Iran Sanctions - JCPOA in the Balance

On 12 May 2018, US President Trump will decide whether or not to renew the US sanctions relief in relation to Iran. Declining to do so would put the US in breach of, and amount to US withdrawal from, the JCPOA, the Iran sanctions/nuclear agreement reached in 2015¹. Whether or not he does so could have implications for any business (whether in EU or elsewhere) which operates in or with Iran or Iranian entities. 

The Background 

In January 2016, UN, EU and US sanctions on Iran were significantly eased, in exchange for commitments given by Iran to decommission its nuclear weapons programme, pursuant to the JCPOA. At the time this easing was heralded as step towards warmer relations between Iran and the West and away from Iran’s economic isolation. But in January 2018, President Trump, a long-standing critic of the JCPOA, warned that he would not renew the US sanctions relief (a necessary step in US compliance with the JCPOA) in May unless the UK, France and Germany (“the E3”) agree to “fix the terrible flaws of the Iran Nuclear Deal”. 

What are the “Terrible Flaws” That President Trump Sees? 

President Trumps opposes a number of aspects of the JCPOA. One is that the obligations it imposes on Iran relate only to its nuclear programme, but not on its “other malign activities”² (IRGC funding, cyber aggression, maritime aggression, human rights violations, destabilising activity in the Middle East); a second is that the JCPOA does not consider long-range missile development as part of a nuclear weapons programme; a third is that the JCPOA has an expiry date (on Termination Day, in 2025). 

Position of UK, France and Germany 

Recognising both the difficulties in re-opening the JCOPA (to which Iran, Russia and China are also parties), but also the importance of keeping the US on board, the E3 have sought to address at least some of the US concerns by proposing new EU sanctions on Iran over its ballistic missile programme (which can be done separately from and without breaching the EU’s commitments to ease its nuclear sanctions). Current indications are that this proposal has not been supported by at least some of the EU’s other Member States, although that position could change between now and 12 May. Discussions are reported to be continuing between the E3 and the US as to a possible agreement on working to other solutions, but without tangible progress at this point. 

Will the US Withdraw on 12 May? 

Since January, various pronouncements from the US administration have indicated that its expectations of what must happen by May – both within and outside of the United States – in order to keep the US in the JCPOA set a lower standard than was understood from President Trump’s January remarks. President Trump had called for the US Congress to issue legislation to cancel the “sunset” provisions of the JCPOA under which some limitations on Iran’s nuclear program eventually would expire, but there has been no further movement on this issue in recent months. President Trump also had called for the E3 to agree to a supplemental framework agreement imposing new restrictions on Ir an’s ballistic missile program and frequency of nuclear inspections, and a State Department cable in February clarified that “we are asking for [E3] commitment that we should work together to seek a supplemental or follow-on agreement that addresses Iran’s development or testing of long-range missiles, ensures strong IAEA inspections and fixes the flaws in the sunset clause”. In March, the State Department confirmed that what is needed by 12 May is an agreement between the US and the E3. It was indicated that, if the US cannot reach an agreement with the E3 (or if it can, but which does not fully address the US concerns), that will be reported to the President “and then he will make a decision as to whether he wants to remain in the deal or stop waiving sanctions”. At this stage, therefore US withdrawal from the JCPOA is not certain, but remains a very real possibility. 

What Will Happen if the US Withdraws on 12 May? 

The JCPOA includes a “snap-back” mechanism which any of the parties (other than Iran) can invoke, triggering the snap-back of pre-JCPOA sanctions (including mandatory UN sanctions) if Iran fails to meet its commitments. However the US has indicated recently³ that Iran is compliant; accordingly any withdrawal by USA will not itself trigger snap-back of non-US sanctions. But it would be likely to trigger a range of responses: 

• The US, by not renewing the waiver, could choose to re-introduce wider secondary sanctions in relation to Iran that have been suspended since the implementation of the JCPOA authorizing penalties against non-US persons that engage in certain activities involving Iran (e.g., certain activities involving Iran’s energy, shipping, or shipbuilding sectors). The US also could choose to cancel a general licence that authorizes non-US subsidiaries of US persons to engage in most activities involving Iran; 

• Iran may decide itself to abandon the deal and resume its nuclear weapons programme. It indicated in February that it would not do this, but there are reportedly internal tensions on this point, and it has indicated recently its dissatisfaction with the level of economic benefit it derives from the deal – mainly due to bank caution about US sanctions, a concern which will only increase if US sanctions on Iran are broadened. Indeed, even without the current US threat, reports have been that Iran may withdraw due to its perception that it is not getting from the JCPOA the benefits that it had expected. 

• The EU may look to amend its existing blocking statute (an EU regulation adopted in the 1990s prohibiting compliance with certain US sanctions and providing that US rulings upholding them would not be recognised in the EU). This measure pre-dated US secondary sanctions, and would therefore need to take a different approach. The introduction of any such measure would significantly increase compliance complications for EU businesses. 

• Russia, having in recent days proposed new counter-measures to the US’s new listings of Russian oligarchs etc, may take further action in response to the US withdrawing from its 2015 agreement; 

• China also may respond negatively, although prediction of its likely response is further complicated by its existing trade tensions with the US. 

Under the JCPOA, the EU sanctions on Iran have been very significantly eased and EU persons are largely permitted to engage in business with Iran (although the restrictions that remain include a long list of designated entities and some export restrictions). While the majority of US secondary sanctions against Iran have been suspended as well, US primary sanctions on Iran remain in effect and US persons remain restricted from engaging in most commercial activities involving Iran. Any expansion of EU sanctions to convince the US to remain in the JCPOA, or any US reimposition of secondary sanctions, would at least partially level the playing field between US and EU businesses as at least some new restrictions will apply to EU persons (while US persons will remain largely restricted from the Iranian market). Businesses which operate in Iran, trade with Iranian entities, export goods ultimately destined for the Iran market, or invest in Iranian companies will be affected by some or all of these possible steps no matter what jurisdiction they operate in; those with more than minimal exposure should consider developing contingency plans. 

How Dechert Can Help 

With sanctions, trade and government relations experts in both London and Washington, and a wealth of experience in this sector, Dechert is available to advise clients as to their risk assessment of or preparation for these scenarios, and to the changes (if any) to the sanctions framework in relation to Iran which may ensue after 12 May. 

Footnotes

_{1) The Joint Comprehensive Plan of Action (“JCPOA”) agreed in July 2015 between Iran, USA, Russia, China, UK, France and Germany
2) Brian Nook, Director of Policy Planning, US State Department, Press Release 21 March 2018
3) Ibid}