The Limits of a New Iran Nuclear Deal

After months of discussion, negotiators appear close to an agreement to revive the 2015 Iran nuclear deal. Although some issues—including a series of last-minute Russian demands—remain outstanding, both the United States and Iran appear committed to securing a deal in the coming days or weeks. The agreement, if fully implemented, would bring the United States and Iran into compliance with the original pact, the Joint Comprehensive Plan of Action (JCPOA), rolling back parts of Tehran’s nuclear program in exchange for relief from the most severe U.S. sanctions regime ever imposed.

In its likely form, the deal will provide significant near-term economic benefits to Iran—allowing it to sell oil freely and reconnect to the global financial system. In turn, Tehran will restrict its enriched uranium production and centrifuge testing and accept enhanced international inspections. But any agreement will also suffer from the same broader shortfalls as its predecessor did six years ago—likely exacerbated by worsening attitudes in the United States and in Iran itself.

The uncertain future of the nuclear deal risks becoming a self-fulfilling prophecy. Doubts about the longevity of the agreement may convince businesses to steer clear of Iran, reducing Tehran’s interest in keeping the deal afloat and lowering the costs of another U.S. withdrawal. That will leave the agreement fundamentally unstable in the coming years, undermining its potential to serve as a firm foundation for subsequent negotiations or any broader improvement in U.S.-Iranian relations.

RIAL RELIEF

If successfully implemented, a new agreement will unlock real economic benefits for Tehran. Iran would be able to sell oil freely at higher prices and repatriate the revenues. That alone will provide billions of dollars of additional revenue per month. Tehran will also be able to access more of its approximately $100 billion in foreign exchange reserves held overseas. Iran’s banks will be able to reconnect to the global financial system. Trade will expand, and some Asian and European companies will likely establish a presence in the country. As when the original deal was initially implemented in 2016, these developments will drive growth, reduce inflationary pressure, and improve the lives of millions of Iranians.

But the impact of the JCPOA is also a cautionary tale. Iranian leaders and the public saw a mismatch between the promise of the agreement and the actual economic benefits it bestowed. After the original agreement was implemented, Iran’s economic integration moved in fits and starts as it struggled to rebuild financial connections with the outside world. Major European firms and banks looked warily at the sustainability of the nuclear deal, the compliance and reputational requirements of operating in Iran amid existing U.S. sanctions, and Iran’s challenging business environment. Iran’s destabilizing regional activity induced additional caution, as did the country’s structural economic problems, including mismanagement, corruption, and the wide-ranging role of the Islamic Revolutionary Guard Corps (IRGC). European banks were especially attuned to these concerns.

Iranian officials also accused the United States of lifting sanctions on paper but not in practice. Months after the deal was implemented in 2016, Iranian Supreme Leader Ali Khamenei assessed that “sanctions repeal will not be witnessed at all.” Iran’s central bank chief added, “Let me . . . give you a snapshot of what has happened since three months ago, the date of implementation of the JCPOA: almost nothing.” This experience has fueled Tehran’s recent demands for sanctions “verification”—a period of time meant to ensure that economic activity actually increases before Iran gives up nuclear leverage.

2022 IS NOT 2016

As messy as the implementation of the deal was in 2016, it will be even more challenging today. At the core of the problem is a fundamental logic of sanctions relief. The United States and European governments can encourage business engagement with Iran, but they cannot guarantee that economic benefits will flow once restrictions are lifted.

Thousands of individual banks and corporations make their own decisions about risk and reward, and there are limits to how governments can assuage the concerns of anxious investors, shareholders, and boards. The current corporate exodus from Russia after its invasion of Ukraine, involving many companies not directly impacted by U.S. or European sanctions, demonstrates that private-sector actors make their own decisions that extend beyond strictly legal considerations.

The uncertain future of the nuclear deal risks becoming a self-fulfilling prophecy.

The medium- and even short-term longevity of the nuclear deal is also much more uncertain than it was in 2015. The United States’ withdrawal was conceivable then, but few considered it likely or imminent. Now, President Donald Trump’s unceremonious withdrawal in 2018 looms large. Top Republicans have even promised to renege on the deal as soon as they retake the White House, potentially in 2025. Three years is a long time for Iran to build up its war chest and stabilize conditions at home, but it is a perilously short time for any business weighing sustainable engagement with the country.

The risks may rise sooner than 2025. If Republicans win control of the House and the Senate in November, as appears likely, they will probably aim to throw as much sand in the gears of the agreement as possible. That could include new legislation aimed at reimposing sanctions under terrorism or human rights authorities that were otherwise lifted under the new deal. Iran’s regional activity—including support for terrorist groups that threaten the United States and its partners—will provide ready-made talking points for Republicans and some Democrats, as will Tehran’s likely ability to spend billions of dollars more on its military after sanctions relief takes effect. President Joe Biden still wields a veto, but the drumbeat of congressional pressure will be a constant reminder of the precarious nature of Washington’s commitment.

Congressional pressure will intensify heading into the fall of 2023, when the agreement requires the United States to seek to repeal legislation imposing sanctions against Iran. In exchange, Tehran is to ratify the Additional Protocol inspections regime, which expands the International Atomic Energy Agency’s authority to monitor Iran’s nuclear program. Even if Democrats retain control of one or both houses in the midterms, Congress will almost certainly not fulfill this provision. The UN Security Council’s restriction on Iran’s development of ballistic missile technology also expires simultaneously. Although these milestones may not automatically imperil the deal, they will at least cast a dark shadow over its future.

RAISI’S RESISTANCE

Shifts in Iran’s political scene over the past six years will also make implementation more difficult. In 2016, President Hassan Rouhani championed the agreement as a transformational moment in Iran’s relationship with the world, especially the United States and its allies. Only weeks after the deal was implemented, Rouhani traveled to Europe to sign billions of dollars’ worth of business deals. He also fought pitched battles at home to implement the agreement, including tussling with the IRGC over the involvement of foreign firms in sectors such as energy and construction. He pushed through legislation to reform Iran’s domestic banking regulations against stiff hard-line opposition. Still, Rouhani was only partially successful in this endeavor, and Iran today is on the blacklist of the Financial Action Task Force (FATF), a watchdog group that combats money laundering and terrorism financing.

The differences between Rouhani and the current Iranian president, hard-liner Ebrahim Raisi, are striking. Raisi’s foreign policy is focused on improving ties with Iran’s neighbors, Russia, and China—not the United States and Europe. It is hard to imagine Raisi traversing Europe seeking contracts or executives glad-handing a president who played a key role in the mass execution of thousands of political prisoners in 1988.

Negotiating the deal’s revival was challenging, but keeping the deal afloat promises to be even more difficult.

Raisi is also less likely to take the steps necessary to attract vital domestic investment to Iran. Since his election, he has spoken disparagingly about the reforms needed to remove Iran from the FATF blacklist. Given the IRGC’s prominent role in his administration, Raisi is unlikely to push the group aside to make way for foreigners. Instead, he will probably double down on Khamenei’s concept of a “resistance economy”—pouring resources earned from sanctions relief into strengthening Iran’s capacity to withstand future sanctions shocks, not into global economic integration.

Nevertheless, Raisi will claim credit for getting a better deal than his predecessor. But he will probably not be a cheerleader for very long, especially if the benefits come up shorter than many Iranians expect. Last year, some observers cast Raisi’s election as a “Nixon-goes-to-China” moment. Only a hard-liner, some analysts said, could deliver and defend controversial engagement with an adversary. As the vulnerability of the deal becomes clearer, however, Raisi is just as likely to use the agreement to fan the flames of resentment against Washington.

A TURBULENT PATH

European and some Asian firms will be the most sensitive to economic and political headwinds. Iran may bet that companies and banks in China and Russia will serve as better partners, although it is unclear whether these countries will buoy the Iranian economy. Moscow’s invasion of Ukraine has sent the Russian economy into a tailspin, and there is little reason to believe Russian firms will have the cash to invest in Iran.

Chinese firms, for their part, may be less cautious about returning to Iran. The 25-year agreement struck between Beijing and Tehran in 2021 could provide a road map for greater engagement, even though the U.S. media routinely exaggerate its importance and price tag. Yet Chinese firms are not immune to the structural problems of the Iranian economy or the risks of running afoul of U.S. sanctions, even if Beijing may be more supportive of the deal than other governments are.

Although the Biden administration originally aimed to use the revival of the deal as a platform for future negotiations with Iran, this prospect appears dim, especially if the deal fails to deliver the benefits many Iranians may expect. U.S. and European officials will probably argue that if Iran wants a more sustainable agreement, it needs to negotiate for one. But Tehran will probably draw the opposite conclusion. If the United States and its allies cannot deliver relief in the current circumstances, they are unlikely to do so in the future. Negotiating the deal’s revival was challenging, but keeping the deal afloat promises to be even more difficult.