In its negotiations with Tehran on this issue, the Obama administration has declined to commit to the retention of sanctions until Iranian compliance can be demonstrated. For its part, Iran has insisted that it will agree to no deal that doesn’t include sanctions relief on day one. The Obama administration has instead chosen to focus on the notion of “snap back,” claiming that sanctions can be immediately re-imposed if Iran is found to be cheating on a deal.
This claim has been disputed by various commentators, including former US Special Envoy for Nuclear Nonproliferation Robert Joseph, who gave on online talk on Wednesday via the IranFreedom.org website, in which he discussed his objections to the nuclear negotiations and his more general recommendations concerning Iran policy.
Joseph described the notion of snap back as “illusory,” saying that the emerging nuclear deal lacks effective verification and that commercial interests among countries that begin doing business with Iran will undermine political will to identify cheating or to act upon it with global consensus. Joseph claimed that this would apply even to countries that count among US allies and current adversaries to Tehran, such as France and Germany.
Among opponents of the Obama administration’s strategy, this concern comes in addition to concerns over the influence of Iran’s allies, which already have an interest in undermining enforcement of current sanctions, as well as snap back of those that might be removed. These concerns were amplified on Thursday when Bloomberg reported that Vitaly Churkin, the Russian ambassador to the UN had explicitly rejected the idea that Russia would support automatic re-imposition of sanctions on Iran.
As one of the five permanent members of the UN Security Council, Russia is in a position to veto such measures and is also a part to the negotiations over Iran’s nuclear program, which are facing a June 30 deadline.
But at the same time that Iran’s close relations with countries like Russia provide it with some insulation from the effects of international economic pressure, Iran’s deteriorating relations with other global players may still have the opposite effect. This was illustrated on Wednesday when Reuters reported that the Central Bank of Bahrain had taken control over Future Bank, which is Iranian-owned and has operated on the imperative to expand economic cooperation between Iran and the Gulf Arab nations.
The CBB explained that this measure was aimed at “protecting the rights of depositors and policyholders,” but it did not elaborate, leading to some speculation that the conflict stems from Arab fears of expanding Iranian influence in the broader Middle East. Iran’s contribution to the troubled security situation in the Gulf may thus threaten business opportunities with some foreign entities even if sanctions are removed.
According to another Reuters article, this only adds further to pre-existing barriers to investment in the Iranian economy, even among entities that genuinely want to pursue those investments. After noting that Iran has an enticing 523 billion dollars in banking assets, Reuters says: “But the Iranian banks’ shaky finances and close ties with their government will increase the risks of dealing with them. And during their years of isolation, they have developed a version of Islamic finance that is in some ways markedly different from that practiced in other Muslim-majority states.”
In other words, the Iranian banking system has adapted to operating in isolation and may find it difficult to adapt to a post-sanctions situation. And this is to say nothing of the concerns that foreign countries may have about investing in Iranian banks that are cash-starved and that operate with close ties to the hardline Iranian government.
Yet another Reuters report indicates that foreign investors in the Iranian market may remain skittish about such investments even after sanctions are lifted. Although the input of entities like Russia and the analysis of individuals like Robert Joseph suggest that snap back may be impractical, any threat whatsoever may be substantial, especially at a time when Iran simply does not possess enough business opportunities to outweigh the implicit risk.
On the other hand, this risk is a known factor because some Western banking institutions have already fallen afoul of sanctions and been penalized in the billions of dollars. But this also illustrates an extant interest in foreign investment, which is likely to grow once sanctions are removed, regardless of any snap-back threat.
At the same time, this growth in interest is something that Iran will do everything in its power to push for. This was acknowledged by Reuters in an article indicating that Iran desperately needs higher oil sales to stabilize its economy, and will even accept lower prices in order to secure those sales. In this sense, even modest foreign investment will help to preserve the Iranian regime and will effectively represent a loss of international leverage over that regime.
This is significant even if the loss of leverage is less dramatic than some of the regime’s strongest opponents might expect. Such opponents emphasize that a net increase in the Iranian regime’s wealth could be channeled into further support of global terrorism and further crackdowns on the domestic population.
On Monday, the Financial Times pointed to this danger in its reporting on Iran’s illicit purchase of nine commercial aircraft via an Iraqi front company. The report points out that the type of aircraft concerned are known to be used by the Iranian Revolutionary Guard Corps for shipments of arms and personnel to foreign terrorist organizations and battlefields onto which the IRGC has extended its direct influence.
The fact of this purchase and its potential consequences both point to the dangers of lost economic leverage against the Islamic Republic. Notwithstanding the barriers to newfound investment in Iran, the cumulative effect of sanctions relief may be greater than expected due to the ongoing Iranian circumvention of sanctions with the help of a growing list of international partners.