The Iran Nuclear Deal: What happens after Implementation Day?
By Richard Nephew*
Today, the United States, its P5+1 partners, and Iran announced that the formal Implementation Day described in the Joint Comprehensive Plan of Action (JCPOA) had been reached. This announcement followed on the report by the Director General of the International Atomic Energy Agency (IAEA), Yukiya Amano, that Iran had fulfilled all of its nuclear obligations under the JCPOA and that the agency was in a position to verify this situation going forward.
With this announcement, the focus of over a decade’s work by nonproliferation professionals, sanctioners, and regional experts paid off: Iran no longer has a near-term option for the development of a nuclear warhead. Its nuclear program has been stalled and will remain so for around a decade, and will be hamstrung for years after that. Moreover, that program will finally be subject to the intrusive monitoring and transparency measures necessary to provide clear warning that Iran is breaking its Non-Proliferation of Nuclear Weapons (NPT) commitments in pursuit of nuclear arms.
From this perspective, it is fair to say that we are entering into a new chapter in international relations with Iran, one that will closely be watched by policymakers and energy markets. Here are four things to keep in mind as we cross the threshold:
1) While today represents something new and significant in the Middle East, it will not transform the region (for better or worse). It remains possible that the JCPOA will contribute to the moderation of the Iranian government’s policies both at home and abroad. But, as many supporters of the JCPOA (myself included) have warned for months, the JCPOA was never going to solve all the problems stemming from Tehran’s policies. There is a political element to this conclusion, as people in Washington and Tehran (principally) seek to demonstrate that they remain “tough” on their adversaries in the other capital and to appease their domestic hardliners. The recent incident involving U.S. sailors being detained briefly after they crossed into Iranian waters is a case in point: the reaction in some quarters in Washington essentially equated the incident with the same level of strategic menace as the Cuban Missile Crisis, and – in Tehran – the incident became something to crow about. But, there is also a plain strategic reality that removing the nuclear issue from the table does not itself solve the problems in Syria, Yemen, or the broader sectarian conflict within the region. The nuclear deal is not responsible for these other problems nor can any serious argument be made that, should there have been no JCPOA, there would have been a clear solution to any of these conflicts. These problems have their own origins and will require their own solutions.
2) More Iranian oil will be added to the already oversupplied oil market. Implementation Day means that Iran is now free to sell as much oil as it wants to whomever it likes at whatever price it can get. However, conditions are vastly different than they were in 2012, the last time Iran was had unrestricted access to global oil markets. While Iran’s revenues from oil will increase in relation to what it was able to achieve under sanctions and I anticipate they will be able to add anywhere from 300-500 thousand barrels per day to the market (probably with an up-front spike as inventories are depleted), in the current low price environment, Tehran’s oil sales will bring in far less revenue than they did in 2012 and Iran will have to compete for market share. While the return of Iranian oil to the market has been clearly signaled (so a major price move is probably unlikely), it will only exacerbate the level of oversupply in the market. Moreover, it seems likely that Saudi Arabia—which is effectively locked into a confrontation with Iran—will seek to maintain its market share and deprive Iran of opportunities to retake market share it lost due to sanctions or expand into new markets.
The oil sector will also be closely watching what investment opportunities are presented in the post-sanctions Iran. Though it is doubtful that Tehran would or even could abandon oil as a primary source of export revenue anytime in the foreseeable future, it is possible that it could prioritize natural gas over oil as it solicits external investment in the energy sector. With the world’s second largest natural gas reserves, Iran will seek to use more gas (and thus address a persistent problem with energy shortages while freeing up more oil for export) at home and export what it can abroad. In any case, Iran will be hindered in attracting foreign investment for some time due to the residual effects of sanctions, but there is a huge amount of international interest. By the time the JCPOA has run its course in 15-20 years, Iran may be in a position to be a major supplier of gas in the region and beyond. That said…
3) Iran will remain a tough place to do business. Sanctions relief has removed a major hindrance to non-US business in Iran. American firms still will not be able to do much business in Iran, though their subsidiaries can (albeit without the participation of U.S. persons, involvement of controlled technology, or finance). Still, it will remain a hard place to operate. Business in Iran continues to suffer from internal bureaucratic complications and the due diligence concerns surrounding residual secondary US sanctions–which are significant–will have a chilling effect on business. This effect will be amplified by the active efforts of some in the Iranian system to remind outside influences that they are not welcome in Iran. The Iranian security campaign against “infiltration,” which the Supreme Leader has decried as a fundamental threat to the revolution, was the start of this intimidation effort; the arrest of Iranian-American businessman Siamak Namazi was the most visible manifestation of the conflict within the Iranian government about how to handle economic openness.
Some have argued that, because the security services have been given freer rein to crack down on outside influences in Iran, it is this constituency that was the big winner from the JCPOA. But, this should not distort our perception of the fact that the hardliners in Iran are acting this way because they are scared. They fear the demographic realities of Iran, where most of the population is young, does not remember the Revolution or the Iran-Iraq war, and craves access to international culture and goods. The hardliners are concerned about what economic openness may unleash. And they worry about a world in which there are fewer foreign enemies to blame for inflation, unemployment, and economic inequality, leading to…
4) US skeptics should not help their enemies in Tehran by giving them a way out of the problems they will now face. There are many in the United States concerned about the nuclear deal and Iranian behavior in the region and at home. I count myself among them. The deal can have major benefits beyond the nuclear ones already identified, but securing these benefits is dependent on vigorous enforcement of the JCPOA and readiness to walk away if Iran cheats. But there are other people in the United States who appear to be looking for any excuse to back out. Some support this course because they do not trust the nuclear benefits to manifest and others fear we have paid too much for them. While I disagree with these views, I can respect that some of them are offered out of sincere anxiety about what we face in Tehran.
But these anxieties should not be allowed to undermine the US position in dealing with Iran. First and foremost, the United States must not take actions that would prevent the JCPOA from being fully and faithfully implemented. Iran may indeed cheat on its part of the deal, but the United States must not if it is to keep the international community onside in dealing with Iran on the nuclear and other fronts. In a scenario where there was a need to resume active nuclear-focused sanctions, the world must believe the US sought to make the JCPOA work. Indeed, the remaining non-nuclear sanctions (and which will probably require expansion) also require cooperation, as would mounting a military operation to terminate any Iranian nuclear breakout attempt. I support efforts to expand non-nuclear sanctions against Iran, if framed properly and designed in smart ways. Provoking Iran to walk away from the deal – particularly in as transparent a way as the recent US House of Representatives bill on Iranian support for terrorism, which would preclude JCPOA relief from happening – is not in the US national interest. Everyone who cares about a serious US response to Iranian provocations should keep this in mind.
In part, this is because Iran has so clearly made an attempt to bring the deal into force as swiftly as possible. Analysts around the world believed that the earliest the JCPOA could probably be implemented was February 2016. My own estimate was February-April, with a bias towards April. We were wrong. Iran moved very fast to implement its part of the deal, probably cutting corners in its removal of centrifuges and modifications to the Arak reactor that could undermine its ability to restart its nuclear program rapidly in a breakout scenario. This should alleviate some concerns about Iran cheating and demonstrate to the world and to its own population that Iran wants this deal to go into force. This will help Iran in a future implementation crisis and buttress its argument that, notwithstanding incomplete answers to the IAEA on its past nuclear weapons work and the myriad of bad acts outside of the nuclear arena, it tried to make the JCPOA function. The United States can do no less.
*Richard Nephew is the program director for Economic Statecraft, Sanctions and Energy Markets at Columbia University’s Center on Global Energy Policy. Prior to joining CGEP in February 2015, he served as principal deputy coordinator for Sanctions Policy at the Department of State, a position he assumed in February 2013. Nephew also served as the lead sanctions expert for the US team negotiating with Iran, and from May 2011 to January 2013, he was the director for Iran on the National Security Staff where he was responsible for managing a period of intense expansion of US sanctions on Iran. The comments here are his own.