The easing of US sanctions on Iran: slowly, but surely
- Middle East
- Political and Economic Risk Consulting
The easing of US sanctions on Iran: slowly, but surely
Nicki Siamaki, Researcher
Joe Biden won the US presidential election on 7 November, likely ushering in a less confrontational phase in US-Iran relations. During the four years of US President Donald Trump’s tenure tensions between Washington and Tehran have skyrocketed, driving both countries to the brink of war when the US, in a targeted strike in the Iraqi capital Baghdad on 3 January 2020 killed Islamic Revolutionary Guards Corps (IRGC) Qods Force commander Qasem Soleimani.
The strike that killed Soleimani was the culmination of a series of escalatory events that began with the US’s withdrawal from the nuclear deal in May 2018 and the subsequent reimposition of sanctions on Iran. In mid-2019, Washington began a “maximum pressure” campaign against Tehran. US sanctions have prevented many multinational companies from easily doing business with Iran and deterred international banks from processing Iran-linked transactions, including transactions connected to non-sanctioned sectors, such as the humanitarian sector.
Biden will prioritise re-entering the nuclear deal in the months following his inauguration in January 2021 in exchange for Tehran’s strict compliance, though he will be reluctant to lift all sanctions before reaching an agreement that expands the deal’s scope beyond nuclear issues. Biden has said that he wants to use the deal as a platform for follow-on negotiations that would address the US’s additional concerns, such as the detention of US citizens in Iran and Iran’s foreign policy in the Middle East, which includes support for armed groups in Iraq that conduct attacks on US interests there. On 23 November, Biden appointed Antony Blinken as US Secretary of State and Jake Sullivan as the US’s National Security Advisor, both of whom have supported and continue to support the nuclear deal.
Should Biden deny Iran significant sanctions (and therefore economic) relief – such as re-instating sanctions waivers to allow countries to purchase Iran’s oil – Iran would be reluctant to fully comply with the deal. Iran wants immediate sanctions relief and believes that sanctions related to its nuclear programme should be fully lifted if it returns to strict compliance. Similarly, Tehran will be unlikely to agree to expand the deal’s scope before the US provides it with substantial economic relief. Since the US withdrawal from the nuclear deal in 2018, Tehran has repeatedly stated that it has no interest in renegotiating.
Although Biden is unlikely to lift nuclear programme-related sanctions on Iran in the coming year, foreign companies should monitor two of Biden’s potential decisions in his first 100 days in office to kickstart negotiations. Firstly, Biden will likely facilitate the export of some pharmaceuticals to Iran. Trade channels (such as the EU Instrument in Support of Trade Exchanges or the Swiss Humanitarian Trade Arrangement) would allow Biden to facilitate such exports without lifting sanctions. Secondly, Biden may also lift some of Trump’s designations of financial institutions to further facilitate this humanitarian aid. This could include reversing the 8 October imposition of secondary sanctions on 18 Iranian banks or the September 2019 designation of the Central Bank of Iran as a Specially Designated Global Terrorist. These initial conciliatory steps will help foreign companies seeking to do business in Iran in sectors not covered by US secondary sanctions, such as the pharmaceutical sector.
Despite its initial reluctance, Tehran will likely engage in negotiations with Washington following a US re-entry to the nuclear deal over the coming year. The outcome of the Iranian presidential election in June 2021 will not significantly affect Tehran’s willingness to engage. Although Iran’s reformists favour engagement with the US, both they and conservative factions in the government want the lifting of US sanctions. Iranian President Hassan Rowhani’s government has key figures who initially negotiated the nuclear deal, providing an opportunity for Biden to prompt negotiations with the same Iranian administration to salvage the deal. However, a more conservative government (that could assume office in June 2021) could also seek the lifting of sanctions on their terms, which could be a political win for them domestically. Although Iran’s Supreme Leader Ali Khamenei, who ultimately directs Iranian foreign policy, deeply distrusts the US, he will likely support efforts that could lead to the lifting of sanctions, as he recognises that this would better serve Iran’s security and economic interests than the status quo.
Iran is acutely aware of how changes in administration can lead to changes in sanctions after the change from President Obama to President Trump. As such, Iran will probably want to test whether a new agreement could be confirmed by the US Congress, with the removal of underlying sanctions legislation, to ensure that the deal is not undermined by a future US president. President Barack Obama was unable to achieve this during his presidency and Biden will face a significant struggle to do so.
Although reaching an agreement amenable to both sides will take time, foreign companies will likely see an agreement reached during the four years of Biden’s administration, leading to the lifting of nuclear sanctions on Iran. The US, Iran, and the remaining signatories to the nuclear deal (the UK, France, Germany, China and Russia) fundamentally support having a nuclear deal and will work towards preserving it. However, foreign businesses looking for an imminent and full lifting of nuclear-related sanctions will be disappointed, as this is unlikely to be considered by the new Biden administration.
Once sanctions start to be eased businesses seeking to re-enter Iran or engage with Iranian entities should consider the reputational and regulatory implications of engaging Iranian counterparties. Historical reputational due diligence and know-your customer (KYC) information should be updated and verified to ensure that it is accurate, up to date and covers potential changes in ownership structures and the reputational profile of the counterpart. Since the US’s withdrawal from the nuclear deal, Iran has faced severe economic challenges that have led to consolidation in some sectors by Iranian government entities and increased private investment in others. Businesses will need to ensure that they are not contracting with or engaging with entities that continue to be sanctioned, and that any reputational concerns can be mitigated or managed by conducting detailed due diligence.