Any U.S. shooting war with Iran will probably be escalation of the sanctions war, a war the US kicked off with the fall of the Shah in 1979, escalated to the United Nations in 2006, and will probably never bring to a conclusion.
The Obama administration tried a sanctions limited cease-fire with the Iran nuclear deal but, with the election of Donald Trump, the peace may turn out to be fleeting and inconsequential.
The key element of the JCPOA (Joint Comprehensive Plan of Action) nuclear deal with Iran was relaxation of sanctions against Iran in return for concessions by Iran on its nuclear programs.
In a bizarre twist, the first stage of JCPOA as negotiated by John Kerry did not involve unraveling sanctions restrictions on U.S. corporations. Those remained largely unchanged. Instead, JCPOA involved the removal of some UN sanctions on Iran and an announcement that non-US parties would no longer face penalties themselves, i.e. “secondary sanctions, ” for doing business with a clutch of key Iranian companies.
In the old days, you see, a European bank or corporation could be itself liable to “secondary sanctions” for doing business with a long list of Iranian entities implicated in U.S. nuclear sanctions; but not anymore! JCPOA knocked about 200 entities off the U.S. sanctions list, the biggest one being Iran National Oil Company, and oil was back on the menu!
Back on the menu for the Europeans, at least.
The P5+1 international structure of JCPOA and staged de-sanctioning was designed by the Obama administration in part, I think, to entangle the Europeans into the deal and buck some major US domestic political headwinds.
Getting EU businesses into Iran was, I suspect, one of those irresistibly smart/clever gambits that Obamanistas congratulate themselves about. If the EU got in, American business would demand to get in, too, and energize a key constituency for normalization of U.S. relations with Iran.
And, since the European nations and banks were, at best, unenthusiastic participants in the Iran sanctions regime and would object to a collapse of the agreement and closure of the business window with Iran, supposedly the diplomatic costs of withdrawal for any successor US administration would be unacceptably high.
Well, maybe too high for Clinton. With Trump, we’ll see. I don’t think he expects to put “got rolled by the EU on Iran” on his list of achievements.
But even if Trump doesn’t overtly can the Iran deal, he can still sabotage it, mainly by sanctions.
And that’s already happening. And it didn’t start with Trump.
It has been virtually ignored in the US media, as far as I can tell, that the Treasury Department has significantly sabotaged Obama administration removal of "secondary sanctions" related to Iran’s nuclear activities--in other words, undercutting the declaration that third parties, mainly EU corporations and businesses, could safely do business with Iran.
Significant swaths of the US Treasury Department are a hotbed of anti-Iran sentiment. In 2011, the Treasury Department designated Iran’s entire financial sector as a jurisdiction of primary money laundering concern whose “deceptive financial practices” “facilitate illicit conduct and evade sanctions” and pose “illicit finance risks for the global financial system”.
There are some hard, hard core anti-Iran ideologues in Treasury, particularly in the Office of Terrorism and Financial Intelligence. But their anti-Iran vendetta can also draw support from the fact that Treasury relies on cooperation from foreign jurisdictions for its enforcement activities… and they are never going to get the cooperation they want from Iran.
As far as Treasury is concerned, I think the presumption is that the Iranian government does not accept the legitimacy of the sanctions regime, it will connive to evade sanctions, and it cannot be regarded as a sincere or trustworthy interlocutor with the Treasury Department in detecting, investigating, or reporting violations.
In other words, Treasury believes as long as there are illicit Iran-related operations going on and the Iran government is determined to shield them, probably any foreign bank is going to end up handling tainted transactions wittingly or unwittingly…and JCPOA enables that by opening up the European end of the global financial system to Iran.
Put it that way, you have to admit Treasury has a point.
And European banks have a problem.
Treasury penalties can sting. When BNP Paribas accepted responsibility for knowingly flouting US sanctions on Cuba, Sudan, and Iran, it paid a $963 million fine to the Department of the Treasury…on top of $8 billion in federal and state criminal penalties as part of its plea deal.
With this context, European banks are understandably queasy about endangering their global business for the sake of scooping up some Iranian letter of credit money.
So you get reports like this:
Although Europe’s industrial powers have shown great enthusiasm for closer trade ties with Iran since then, the remaining unilateral US sanctions, whose language is vague and levy hefty fines on violators, have frightened European companies.
...matched with reassurances like this one from Iran’s President Rouhani, who is now in Sweden trying to convince Europe to stand up to Trump:
Iran’s president said the European Union is counted upon to support European firms and banks willing to work with Tehran, assuring them there will be no negative consequences.
Yeah, sure.
Treasury has enormous discretion in identifying, investigating, designating, and delivering “negative consequences” to foreign institutions that displease it, by hammering them via unilateral closed-door proceedings that exclude the accused and can employ confidential informants *cough* US cyberhacks *cough* and evidence provided by friendly foreign governments *cough* Israel *cough*.
Treasury has provided little if any assurance that it will be liberal and benefit-of-the-doubt-y in looking at the operations of European banks doing business with Iran. Just the opposite, it appears.
JCPOA was supposed to ease Iran into the international financial system by letting European banks transact dollar-denominated business with Iran as long as it didn’t touch the American shore.
But, as a law firm explained…
It remains to be seen whether many FFIs [Foreign Financial Institutions] will be willing to engage in this kind of business because there are still risks. First, FFIs have to ensure they are not inadvertently clearing payments through U.S. financial institutions. Second, they have to ensure they are not dealing with SDNs [Specially Designated Nationals i.e. sanctioned individuals and entities]… Third, engaging in this kind of business could have adverse effects on an FFI’s relationship with U.S. financial institutions. U.S. banks, for example, may be hesitant to maintain correspondent banking relationships with FFIs that process U.S. dollar payments offshore for Iranian banks.
Unsurprisingly, with the departure of Obama and the advent of Trump, as of mid-January, Treasury was still putting the chill on European banking arrangements with Iran.
European and Asian financial institutions are cautious about returning to Iran because of the multi-billion-dollar fines imposed by the US Department of Justice on the likes of Hong Kong’s HSBC and France’s BNP Paribas for alleged sanctions violations since 2010.
‘For good reasons, a number of non-US financial institutions have a policy that they will not get involved in any of these transactions. A number of others will simply assess the opportunity on a case-by-case basis, having done their own due diligence and sought legal advice.’
Trump doesn’t have to do much to poison the Iran deal; Treasury’s doing that for him.
If he wants the Iran deal to work, he’s got to bulldoze Treasury; and I don’t see him doing that.
Combine an aggressive Trump anti-Iran strategy with Treasury recalcitrance and you've got a recipe for trouble.
Trump can make those de facto secondary sanctions de jure by repudiating the Iran deal. Or, if he decides to keep the Iran deal in place, albeit only as a lifeless shell, he can relist important Iranian entities on the US sanctions list for supposed non-JCPOA transgressions in the areas of missile tests, human rights, and support for terrorism, and reinstitute secondary sanctions that way.
And he might not even have to that, and just rely on Treasury to continue to intimidate European banks with the threat that they might get investigated and penalized for any Iran links they do establish.
Iran is looking at dodging US sanctions-related harassment by switching to the Euro, as an Iranian news agency reported:
Relatedly, a banking director has stated that in currency dealings, measures have been taken to carry out financial transactions in currencies other than US dollar and currently, along with euro, local currencies have also replaced the American money.
“It seems that anti-sanction measures of Iran against threats made by Donald Trump are being unveiled and activated in a succession,” he underlined.
But Iran might find that any European financial institutions with dollar exposure i.e. all of them might still be governed by fear of the U.S. Treasury Department, no matter how much they hate Trump and would love to do Euro business.
As Iran tries Plan B-- a path to the Euro, I think it is probably now looking at Plan C--C as in China--where it has to conduct its international business through cutouts in China.
And, as I describe in my February 6 edition of China Watch, China, by virtue of its deep economic engagement with Iran and history as co-conspirator in Iran’s evasion of sanctions, is an essential element in any Iran sanctions war strategy.
Iran is not terribly happy to rely on the PRC, which was apparently rather predatory in its commercial dealings with Iran during the Bush/Obama sanctions years.
Rather spectacularly, if also confusedly, Iran media reported that Iran was engaged in a dispute/negotiation/discussion? whatever with China over $18 billion/$22 billion/$25 billion/$47 billion? whatever of Iranian oil money that Ahmadinejad had locked up in a Chinese bank when US dollar denominated oil business couldn’t be openly transacted.
Probably part of Iran politics, and an attempt by the Rouhani crowd to dodge the "sold out to the United States" smear by redirecting to the "Ahmadinejad sold out to China" smear.
But also, I think, a sign to China that Iran can make trouble for the PRC by exposing it as a sanctions violator if Xi Jinping is too supportive of an aggressive Trump policy on Iran.
And the Trump administration already has its eye on China in the Iran sanctions game.
Trump fired the first volley in his sanctions war with Iran and China with his February 3 addition of several Chinese individuals and companies to the Iran sanctions list.
I doubt it will be the last.
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Peter Lee, Newsbud Senior Analyst & Commentator, has been involved in East Asian affairs since 1979, first as a businessman and then as a writer. He has been writing on China with a focus on US policy since 2005. Mr. Lee’s work has appeared at Asia Times, CounterPunch, Japan Focus: The Asia Pacific Journal, and the South China Morning Post. He is the proprietor of the China Matters blog.