Iranian nuclear agreement at risk

On 13 October, US President Donald Trump announced his intention to refuse to certify the Iranian nuclear agreement (the Joint Comprehensive Plan of Action: JCPOA) on the grounds that the agreement is not consistent with US national security interests.

US President Donald Trump's decertification gives the Republican-majority Congress the option to "snap back" the pre-2016 US sanctions on Iran with a simple majority in both chambers within 60 days. These sanctions included a ban on non-US businesses trading Iranian crude oil, investing in Iran's energy, petrochemicals, and automotive sectors, and transactions involving Iran's financial system.

However, a congressional "snap back" of the Iran nuclear sanctions, which would constitute a US unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA), is far from certain. Trump administration officials, including Secretary of Defence James Mattis, would likely lobby against any congressional action to reimpose deep sanctions to keep the United States technically compliant with the JCPOA. In the Senate, where the Republicans hold a narrow majority (52-48), even two likely defections could prove prohibitive, should such a bill come to a vote.

Absent a congressional "snap back", Trump would be required to take affirmative action in mid-January 2018 to keep the United States compliant with the JCPOA. Iran's sanctions waivers, directly affecting Iran's crude oil exports, expire every 120 to 180 days, with both sets of waivers up for renewal by mid-January 2018. Congressional impasse during the 60-day period would make the renewal by Trump more likely. Nevertheless, should Trump choose to withdraw the United States from the JCPOA, he could do so unilaterally at any point, without congressional action, by either refusing to renew the sanctions waivers or otherwise imposing the pre-2016 sanctions via executive orders.

Indicators of changing risk environment

• The Trump administration succeeds in amending the certification process with Congress (eliminating the requirement for the president to formally give a stamp of approval to the JCPOA every 90 days), reducing the risk of the United States withdrawing from the JCPOA in the one-year outlook by lowering the political costs of preserving the agreement for Trump.
• Trump declares the JCPOA is inconsistent with US national security interests, increasing the risk of the United States "snapping back" its nuclear sanctions in response to potential kinetic incidents between Iran and the United States, particularly between their respective naval forces in the Gulf.
• Although Trump will likely announce some new sanctions against Iran's powerful Islamic Revolution Guards Corps (IRGC), he will not formally call the entity a foreign terrorist organisation (FTO). The labelling would place Iran's most powerful state institution in the same category as other FTOs such as Al-Qaeda, Hizbullah, and the Islamic State, increasing the risk of Iran-US interstate war.
• A deterioration of Iran-Russia relations removes a key complication for the United States, increasing the risk of US military action against Iranian nuclear and military sites should Iran opt to expand its nuclear programme.
• The United States decides to withdraw from the JCPOA, with the reimposition of the pre-2016 sanctions likely in one fell swoop, rather than through incremental escalation. Residual US institutional and regulatory infrastructure means that activation of these sanctions will be relatively quick; however, there is precedent for the United States to offer exemptions to firms with significant investment in Iran.
• The United States withdraws from the JCPOA and "snaps back" its sanctions. However, Iran is likely to continue nuclear compliance to keep the JCPOA alive, preventing a "snap back" of UN and European sanctions. This follows Iran's likely priority of widening the gap between the United States and its European partners. This will mean that non-US companies with little exposure to the US financial system will have little incentive to withdraw their businesses from Iran. In contrast, non-US companies with significant operations in the United States and exposure to the US financial system will be likely to comply with US sanctions even if their origin country does not impose sanctions on Iran, unless they have secured exemptions from US sanctions.
• Nonetheless, decertification without sanctions "snap back" likely slows the inflow of much-needed investment in Iran's strategic oil and gas sector, critical for Iranian ability to grow production. If the economic benefits of Iran's continued nuclear compliance are deemed insufficient, Iran is likely to seek to quickly expand its nuclear programme. The narrowing of the breakout window - the time it takes to build one nuclear weapon - is Iran's strongest negotiating leverage for a potential future nuclear agreement, but it also increases the risk of US and/or Israeli military action.

Nazanin Soroush is an Analyst with the Country Risk team at IHS Markit covering the Middle East and North Africa
Posted 13 October 2017