BGA Dispatch: Trump Terminates Nuclear Agreement with Iran

A long way to an agreement

The path to the nuclear agreement with Iran began with critical dialogue. For decades, direct contact with Iran had been strictly rejected by the US yet supported by Germany and by the European Council since 1992. The subsequent negotiations covered a broad range of topics from regional issues to human rights. The process was repeatedly interrupted, because Iran was not prepared to disclose its nuclear plans and regularly accused of being involved in terrorist attacks. Nevertheless, despite US protest Germany repeatedly pressed forward to integrate Iran and prevent nuclear armament in the region.

The US followed this policy with suspicion and was initially unwilling to participate. Regime change in Iran was the priority. Even when Iran elected a moderate president Mohammad Khatami there was no American willingness to take a step towards him. It was only in 2008 that the US joined the Europeans, which led finally to a breakthrough that paved the way for the Joint Comprehensive Plan of Action (JCPOA) in January 2016.

Even back then there was a great deal of resistance from the hardliners in Iran. It was also difficult for US President Barack Obama and the Democrats to obtain congressional approval in the US.  The memory of the occupation of the American embassy in Tehran in 1979 was still very present. The Israeli government declared the deal a threat to its national security and lobbied hard for Congress to block the agreement, an effort that continues to this day.

An imperfect nuclear agreement is better than no agreement at all

Measured against its sole aim to prevent nuclear armament, the agreement is a success. Dismantling of centrifuges, limitation of uranium enrichment, verification of measures and on-site inspections were agreed and carried out. The International Atomic Energy Agency (IAEA) has repeatedly confirmed Tehran’s compliance with the treaty. The nuclear threat in the region has decreased. The recent accusation by Israeli Prime Minister Netanyahu that Iran has lied to the world public about having a secret nuclear program is completely unfounded. Like the false assertion made before the Iraq War that Saddam Hussein possessed weapons of mass destruction (WMDs), this policy is once again not based on facts. The current US Secretary of State Mike Pompeo, as CIA Director at his hearing before the US Senate in March this year, declared that there was no evidence of a violation of the nuclear agreement by Tehran. This view is shared by most credible security experts in Washington, Russia, China and the EU.

Missile programs, interference in Syria and the renunciation of destabilization of the region were never part of the treaty. Those issues cannot be negotiated into an existing agreement but require a new agreement. Instead, President Trump solemnly declared the US’s withdrawal from the existing treaty and reactivated all sanctions as soon as it is possible under the terms of the JCPOA, complemented by further tough conditions. The US Departments of State and Treasury established 90-and 180-day deadlines to stop all trade activities which were allowed under the JCPOA. This is the hardest possible direction in the negotiations without having a plan to proceed in the future. Consequently, all other co-signatories have since confirmed that they intend to abide by the contract incl. Iran. Even without the sanctions the economic boom expected from the JCPOA has failed to materialize for German and European firms Exporters were reluctant because punitive measures by the US were always possible, particularly in financing. Diplomatic visits by German ministers did not change much. While Germany remains one of Iran’s most important European trading partners, exports were worth only 2.97 billion euros in 2017. Trade volume stands at 3.5 billion euros compared to initial forecasts by the German Chamber of Commerce (DIHK) that the German trade volume could rise to 6 to 10 billion euros. Next to Germany, China has been a beneficiary. Its exports to Iran have been growing strongly, helped by its banks that are far less sensitive to American pressure. On the Iranian side, too, the expectations of the economy and the associated hopes of the people have not materialized. President Rohani’s promise that the nuclear agreement will improve the situation of the people was not fulfilled, either.

The consequences of America’s unilateral termination might be severe

President Trump’s decision has a considerable impact on the Middle East, including the risk of military clashes. Iran will hardly accept any further Israeli military intervention against Iranian forces in Syria. Not to mention that Iran has built up considerable Cyber capacities, ready to be re-activated if needed. Israel could be tempted to provoke US military operations against nuclear installations in Iran or to act itself relying on American tolerance and ultimate support. President Trump’s threats can only arouse suspicion that this is a militarization of American foreign policy with dangerous consequences for the Middle East and beyond. Against this background the assertion by the US that the JCPOA threatens stability is absurd.

Iran’s release from its contractual obligations will remove all shackles and increase the risk of armed conflict in the Middle East. A new coalition is forming in the Middle East: USA – Saudi Arabia – Israel. This is seen with concern in some parts of the region. If Israel were to succeed in pulling the USA into military action against Iran, it would trigger a conflagration that plays directly into Iran’s hands by justifying a nuclear deterrent for itself. Israel’s immediate and heavy retaliation after Iran fired rockets on the Golan Heights the night after Trump’s announcement of his withdrawal emphasizes the fact that the Middle East is sitting on a powder keg ready to explode.

Even without military confrontation, the prospect of sanctions and no clear path to a new agreement contribute to a bullish environment for oil markets at a time where OPEC production is already below target due to the problems in Venezuela. While swing producers such as US shale and Saudi Arabia may eventually step in with higher production, they may need to or choose to take their time before ramping up volume. This leaves the world economy, incl. the US, exposed to rising oil prices.

Under the JCPOA restrictions on foreign exchange and capital movements were lifted. This applied to investment and supply bans on crude oil, natural gas, petrochemicals, marine equipment and related services. Business relations with many important companies, including the National Iranian Oil Company and with Iranian banks were again possible. Renewed US sanctions will affect Iran’s oil exports and in the long-term will also have a significant impact on its oil production and refinery capabilities. Under President Rohani, Iran has been striving for a high degree of energy independence and can cover its own energy needs. However, this may not last long under Trump’s threatened sanctions policy. Thus, the Iranian threat of dissociating itself from all obligations under the agreement and resuming uranium processing remains in place.

The only factor preventing Iran from aggressive behavior, is that the remaining signatories, China, France, Russia, the United Kingdom and Germany are continuing to partner with Iran. It is Europe’s position that Iran must not be isolated. It is very likely that Russia and China will follow Europe’s position and keep the agreement intact. Russia has good relations with Iran and no interest in an additional military confrontation in the Middle East. The withdrawal of the US from the JCPOA might even have an additional positive effect on the bilateral relations of both countries. China has also an interest in keeping the Middle East stable, given that it will need safe transit routes to Europe for its “One Belt One Road” project.

European companies will find it very difficult to trust their policy makers in negotiating with the United States on a common amicable trade solution. A transatlantic trade war will produce lost opportunities on both side of the Atlantic and on a peaceful Middle-East. However, Trump already made up his mind some time ago. The Europeans could not have saved the Iran agreement even by making concessions in the trade dispute over steel and aluminium. Germany and Europe would also have been ill-advised to engage in such a trade war. Their dilemma is that they would like to keep up the agreement with Iran in order to keep the Middle East away from a new armed conflict. At the same time, they will become targets of US sanctions if they do not comply with Trumps decision.

The US has considerable leverage against European companies. The call by the new US Ambassador to Germany, Richard Grenell, on the first day of his term of office, for German companies to withdraw immediately from the Iranian market is not very helpful for US-German relations and has been rejected by German policy makers so far. In the past, the US has not hesitated to issue secondary sanctions and levy fines. Financing trade with Iran will become increasingly difficult and risky in the future. Even a conversion to US dollars without further reference to the US market could trigger penalties and close off access for foreign banks to US financial markets.

The medium-term outlook depends very much on how the US will react to Europe’s and the remaining signatory parties’ willingness to keep the agreement with Iran alive. The pressure on European governments is high. The coming weeks will be paramount.

 

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BGA Experts

Jürgen Chrobog

Jürgen Chrobog

Partner
Jürgen's Bio
Ambassador Chrobog is a BGA Partner and a former State Secretary at the German Foreign Office and was Germany’s Ambassador to the United States. As State Secretary of the German Foreign Service​, he was directly responsible for Asia, Africa, the Near and Middle East and Latin America and dealt with Foreign Trade and Economic matters comprising Export Control and Export Guarantees.

His experience spans countries such as Egypt, Libya, Algeria, Jordan, Yemen, Tunisia and the Gulf States, where he consulted with leading politicians for many years. After his diplomatic career, Ambassador Chrobog served as Chairman of the BMW Foundations Herbert Quandt from 2013 to 2015 and was a board member of MAN Ferro Stahl. ​

Matthias Hieber

Matthias Hieber

Senior Consultant

Matthias' Bio
Matthias is a Senior Consultant at BGA. He started his career as Research Assistant at Revue Défense Nationale, a French journal on security policy, in Paris and at the British Institute of International and Comparative Law, London. Before joining BGA, he worked in Chambers at the United Nations International Criminal Tribunal for the Former Yugoslavia (UN-ICTY), within the Terrorism Division of the Council of Europe and at the Federal Academy for Security Policy (BAKS) in Berlin. He also gained experience as Consultant for the private sector.

Matthias is also member of several professional networks, including the Institut des Hautes Études de Défense Nationale (IHEDN), the Geneva Centre for Security Policy (GCSP) and the German Council on Foreign Relations (DGAP).

Education
Matthias studied Political Sciences and International Law at University of Zurich and University of Vienna. He is bilingual French-German and proficient in English. Furthermore, he received enhanced professional training in Terrorism Studies from University of St. Andrews.

 

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