“Sanctions are coming”— but Trump has no achievable end game for Iran

11/05/2018

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Suzanne Maloney | The Brookings Institution

“Sanctions are coming”— but Trump has no achievable end game for Iran

As the full brunt of American sanctions targeting Iran’s Central Bank snap back into place today, Tehran and the world are bracing for impact. The Trump administration’s “maximum pressure” campaign has already inflicted acute strains on Iran’s economy since the president’s decision six months ago to exit the 2015 nuclear deal. For the moment, Iran’s leadership is seeking to wait out the U.S. campaign, calculating that a show of endurance strengthens its hand by defying the administration’s narrative of its imminent collapse. Still, a prolonged standoff threatens far more damage for Iran at an appreciably precarious moment for the stability of the ruling system.

 

For its part, the Trump White House was practically giddy with anticipation as its self-imposed deadline approached for re-enacting the sanctions suspended by the nuclear deal. The White House trumpeted its application of the most intense economic warfare in modern times with a social media meme that likened President Donald Trump to a “Game of Thrones” character. It was a sophomoric, ego-driven stunt that only served to underscore the administration’s hubris in launching an assault against Iran that appears to have no achievable end game.

What does Washington want from Tehran? That is the central uncertainty of Trump’s Iran policy, since his evident impatience for triumphal headlines runs counter to his national security cabinet’s readiness to subject its longstanding Iranian nemesis to a crippling siege in hopes of regime change. The administration’s 11th-hour waivers for eight countries to continue importing Iranian crude will temper upward pressure on oil prices. But if Trump wants to bring Tehran back to the table, his officials will have to outline a more realistic platform for negotiations than the wish list of wholesale surrender that the administration has been advertising to date. The alternative—a high-stakes game of chicken between two unpredictable leaderships—leaves a profoundly risky environment for oil markets and for American interests in the broader Middle East.

U.S. TACTICAL SUCCESS

While its objectives remain unclear, Trump’s Iran policy to date has achieved some notable tactical success. Despite furor in Iran and from the European partners over his repudiation of the 2015 Joint Comprehensive Plan of Action (JCPOA), Washington’s uncompromising economic onslaught has hit Iran hard at a time when confidence was already flagging, thanks to disappointment that followed inflated expectations around the dividends of the nuclear deal. Since Trump’s May announcement, nearly all major European investors and banks have fled Iran, the value of its currency has plummeted, and shortages of basic goods from diapers to tomatoes have necessitated rationing as well as new price and export controls.

And while the waivers have prompted sighs of relief among market watchers and others, it’s likely to get worse for Tehran. Anticipation around today’s re-imposition of measures penalizing Central Bank transactions has already begun to erode Iran’s oil exports, with official statistics for September and October down by at least 600 barrels per day, down from an average 2.2 thousand barrels per day (mbpd), despite a recent boost in Chinese crude loadings. Today’s sanctions waivers for several of Iran’s largest importers may assuage oil market jitters and leave greater flexibility to manage any future supply disruptions, but they won’t significantly mitigate the impact on Tehran, as the measures will keep the bulk of its oil revenues locked in overseas escrow accounts. The net result is likely to be a slow-motion collapse of Iran’s fiscal balance and new strains on its capacity to manage an intersecting array of internal and external crises.

The sanctions’ precipitous impact on Iran refutes some of the skepticism that initially greeted Trump’s withdrawal from the deal. The conventional wisdom holds that unilateral sanctions tend to be ineffective and easily bypassed, and many assumed Washington’s go-it-alone approach on exiting the nuclear deal would be undercut by defiance from Iran’s eager trade partners in Europe and Asia. However, that premise proved overly optimistic, as the centrality of the dollar in the international financial system and the threat of losing access to U.S. markets persuaded a rapid and nearly wholesale exodus from non-oil business with Iran. And even with the active opposition of the rest of the world, the Trump administration has secured larger cuts to Tehran’s oil exports on a more accelerated timeline than President Obama’s more judicious and far more multilateral approach managed to do. The slope of the decline may modulate over time, depending on global economic growth and the stability of other sources of oil supply.

Still, under current conditions, the world’s capacity to constrain American economic hegemony has proven limited. A banking mechanism announced with great fanfare by European leaders in September remains in limbo due to their own governments’ risk aversion. Even the Chinese have been forced to scramble; the bank that had long served as a reliable and seemingly insulated conduit for transactions with Tehran has severed its business with Iranian customers. Even as Iranians crow that the administration failed in its bid to drive its exports to zero as U.S. officials repeatedly threatened, the inference for the rest of the world is clear: American financial unilateralism works, at least for now.

IRANIAN SURVIVAL SKILLS

Tehran has many tools at its disposal to manage financial constraints, and considerable experience in enduring epic crises. After all, the Islamic Republic has faced various forms of economic pressure throughout its 40-year existence, beginning with the disruption caused by the 1979 revolution. The first round of U.S. sanctions were imposed later that year after Iranians seized the U.S. Embassy in Tehran and held its personnel hostage for 15 months. In the decades that followed, the Iranian leadership has had to contend with profound economic constraints—those generated by sanctions as well as a succession of regional conflicts and the recurrent volatility in oil markets.

As a result, Iranian leaders have nearly perfected the playbook for surviving tough times by any means necessary. The regime’s very survival during the eight-year war with Iraq, when U.S. measures prevented the replenishment of its military equipment, depended on mobilizing domestic production and tapping into alternative supply networks, and both remain essential tools in the arsenal of Iran’s Revolutionary Guard Corps. Tehran has developed its own fleet of supertankers as a backstop to store excess crude production, and—once the transponders are deactivated—to export it semi-covertly. With oil prices hovering near $80 per barrel, Iran will find buyers for whatever volumes it can export.

Based on prior experience, Iran has expanded its external crude storage capacity in China and will be doubling down on opportunities to amplify opportunities for non-oil trade with its neighbors. Its officials and businesses are adept at various means of circumventing U.S. measures that target financial flows, whether that involves working via front companies, conducting barter trade, funneling crude exports via neighbors, or utilizing or even more unconventional tender such as cryptocurrency.

All these contrivances will surely enable Tehran to muddle through with a combination of mitigation, improvisation, and greater institutional capacity than outside analysts typically presume, just as its leadership has during even more severe episodes of financial constraints and externally-imposed pressure. And today the Islamic Republic benefits from more meaningful international support than at any other point in the past 40 years: a burgeoning if mutually suspicious strategic partnership with Russia, the economic and strategic opportunism of Beijing, and full-throated (if still operationally impeded) assistance from Europe. All this enables Iranian leaders to put up a good front at home and stiffens its spine in responding to Washington.

However, the presumption that the Iranian leadership can simply choose to wait out the sanctions is plainly unrealistic. The capacity to ride out tough times does not imply a readiness to submit to an indefinite siege, particularly at a time when public patience with economic malaise is already running thin. The Islamic Republic has demonstrated greater resilience than many outside observers initially anticipated, but that is a direct product of its leaders’ core pragmatism, especially with respect to the regime’s survival. (Remember Ayatollah Khamenei’s “heroic flexibility”?) Neither this week’s midterm elections nor any other possible twist in American politics will reverse the U.S. policy of pressuring Tehran, and enduring until 2020 offers hardly better guarantees. With an epic transition—only the second process of succession of the revolutionary state’s supreme leader—looming not far over the horizon, the mandarins of the Islamic Republic are appraising their options shrewdly.

This is why Iranian Foreign Minister Mohammad Javad Zarif greeted the re-imposition of sanctions with a carefully placed interview in a mass readership American newspaper suggesting Tehran would countenance renewed engagement as soon as “mutual respect” could be established. His remarks build on months of casual speculation among Iranian politicians around the possibilities of generating viable new negotiations.

TRUMP ADMINISTRATION IN A BOX

The severity of the sanctions and the wary overture from Tehran will surely tempt the hawks in the White House to turn up the heat further in the expectation that the clerical regime is already on the ropes. However, tactical gains don’t constitute a successful strategy, and the distinction between Trump’s episodic commentary on Iran and the narrative articulated by senior officials such as National Security Advisor John Bolton and Secretary of State Mike Pompeo suggests real ambiguity surrounding the administration’s end game and the means of achieving it. While the president himself has consistently touted the prospect of a new negotiating process, Bolton and Pompeo have a long history of infatuation with the concept of regime change, and the clamorous public diplomacy campaignthat has accompanied the sanctions seems to designed to reinforce that perception.

Washington won’t succeed if the administration is pursuing mutually incompatible goals. If the Trump administration is serious about new negotiations that are intended to devise a treaty relationship with Tehran, the White House needs to articulate a viable strategy for engaging with Iran around a vast and complicated array of issues. Pressure in and of itself won’t generate a durable negotiating track or a bargain that is broader and more advantageous to Washington than the JCPOA.

Alternatively, if the point of pressure is regime change, it’s simply not a reasonable near-term bet. Many Iranians are deeply unhappy with their government, and as I argue in a forthcoming essay, the convergence of pressures from within and without is pushing the ruling system toward a breaking point. However, popular dissatisfaction alone rarely produces simple, successful democratic transitions, and an authoritarian regime that sees its existence threatened by economic pressure may only turn inward and more antagonistic toward the region and its own citizens.

With a president whose mercurial temperament is particularly ill-suited to strategic patience and an adversary that has a range of alternatives to dialogue available, the longer this standoff with Iran endures, the more destabilizing its denouement is likely to become. Trump’s success to date has already incurred significant long-term costs, including weakened American credibility, embittered allies, and the inevitability of blowbackto U.S. financial unilateralism will weaken American influence over time. If all else fails, Tehran may make good on a chorus of warnings from senior officials that blocking its oil exports will endanger its neighbors’ capacity to export. Today’s waivers preempted supply disruptions that could have caused energy prices to spiral and global growth to slow. Should the survival of their regime come into question, Iranian leaders may not prove so prudent.

Copyright 2018 The Brookings Institution

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