Iran: Efforts to Preserve Economic Benefits of the Nuclear Deal

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Updated February 26, 2019
Iran: Efforts to Preserve Economic Benefits of the Nuclear Deal
Overview
largest importer, accounting for more than one-third,
On May 8, 2018, President Trump announced that the
followed by India. During the escalation of sanctions in
United States would cease implementing U.S. commitments
2011-2015, Asian trading partners cut Iranian oil imports
under the 2015 multilateral Joint Comprehensive Plan of
(to earn a U.S. sanctions exception for “significantly
Action (JCPOA) with Iran. On November 5, 2018, at the
reducing” oil purchases), but did not follow the EU in
end of a “wind down period,” all pre-JCPOA U.S. sanctions
imposing an embargo.
on foreign firms that conduct transactions in all of Iran’s
core economic sectors, including energy, banking, shipping,
Figure 1. Iran’s Crude Oil Exports by Region
and manufacturing, went back into effect. These include
sanctions on “petroleum-related transactions” and
transactions by foreign banks with Iran’s Central Bank. In
addition, foreign firms that transact business with entities
designated by the United States for sanctions could face
virtual exclusion from the U.S. economy.
The non-U.S. parties to the JCPOA—the United Kingdom
(UK), France, Germany, Russia, China, the European
Union (EU) and Iran—opposed the U.S. move and have
sought to preserve the accord. The outcome of their efforts
may depend on the degree to which Iran perceives that it
continues to receive economic benefits of the agreement.
To date, Iran has continued to comply with the JCPOA,
while pressing the EU and other parties to provide

assurances of continued economic engagement with Iran.
Figure 2. Iran’s Crude Oil Exports to Europe
Iran Trade and Investment Post-JCPOA
Iranian leaders might abrogate the JCPOA if the economy
suffers the effects of multilateral sanctions as during 2011-
2015. During that time, Iran’s crude oil exports dropped by
more than half, and its total trade by value fell nearly 50%,
according to International Monetary Fund (IMF) data. In
April 2015, then-Treasury Secretary Jacob Lew said Iran’s
economy was about 20% smaller than it would have been
had sanctions not been imposed. Iranian officials have
stated that avoiding a repeat of such economic damage
depends, in particular, on maintaining the ability to export
oil and receive payments in hard currency. Oil and
petroleum products account for 80% of Iran’s exports, and
the proceeds are expected to fund half the 2018-19 budget.

In October 2018, the IMF reduced its economic growth
Source: Bloomberg tanker tracking.
outlook for Iran, estimating a contraction of -3.6% in 2019,
due primarily to the impact of U.S. sanctions.
Iran’s continued adherence to the JCPOA might hinge on
whether it can generate enough oil revenue to avoid a
Following adoption of the JCPOA, Iran’s crude exports had
severe recession. Since 2016, Europe accounted for more
more than doubled, reaching a monthly peak of 2.5 million
than a fifth of Iran’s crude exports. From 2016 to 2017,
barrels per day (bpd) in early 2018, according to Bloomberg
exports to Europe grew nearly 50%; within the EU, Italy,
tanker tracking data. According to Bloomberg data,
Spain, and Greece have been the largest importers (Figure
observed shipments fell below 1 million bpd as of January
2). However, after U.S. sanctions were reimposed, EU
2019; however, other estimates suggest Iranian trade
imports fell to zero; other buyers, such as Japan and South
remains higher. Reports of the Iranian oil tanker fleet
Korea also cut purchases. Exceptions from U.S. sanctions
switching off its transponders have made accurately
allow certain countries to maintain limited trade, however
tracking Iranian trade flows difficult.
(see below), and some purchases resumed in early 2019.
Asia, Iran’s largest market, purchased more than 65% of
Iran’s crude exports (Figure 1) in 2018; China was the
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Iran: Efforts to Preserve Economic Benefits of the Nuclear Deal
Since 2016, oil shipments to Europe had not surpassed pre-
conducting indirect, rather than direct, transactions with
sanctions levels, unlike in China and India. By mid-2018,
Iran. On January 31, 2019, France, Germany, and the UK
Iranian exports to China and India had grown significantly,
registered the Instrument for Supporting Trade Exchanges
with monthly purchases peaking near 800,000 bpd, as the
(INSTEX), based in France. INSTEX will focus initially on
countries stockpiled imports. In the wake of U.S. sanctions,
facilitating trade in humanitarian sectors that generally are
both countries continued to buy Iranian oil, but at reduced
exempt from any sanctions but might eventually provide a
volumes. Continued trade with China and India will be a
platform to trade with Iran in oil and other products.
major factor in Iran’s ability to sustain oil export revenues.
However, U.S. sanctions penalize even indirect forms of
After sanctions were eased in 2016, many EU and other
trade with Iran. Moreover, INSTEX personnel and
foreign firms also began to resume business ties and
operations could be made subject to additional U.S.
investments in Iran, including in the manufacturing, energy,
sanctions or sanctions designations. At a February 14, 2019
and auto sectors. In 2017, foreign direct investment inflows
international conference in Warsaw, Poland, convened by
to Iran increased by nearly 50% to $5 billion, according to
the United States primarily to build greater international
the U.N. Conference on Trade and Development. Iran’s
support for U.S. efforts to pressure Iran, Vice President
imports also expanded by nearly 40% over 2015-2017.
Mike Pence stated “We call [the SPV] an effort to break
American sanctions against Iran’s murderous revolutionary
However, with re-imposed U.S. sanctions, several firms
regime. It’s an ill
pulled out of operations and investments in Iran. EU firms
-advised step that will only strengthen
with extensive transatlantic business face higher risk of
Iran, weaken the EU, and create still more distance between
Europe and the United States.”
sanctions violations than those less integrated with the U.S.

Another source of U.S.-EU friction is a U.S. insistence that
JCPOA Preservation Efforts
the Brussels-based SWIFT electronic payments network
Even if Iran’s oil customer base shifts even more sharply
expel Iranian banks from its system. The EU wanted Iran to
toward Asia, EU countries have a substantial strategic and
remain within the network, but after many Iranian banks
political stake in preserving the JCPOA. The leaders of
were again designated by the United States for sanctions,
France, Germany, and the UK (the three European countries
SWIFT disconnected those banks from the network.
that negotiated the JCPOA alongside the U.S., China, and
At the same time, Europe’s halting efforts to preserve the
Russia)—and the EU collectively—issued statements
JCPOA have apparently emboldened Iran’s hardliners. On
expressing “regret” over the decision. EU leaders stated that
February 26, 2019, Iran’s Foreign Minister Mohammad
they remained committed to the JCPOA as “important for
Javad Zarif, chief negotiator of the JCPOA and recipient of
our joint security,” and have consistently claimed that the
hardliner criticism for arguing that Iran remain in it,
JCPOA is a binding international commitment under U.N.
announced his resignation. President Hassan Rouhani
Security Council Resolution 2231.
rejected the resignation.
EU Efforts
Role of Non-EU Countries
The EU has taken a number of steps in an effort to maintain
Non-EU countries are increasingly critical if Iran is to
the economic benefits for Iran of the JCPOA. In June 2018,
the EU updated a 1996 “blocking regulation” that seeks to
continue receiving the economic benefits of the JCPOA.
China and India, Iran’s two largest oil customers, were also
shield EU firms from potential U.S. sanctions penalties by
granted a six-month SRE, and have indicated they will
allowing EU firms to recover damages that arise from
continue economic engagement with Iran. According to
noncompliance. In practice, there have been few cases of
media reports, China and India have agreed not to purchase
enforcement, and few experts expect that measure, which
more than 360,000 bpd and 300,000 bpd of crude,
entered into force on August 6, 2018, to persuade major
respectively. While these are sizable reductions compared
firms to undertake the financial risks of violating sanctions.
to import volumes in 2018 the two countries may help keep
Iran’s exports high enough to help the country avoid a more
In June 2018, the European Commission updated the EIB’s
severe recession.
external lending mandate of the European Investment Bank
(EIB) to make Iran potentially eligible for EIB investments.
The shifts in Iran’s oil export patterns might further
Additionally, the European Commission adopted an €18
increase Iran’s reliance on China, which is already a top
million aid package for Iran in August 2018, which includes
trading partner and source of investments in infrastructure
€8 million for Iran’s private sector, such as support for
in Iran. Unlike the EU, the Chinese government has some
“high-potential” Iranian SMEs. Further EU efforts may
capacity to direct firms to continue transacting business
center on incentivizing EU small and medium-sized
with Iran despite U.S. sanctions. India and Iran reportedly
enterprises (SMEs), which generally have little or no
have agreed to use India’s currency, the rupee, as a means
exposure to the U.S. market, to expand business ties to Iran.
of maintaining economic ties. In addition, the Indian
government announced it would permit state refiners to
On November 5, 2018, Italy and Greece received U.S.
continue to import Iranian oil. Chinese state oil traders also
sanctions exceptions for “significant reductions” in oil
have shifted to using Iran-operated tankers to deliver oil.
purchases (SRE) and can import Iranian oil for six months
without U.S. penalty. Nevertheless, the Trump
Cathleen D. Cimino-Isaacs, Analyst in International Trade
Administration has refused to provide broad exemptions for
and Finance
EU firms to do business with Iran. The EU consequently
Kenneth Katzman, Specialist in Middle Eastern Affairs
developed a “Special Purpose Vehicle,” a mechanism that
Derek E. Mix, Analyst in European Affairs
would allow EU firms to avoid U.S. sanctions by
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Iran: Efforts to Preserve Economic Benefits of the Nuclear Deal
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