Back Under U.S. Sanctions, Iran Looks for a Plan B
By: Analysis | Stratfor.comJuly 24, 2018
Highlights
  • Iran's strategy to get the European Union and other economic partners to push back against unilateral U.S. sanctions will fail.
  • As sanctions hit Iran's economy, the country will eventually have to resume negotiations with the United States, but it will try to wait until President Donald Trump leaves office.
  • In the meantime, Tehran will consider restarting its nuclear program as leverage in talks with the United States to keep other more important issues off the table.

The question of Iran's changing its response to the United States' withdrawal from the nuclear deal is no longer whether but when. Iran initially took a pragmatic approach to the news, predicated on other countries' willingness to push back against Washington and continue purchasing oil from the Islamic republic after U.S. sanctions go back into effect Nov. 4. But that outcome now looks unlikely. As a result, Iran will shift to a more aggressive response, including perhaps pulling out of the Joint Comprehensive Plan of Action (JCPOA) and even restarting its nuclear program to gain leverage in future talks with the United States. 

The Sting of Sanctions

For Iran, the writing is on the wall. The U.S. sanctions against it have teeth, and so far, most U.S. allies seem reluctant to defy them. During a trip to the Continent early this month, Iranian President Hassan Rouhani couldn't get the guarantees he wanted for continued connection to the European banking sector. Then on July 12, two Japanese banks — including Japan's largest, Mitsubishi UFJ — announced that they would stop processing Iranian transactions once sanctions go into effect. Furthermore, Washington shows little interest in granting waivers to allow countries to import Iranian oil at reduced volumes. That means Iran's oil exports to U.S. allies such as Japan, South Korea and some EU countries could drop to zero. Japanese refiners indicated that they would stop importing oil from the Islamic republic by early October, while other countries such as India have begun reducing their shipments. Iran's oil exports fell from 2.6 million barrels per day to 2.3 million bpd in June. 

Although the United States has yet to rule out waivers, it's becoming increasingly clear that Washington is following a maximalist strategy against Iran and that oil is a critical part of that strategy. The United States has already decided not to issue waivers for the European Union. (The bloc, however, is considering letting member states' central banks work directly with that of Iran to maintain some incentive for Tehran to stay in the JCPOA.) A U.S. delegation visited Turkey and India last week to push for their compliance as well. And now that Libya's oil production is coming back online, the United States has more room than ever to deny its allies' requests to keep importing Iranian oil. Even China — a rival of the United States — has not committed to maintaining oil imports from Iran. If the trend continues, Iran's oil exports could drop by as much as 1.6 million bpd by the middle of next year — far more than initially expected.

 

The pressure will likely be more than Iran can take in the long run. Its economy was already in rough shape before the United States left the JCPOA. From October to late June, the market rate for the Iranian rial went from 40,000 to the dollar to as much as 90,000 to the dollar. Steep increases in food prices at the end of 2017, moreover, sparked protests that carried into the new year. As the country's oil revenue dwindles, the discontent will doubtless mount. Iran, keenly aware of this risk, recognizes that sooner or later, it will have to come back to the negotiating table or else suffer economic collapse.

Negotiating on Tehran's Terms

When it does, though, the Iranian government will want to make sure its regional and defense policies, including its support for regional militias such as Hezbollah, are off limits in talks with the United States. Tehran managed to get assurances from Washington during discussions over the JCPOA between 2013 and 2015 that the United States would not pursue regime change in Iran. Nor did it have to give up its ballistic missile and cyber programs, its activities in the Persian Gulf or its support of proxy groups. Iran will resist conceding on these issues in future negotiations with the United States, despite the fact that U.S. President Donald Trump's administration is focused on curbing its regional strategy.

To that end, Tehran will consider resuming its long-range ballistic missile tests, its harassment of foreign vessels, including U.S. ships, in the Persian Gulf, and parts of its nuclear program. Developments on these fronts have already started emerging; the Islamic Revolutionary Guard Corps (IRGC) has recently threatened the Strait of Hormuz, while Supreme Leader Ayatollah Ali Khamenei has ordered the expansion of Iran's uranium enrichment capacity. Restarting these programs would give Iran something tangible to offer the United States in negotiations over sanctions without sacrificing more important aspects of its defense strategy. And by doing so, Iran won't necessarily violate the terms of the JCPOA, since it can argue that the goals of its nuclear program are peaceful and that its other activities are aimed at self-defense. Tehran still must tread lightly to avoid heavier punishment from the United States or the return of EU sanctions. But as the U.S. measures restrict Iran's economy and its options to trade with the European Union, Iran will have less reason to worry about alienating the bloc. While it will probably take care not to flagrantly breach the conditions of the JCPOA, Iran is looking increasingly likely to get at least some aspects of its nuclear program back underway.

The challenge for Iran is that any action on its nuclear program will give the Trump administration more ammunition against it and could even prompt U.S. or Israeli airstrikes on Iranian tactical targets. On the other hand, if Tehran goes into negotiations without the bargaining chip of renewed nuclear activity, it may have to yield to further U.S. demands on its nuclear program, such as higher limits on uranium enrichment, to safeguard its regional strategy.

Waiting for the Next Elections

For the Iranian president, this predicament will be difficult to navigate. The JCPOA's failure and Rouhani's inability to fulfill the economic promises he campaigned on in the 2013 and 2017 elections already have forced the president to take a more conservative line to fend off criticism from Iran's hard-liners. Knowing that Tehran will eventually have to return to talks with the United States, the IRGC and other conservative factions will try to expand their political influence in Iran to ensure they have a seat at the table. The Foreign Ministry and moderate politicians took the lead in previous rounds of discussions in 2013 and 2015, sidelining the Supreme National Security Council — a body dominated by the intelligence and military apparatus — all but excluding the IRGC.

To stake its place in future talks, the IRGC will keep trying to discredit and marginalize Rouhani in parliament, in Iran's unelected institutions and on the streets. It has even threatened to impeach the president, though removing Rouhani from office would leave the conservatives to take responsibility for the country's economic problems, perhaps to their detriment in the next elections. Should their efforts win the hard-liners the presidency in 2021, the next round of negotiations with the United States will play out much differently from the last two.

Regardless, the Iranian government will probably try to postpone negotiations with the United States until after the next U.S. presidential election in 2020 in hopes that Trump does not win a second term. A president from the Democratic Party would likely be less aggressive toward Iran and may even emphasize the nuclear issue, ignoring some aspects of regional strategy — as former President Barack Obama's administration did. The trick, of course, will be withstanding the Trump administration's pressure in the meantime. If economic conditions in Iran continue to decline, more large-scale protests like the ones that happened earlier this year or like the 2009 Green Movement could erupt. The IRGC will, in turn, try to suppress public unrest — all the while trying to gain control of the political system. But if it fails, the threat of a popular uprising may be enough to force the government to compromise in negotiations with the United States on the issues it once considered red lines.

Back Under U.S. Sanctions, Iran Looks for a Plan B is republished with permission from Stratfor Worldview, a geopolitical intelligence platform.

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