Why the Iranian Nuclear Deal Is at Risk of Unraveling

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Iran has complained that Washington is preventing the country from rejoining the world economy. Ebrahim Noroozi/AP

Used clothing, toiletries and gifts worth no more than $100—for a decade, these were among the few Iranian products allowed into the U.S., thanks to crippling international sanctions. But when the Iran nuclear deal went into effect in January, Iran was suddenly allowed to resume exports of its famous Persian carpets and pistachios. Iranians also looked forward to reviving the country’s oil industry and gaining access to tens of billions of dollars in previously frozen petroleum revenues, which would provide a much-needed boost to the economy. Perhaps most important, American officials assured Tehran that foreign investment would return to the country, finally ending Iran’s pariah status. ”As soon as we suspend our major sanctions,” Wendy Sherman, the lead U.S. negotiator, had said in 2014, “the world will flood into Iran.”

Today, nearly six months after the deal was implemented, Iran is still waiting for those benefits. The country can’t access most of the estimated $100 billion it holds in foreign banks. The reason: U.S. laws, which weren’t included in the nuclear deal, are still highly restrictive. The foreign business hasn’t materialized because big European and Asian commercial banks are afraid they might inadvertently violate those non-nuclear U.S. sanctions and end up facing hefty penalties. Tehran is angry and says Washington is preventing the country from rejoining the world economy.

Iran wants the U.S. to relax these sanctions, but that would require Congress to act, something unlikely to happen in an election year, especially since even some Democrats are in no mood to revisit a deal many considered flawed. If anything, lawmakers are pushing for more sanctions, this time as punishment for Iran’s ballistic missile program. In Tehran, hard-liners, who never liked the nuclear deal, are urging moderate President Hassan Rouhani to scrap it. "The political space is closing," says Tyler Cullis, a legal expert on the Iran nuclear deal and U.S. sanctions at the National Iranian American Council, a group that advocates for closer relations between the two countries. "The danger now is that [President Barack] Obama is going to leave office in six months with his signature foreign policy achievement on very shaky ground."

Both Tehran and Washington insist they’re committed to the accord. But Iran’s concerns and the prospect of the deal collapsing were evident in April, when Valiollah Seif, Iran’s central bank governor, made a rare visit to Washington, ostensibly to attend the spring meetings of the World Bank and International Monetary Fund. At a sit-down with Treasury Secretary Jacob Lew, Seif demanded more sanction relief. “They need to do whatever is needed to honor their commitments,” the Iranian banker told an audience at the Carnegie Endowment for International Peace, a Washington-based think tank. “Otherwise, the [nuclear deal] breaks up under its own terms.”

Probably the biggest source of friction is a U.S. law that bars Iran from using the U.S. financial system and the American dollar, even indirectly. The law, enacted in 2012, was aimed at punishing Iran for a variety of alleged sins: the country’s ballistic missile program, human rights abuses and state-sponsored terrorism. Because these issues haven’t been resolved, there is virtually no chance Congress would repeal the law in the foreseeable future, experts say. As long as that statute remains in place, foreign banks holding Iran’s funds in dollars will be wary of doing business with the country.

In April, Secretary of State John Kerry met with his Iranian counterpart, Mohammad Javad Zarif, in New York to try to resolve some of these issues. They reportedly agreed on an arrangement under which several European banks will process the transfer of roughly $6.4 billion worth of Indian oil payments to Tehran. According to Cullis, the Iran sanctions expert, the arrangement also will cover the transfer of Iran’s oil revenues locked up in Asian banks. It’s not clear, however, whether Iran will receive the money in dollars or some other currency.

05_27_IranEconomy_01 Iranians were hoping for an economic boost, but so far foreign companies have been slow to commit, fearful of violating U.S. laws that restrict Iran from using the U.S. banking system. Vahid Salemi/AP

The Obama administration insists U.S. law isn’t standing in the way of foreign banks doing business with Iran in other currencies—provided they aren’t dealing with sanctioned Iranian groups, such as companies linked to the Islamic Revolutionary Guard Corps (IRGC). Over the past few weeks, Kerry and other U.S. officials have spread out across the globe to help foreign bankers understand the maze of Iran sanctions and clarify potential penalties. “It’s just not as complicated as some people make it,” Kerry told reporters in London on May 10.

But so far, major European and Asian banks haven’t been mollified. Many have asked for clear guidelines from Washington so they don’t find themselves facing penalties like the nearly $9 billion fine that the French bank BNP Paribas paid in 2014 for violating U.S. sanctions against Iran, Sudan and Cuba. U.S. officials won’t provide specific guidelines, saying instead that if banks have a question, they should direct it to the U.S. Treasury’s Office of Foreign Assets Control, the federal agency that oversees sanctions.

Experts say foreign banks are reluctant to engage with Iran for other reasons too. They cite Tehran’s outdated laws governing money laundering, as well as its lack of prohibitions against terrorist financing and corruption. “Because of a lack of transparency, it would be hard to have certainty that you’re not dealing with someone subject to sanctions or engaged in illicit activity,” says Katherine Bauer, a former Iran specialist at the Treasury Department.

As Tehran waits to see if the administration can ease the banks’ concerns, opponents of the nuclear deal have been as voluble as ever. Donald Trump, the presumptive Republican presidential nominee, calls the agreement “disgusting” and the negotiators who crafted it “incompetent.” Hillary Clinton, the Democratic front-runner, has put more emphasis on the tough measures she’d take to counter Iran’s anti-U.S. policies rather than expressing support for the deal.

Meanwhile, an influential lobby, United Against Nuclear Iran, is leading a major campaign to discourage European companies from doing business with Tehran, warning they could end up violating the remaining sanctions. On Capitol Hill, in addition to the push for further measures—a move experts say could torpedo the accord—some lawmakers are pressuring Boeing to pull out of a reported deal to provide Iran with passenger jets and other services. “We urge you not to be complicit in the likely conversion of Boeing aircraft to IRGC warplanes,” the lawmakers wrote in a letter to Boeing CEO Dennis Muilenburg in May. And in one more blow to Iran, American pistachio growers convinced the administration to slap a 200 percent tariff on Iranian pistachios, effectively eliminating them from the U.S. market.

Last week, as controversy surrounding the nuclear deal continued to swirl, Kerry rejected any suggestion that the next president might scrap it. Perhaps. But on this issue, Iran gets a vote too. And if the promises of the accord remain unfulfilled, it’s not clear how long that country’s embattled moderates can keep the deal—and Obama’s legacy—alive.

California pistachios, anyone?