The Debate

How Trump Can Strengthen US Leverage Against Iran

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The Debate

How Trump Can Strengthen US Leverage Against Iran

Scrapping the nuclear deal will backfire.

How Trump Can Strengthen US Leverage Against Iran
Credit: Flickr/ Bundesministerium für Europa, Integration und Äusseres

Before trashing the Iran deal — the agreement inked last fall, which limits Iran’s nuclear program in exchange for sanctions relief — the incoming Trump administration should consider how a policy of soft economic engagement with Tehran could provide Washington with strategic leverage and increased bargaining power in a post-Iran deal world.

Throughout his campaign, now President-elect Trump attacked the Iran deal, claiming that “it will go down in history as one of the worst deals ever negotiated.” The future of the deal now seems to be far less certain, as Trump fills key positions with outspoken critics of the agreement. Congressman Mike Pompeo (R-KS), Trump’s recent pick for CIA director, is well-known for his hardline stance on the deal, recently noting that it should be “rolled back.”

To be sure, the deal is not without its flaws. For one, there is still uncertainty around what will happen when the agreement expires in ten years, at which point Iran would be free to resume its enrichment program. Moreover, Iran recently violated the agreement’s cap on heavy water and continued to produce heavy water for two weeks after the IAEA learned of the violation. According to David Albright and Andrea Stricker of the Institute for Science and International Security, “the ongoing secrecy surrounding the decision-making of the Joint Commission is a serious shortcoming in the implementation of the JCPOA and raises legitimate questions about the adequacy of Iran’s compliance.”

Upending the Deal Decreases U.S. Leverage

Despite these issues, upending the deal now puts the United States in a precarious position — reducing, not increasing, economic leverage against Iran. Instead, Trump should see the next ten years as an opportunity to ensure Iran’s commitment to a peaceful nuclear program while at the same time increasing Washington’s economic leverage over the country.

The conventional wisdom in Congress — and in the new administration —  seems to be that continuing sanctions will increase U.S. leverage over Tehran. Before breaking for the year, the Senate moved to pass a ten-year extension of the Iran Sanctions Act — the legislative centerpiece that bans U.S. trade and investment with Iran. Senate Foreign Relations Committee Chairman Bob Corker (R-TN), who pushed for tougher sanctions against Iran during negotiations, told reporters that the Senate would push for something “much broader” when Congress resumes next year. In October, Representative Lee Zeldin (R-NY) stated that “the key for the next administration is to have leverage restored so that we can turn this around and start dealing with all of Iran’s bad activity.”

This conventional wisdom, however, is wrong. First, the success of U.S. financial and economic sanctions rested, at least in part, on cooperation with the EU and U.K. If the United States walks away from the deal now, it will do so alone. This means that the United Kingdom and EU will continue to honor its commitments under the deal, offering a circuitous route around the U.S. financial system. This, of course, undermines the U.S. credibility to impose and enforce secondary sanctions.

Second, it is important to remember that the United States is the de facto gatekeeper to the global financial system. Sustained use of global economic warfare risks politicizing the global financial system and increases the likelihood that businesses and states will adapt to hedge against U.S. financial dominance. A recent study by John Park and Jim Walsh at MIT found that U.S. sanctions imposed against North Korea have been largely unsuccessful at curbing the country’s illicit procurement because of, in part, North Korea’s keen ability to adapt.

In a recent statement to the Washington Post, Mark Dubowitz, the executive director at the Foundation for Defense of Democracies, stated that “one should never underestimate the power of U.S. secondary sanctions and the fear that creates in the marketplace — a fear that has now been intensified as a result of a President Trump.” But it was fear of secondary sanctions that led some states, like Russia and China, to begin developing alternatives to the U.S.-dominated global financial system. Thus, while secondary sanctions are indeed powerful tools, there is a degree of risk and uncertainty in the long run, which could leave the United States in the cold.

Although Unpopular, Stay the Course

Although politically unpopular, the Trump administration should resist calls to change course on the Iran deal. Instead, and perhaps somewhat counterintuitively, Trump should continue the Obama administration’s current policy of building confidence within the global economy, and assuring international banks that the United States will uphold its commitments under the deal to provide sanctions relief, all the while keeping Tehran at an arm’s length from the U.S. financial system. This can provide a significant strategic advantage for Washington.

To promote deeper ties between Iran and the international economy, Secretary of State John Kerry has worked behind the scenes to provide assurances to global financial institutions. While international banks are warming to the idea of re-engagement with Iran, the U.S. financial system remains off limits, despite the increased rhetoric from Tehran that Washington is not upholding the “spirit of the agreement.” In a speech to the UN General Assembly this past September, Iranian president Hassan Rouhani chided the United States for its “lack of compliance with the JCPOA,” and later lamented the “confusing signals” from the Treasury Department for creating doubt about the legalities of conducting business with Iranian entities.

In fact, one of Iran’s major complaint is the ban on “U-turn” payments, which remains in place. In November 2008, the U.S. Treasury Department revoked Iran’s license to conduct “U-turn” payments, citing Iran’s threat to global financial system and its banks’ role in terrorist financing and nuclear proliferation. Prior to the determination, Treasury had permitted U.S. banks to conduct financial transactions that benefited Iran, but only if the transaction originated at a non-Iranian, non-U.S. offshore institution and ended at an offshore institution. For these transactions, U.S. banks acted essentially as pass-through accounts, which effectively allowed Iranian banks to bypass sanctions. With the ban in place, however, Iranian banks are largely prohibited from accessing the U.S. financial system. In addition to the U-turn ban, other U.S. terrorism and human rights-related sanctions remain in place, which, according to Rouhani, are not consistent with the spirit of the agreement.

In September, the U.S. Treasury Department updated its guidance to foreign financial institutions on lifting sanctions, specifically providing clarification on permitting dollar-denominated accounts for Iranian customers, transactions with off-shored U.S. dollars, and doing business with entities partly owned by sanctioned businesses. Although the guidance was meant to provide assurances, it is not yet clear, however, how this it will affect international banks’ perceptions of risk in doing business with Iran.

Clearly, though, Iran understands the importance of making progress toward implementing modern banking standards and reintegrating its banks into the global financial system. The country has made overtures to clean up its own financial system. In fact, Iran has adopted new legislation countering money laundering and terrorist financing, which addresses many, but not all, of global banks’ concerns. The country is also in the process of joining the Financial Action Task Force, which is an international non-governmental body responsible for setting anti-money laundering and terrorist financing standards.

Iran’s continued progress is not only good for the deal in the short run, but also provides greater transparency and better leverage for the United States in the long run. What the Trump administration must realize is that as Iran reconnects with the global financial system, the number of options available to the United States to apply pressure also increases. Targeted and secondary sanctions are precision instruments, and are most effective when the receiving country’s economy is sufficiently complex. This allows the sending country, in this case the United States, to precisely target specific businesses or economic sector.

But if the Trump administration backs away from the Iran deal now, the United States will lose this advantage. Without support from the EU and the U.K., there will likely be a shift away from the dollar-dominated global financial system. Not only does this diminish the ability of the United States to impose secondary sanctions against Iran, but it also diminishes the capacity to impose sanctions in other global arenas. In sum, an opportunity to ensure the longevity of the Iran deal exists, but the Trump administration must be keen to playing the long game.

Aaron Arnold is an associate with the Project on Managing the Atom at Harvard’s Kennedy School of Government and an assistant professor of public policy at Curry College.