Iran and risks to the Sanctions Regime

I’ve been spending a lot of time (maybe too much time) in the last few weeks thinking about the Iran deal and economic and political impact of the U.S. exit.  I’m not alone, judging by the sheer number of quickly organized JCPOA exit panels in D.C. last week. If people seemed insufficiently worried about the risks a month ago, now the related topics are front and center, including concerns about the way the decision making process and U.S. isolation might undermine future sanctions, U.S. influence and regional security.

Having written at some length about the macro, energy and policy impacts, it seems a good time to highlight in this post some concerns about possible negative risks to the sanctions apparatus, a topic treated well by Elizabeth Rosenberg (with whom I’m lucky enough to do some work at the Center for a New American Security).

Interlocking sanctions confuse the targets and make it hard to imagine an eventual lifting: U.S. sanctions targeting Iran on different grounds are now becoming intertwined. The U.S. has long had sanctions against Iran for support of terrorism, the nuclear program and ballistic missiles among others. These are now becoming intertangled, blurring the lines for those looking to identify  policies or behavior that might result in sanctions relief or an eventual deal. That is, its becoming harder to isolate the behavior that the target is being asked to change. While premature at this point, it increases risks the sanctions are merely punitive rather than being linked to a policy change Its worth noting that U.S. Russia sanctions too have converged towards to a focus on a wide-range of “bad actions” suggesting they too could be near-impossible to lift or to prove a policy change. Doing so may make it even harder to gain broader support for future sanctions decisions, which risks their effectiveness in their broader goal which is to prompt policy change, contain the target and avoid an escalation to direct conflict.

U.S. policy seems focused on driving regime change rather than specific policy changes. Many U.S. officials now seem focused on inflicting economic pain on Iran to stress the regime in the hopes it will be toppled. I remain concerned that inflicting pain may not lead to policies supportive of regional and global security  and U.S. interests and may actually backfire, especially if they empower those focused on domestic resilience and resistance. While cutting off cash flow may result in a less free hand regionally, and less ability to support proxies, the focus on regime change is likely to disempower any pragmatists. Moreover it risks undermining the deal and making it more difficult for global cohesion.

Challenges to global financial plumbing and dollar funding system: The recent re-imposition revives key questions around the impact on the SWIFT system, which was key to cutting off dollar funding and broader funding in 2012. While a European system, the coordination was key to the depth of the sanctions, cutting off Iran from the global financial system. It also contributed to a further interlinkage between U.S. and European systems.  The tug of war between the U.S. and Europe could add to the confusion for those processing payments and could lead to alternatives to SWIFT and existing payments systems, adding interest for creation of new tools in Russia and China, and even Europe. There may be a cautionary tale from the recent round of Russia sanctions which resulted in several exchanges freezing transactions for a period of time, lest any deals violate sanctions. While targeted to one designated entity, the moves by the LME and Euroclear, while individually rational could pose risks to the exchanges themselves. While not a real challenge to the system any time soon, they may reinforce other structural drivers of competition including new stores of value in non-dollar assets . They could also shift more transactions underground, making them harder to track, collect taxes and fees on and undermine a wide range of policies.

Transactional bargaining between enforcement decisions and trade/security policy: The recent tweet from President Trump that seemed to offer relief for ZTE (a sanctions violator) as part of a broader U.S.-China grand bargain raised concerns for many reasons, not least the willingness to undermine previous legal processes  in exchange for possible trade/foreign policy gains at the executive level. Selected members of the  Trump administration have rhetorically used sanctions relief as a bargaining chip in trade negotiations on several occasions in the last year including offers to China if they imposed tighter sanctions, negotiations with the EU on trade and Russia links to name a few.  The willingness of the Trump administration to (at least rhetorically) use sanctions and sanctions relief for particular corporate entities as a bargaining chip for security and trade policy negotiations raises several issues around consistency of policy, industrial policy (of picking winners and losers at home or abroad).

There are no doubt many more..

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