil exports dropped sharply, exacerbating already tenuous economic conditions in Iran. With the added economic pressure came unemployment, scarcity of consumer goods, and high inflation. Our published analysis, which covers more than 200 sanctions over the past century, indicates that financial sanctions stand a better chance of securing compliance by the target country by comparison with trade restrictions alone (Hufbauer et al. 2007). Moreover, sanctions that are modest in scope and gradually imposed have less chance of success than “full bore” measures that feature financial sanctions.

Second, the partial embargo on Iran’s export of oil could not have been successful without the cooperation of an international coalition of countries, led by the European Union but including key Asian oil importers. In 2010, the UN Security Council passed Resolution 1929, which deepened previous rounds of UN sanctions and urged cooperation on financial sanctions (guided by “vigilance over transactions involving Iranian banks”),6 followed by stricter sanctions mandated by the US Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), as well as new sanctions and gradual implementation of an oil boycott by the European Union. These measures were followed soon after by complementary steps by China, India, Japan, and Korea—under the veiled threat of possible US sanctions under CISADA—to reduce their oil purchases from Iran. As a result, Iran saw its steepest decline in oil shipments between 2011 and 2012; by 2013, oil exports had dropped to 1.1 million barrels per day, a 50 percent decline compared to 2011 (Katzman 2013). To be sure, coalition sanctions do not guarantee success and can certainly complicate the bargaining process. In fact, coalition sanctions in the Iranian case achieved much better results than many past episodes that sought high policy goals (Hufbauer et al. 2007).

A third reason for the success of the sanctions relates to the changed political dynamics inside Iran after the election of President Hassan Rouhani in 2013. Rouhani is a relatively moderate political figure whose victory capitalized on Iranian unhappiness over their economic hardship. The contrast between Rouhani and his bellicose predecessor Mahmoud Ahmadinejad improved prospects for managing hardliners in Iranian politics and engaging with the West. However, with Ayatollah Ali Khamenei firmly in place as Supreme Leader, the room for maneuver remained narrow. One apparent reason for the ability of the United States and its negotiating partners to capitalize on these circumstances appears to be that the coalition kept to the limited goal of curbing Iran’s nuclear activities and not on a sweeping agenda of regime change or ending Iran’s support for Hezbollah. History has indeed shown that sanctions have limited success when the goal is fundamental change in the core policy of an autocratic regime.

Lifting Sanctions Is Complicated; So Are the ‘Snapback’ Provisions

The sanctions against Iran were effective in exerting economic pressure because they involved concerted financial sanctions and resulted from complex international coordination between the United States and its partners, especially the United Kingdom, France, Germany, Russia, and China. They were put in place by a series of resolutions at the United Nations and a series of unilateral sanctions by the countries, with agreement to lift them if Iran reached a comprehensive deal. Because the sanctions regime is so complex, the assertion by President Obama and others that they can easily be “snapped back” has come under some criticism.

The UN, EU, and US commitments to scale back specified sanctions are outlined in pages 10 through 15 of the JCPOA and further detailed in Annex II and related attachments. The terms are extensive; the table below summarizes key commitments. In practice, compared to the European Union, the United States will maintain a number of restrictions against Iran given its complex web of sanctions legislation relating to terrorism and nonproliferation.7 It’s worth emphasizing that the United States (as well as the European Union) has only agreed to lift nuclear-related sanctions, which means those related to terrorism, ballistic missiles development, and human rights would remain place. In those areas, US sanctions are much more extensive than those of other countries.

Table 1 Summary of JCPOA terms of sanctions relief for Iran
Country Terms Implementation
United Nations * Termination of all provisions of UN Security Council resolutions: 1696 (2006), 1737 (2006), 1747 (2007), 1803 (2008), 1835 (2008), 1929 (2010), 2224 (2015). * Simultaneous lifting with the IAEA-verified implementation of nuclear-related measures by Iran.
 
European Union * Termination of EU regulations on nuclear-related economic and financial sanctions related to transfer of funds between EU financial institutions and Iranian persons and entities; banking activities; provision of insurance and reinsurance; SWIFT messaging services; financial support trade, e.g., export credits and grants and concessional loans for Iranian government; energy trade and investment; exports of gold, minerals, precious metals, and software; and asset freezes and visa bans as specified. * Simultaneous lifting of sanctions with the IAEA-verified implementation of nuclear-related measures by Iran.

* The EU will terminate all provisions of EU Regulations which cover sanctions and restrictive measures specified in Annex II, eight years after Adoption Day or when the IAEA has concluded that all nuclear material in Iran remains in peaceful activities, whichever is earlier.

 
United States * The United States will cease application of nuclear-related sanctions covering financial and banking transactions, including the Central Bank of Iran and specified individuals and entities; transactions in Iranian rial; bilateral trade limitations on provisions of US banknotes to Iran and the transfer of Iranian revenues; issuance of Iranian sovereign debt and bonds; financial messaging services to Iranian financial institutions; underwriting and insurance services; efforts to reduce crude oil sales and restrict energy investment; energy purchases and transports; transactions with Iran's energy and shipbuilding sectors; trade in gold and precious, raw, or semi-finished metals, and software; sales related to Iran's auto sector; and specified sanctioned individuals and entities. * Simultaneous lifting of sanctions with the IAEA-verified implementation of nuclear-related measures by Iran.

* The US will seek legislative action to terminate, or modify, those sanctions specified in Annex II, eight years after Adoption Day or when the IAEA has concluded that all nuclear material in Iran remains in peaceful activities, whichever is earlier.

  * The United States will terminate Executive Orders 13574, 13590, 13622, 13645, and Sections 5-7 and 15 of Executive Order 13628.  
  * The United States will permit the sale of commercial aircrafts and related parts and services to Iran.  
IAEA = International Atomic Energy Agency; JCPOA = Joint Comprehensive Plan of Action; SWIFT = Society for Worldwide Interbank Financial Telecommunication
Note: Adoption Day is the date 90 days after the UN Security Council's endorsement of the JCPOA or any earlier date as may be determined by mutual consent of the JCPOA participants, at which time JCPOA commitments come into effect and JCPOA participants make necessary arrangements for the deal's implementation.
Source: JCPOA.

The prospects for permanent changes in sanctions policy are tempered by several factors. The lifting of Iranian sanctions will not be immediate and is contingent on IAEA verification that Iran has begun implementing its end of the bargain. A recent blog post by Stephan Haggard offers a helpful summary of the deal’s implementation timeline and corresponding sanctions relief.

Both the United Nations and the European Union have already approved the terms of the deal, but divisive politics in the United States could hinder implementation of the lifting of some of the sanctions. Members of the US Congress, whose views range from cautious skepticism to outright opposition, have signaled that they want to take a stand on the deal, but whether they can block it is unclear. Congress currently has 60 days to conduct its review. Many of the specified US sanctions can be removed via the president’s executive waiver authority. Still other sanctions can only be lifted by future legislative action.8 Irrespective of what Congress or the president do, the approval of the UN Security Council has set into motion the 90-day countdown to “Adoption Day” when the agreement will formally enter into effect. Such a step will set in motion the lifting of sanctions that were approved by the Security Council, and there may be little the United States can do to stop other countries from following suit.

All these complicated steps by various parties raise questions about the so-called snapback provisions, to be invoked in the event that Iran reneges on the deal. The JCPOA establishes a complex dispute settlement process. In simple terms, the United States can unilaterally restore sanctions if Iran missteps, but a number of procedures must first be followed. Likewise, other participants in the sanctions coalition can make their own judgments, consistent with their interpretations of the JCPOA. That makes the enforceability of snapback terms a key issue. As foreign business firms begin to establish footholds in Iran, and as Iran signs new oil contracts with its main customers in Asia, it is an open question whether the US-European sanctions coalition would be revived if US officials sought to deploy the snapback provisions.9

Notes

1. The immediate sanctions relief was related to petrochemicals, gold and precious metals trade, and the auto sector, while comprehensive sanctions limiting Iran’s oil trade and access to the international financial system remained largely in place but would partially lift over time.

2. The main commitments include limits on uranium enrichment, stockpiles, and related research and development; phasing out of installed centrifuges and limiting capacity or converting functions at the Natanz and Fordow facilities; redesigning Iran’s heavy water research reactor in Arak and limiting future development of like facilities; restricting development of plutonium; and disposing of excess fuels. Strict monitoring by the International Atomic Energy Agency (IAEA) is to be permitted, but critics insist that surveillance is not strict enough since it does not ensure “anytime, anywhere” inspections.

3. For a comprehensive overview of Iran sanctions, see Katzman (2015).

4. These cases were divided into three episodes in our past analysis—see Hufbauer et al. (2007) and updated notes through June 2012 for cases 79-1, 84-1, and 2006-1.

5. In 2012, Hufbauer et al. gave the 1984–2005 sanctions episode a failing grade of 4—on a scale of 1 to 16, where 9 or better is rated “success”—and the 2006–present case a marginally better but still failing grade of 6. This score may warrant upgrading, but the implementation period of the JCPOA should first play out before putting the Iran case in the success column.

6. Specifically, Resolution 1929 calls upon states to “take appropriate measures that prohibit in their territories the opening of new branches, subsidiaries, or representative offices of Iranian banks, and also that prohibit Iranian banks from establishing new joint ventures, taking an ownership interest in or establishing or maintaining correspondent relationships with banks in their jurisdiction to prevent the provision of financial services” and “take appropriate measures that prohibit financial institutions within their territories or under their jurisdiction from opening representative offices or subsidiaries or banking accounts in Iran.”

7. The corresponding legislative changes to comply with the terms of sanctions relief are not listed here for the sake of brevity but are listed in full in Annex II. In sum, the main US legislation requiring amendments will include the CISADA of 2010, the Iran Sanctions Act of 1996 (ISA), the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA), the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA), the National Defense Authorization Act for Fiscal Year 2012 (NDAA), and specified executive orders. For an overview of all US legislation and the corresponding degree of executive authority to lift sanctions, see Rennack (2015).

8. The president can unilaterally suspend US sanctions imposed via executive order for those not codified by law. Those codified by law can only be lifted if specific provisions allow termination via the president’s determination of national interest and certification that Iran has met certain conditions. Otherwise sanctions codified by statute require congressional action. See Katzman (2014) for a comprehensive overview.

9. US business interaction with Iran will almost certainly remain more limited than EU interaction, implying that domestic opposition to snapback measures will be weaker in the United States than in Europe (and much weaker than among Asian importers of Iranian oil). However, US business interest will not be trivial. Following the interim nuclear deal in November 2013, US companies seized on the window of sanctions easing in 2014, and the US Treasury issued nearly 300 licenses in the first three months of 2014. See summary in the Wall Street Journal. Given growing US commercial interest in Iran, even US businesses would be more hesitant to support the reimposition of sanctions, much less if they had to bear the cost of sanctions while EU and Asian competitors took their market share in Iran.

References

Hufbauer, Gary Clyde, Jeffrey J. Schott, Kimberly Ann Elliott, and Barbara Oegg. 2007. Economic Sanctions Reconsidered, 3rd edition. Washington: Peterson Institute for International Economics.

Katzman, Kenneth. 2013. Iran Sanctions. CRS Report to Congress RS20871 (October 11). Washington: Congressional Research Service.

Katzman, Kenneth. 2014. Easing US Sanctions on Iran. Washington: Atlantic Council.

Katzman, Kenneth. 2015. Iran Sanctions. CRS Report to Congress RS20871 (April 21). Washington: Congressional Research Service.

Rennack, Dianne E. 2015. Iran: U.S. Economic Sanctions and the Authority to Lift Restrictions. CRS Report to Congress R43311 (July 15). Washington: Congressional Research Service.

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Cathleen Cimino-Isaacs Former Research Staff
Gary Clyde Hufbauer Senior Research Staff
Jeffrey J. Schott Senior Research Staff

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