By Henry Storey , Global Risk Insights: Facing plummeting oil sales from key customers in Asia and Europe – Iran recently violated the JCPOA’s low-enriched uranium stockpile limit and enriched uranium above the mandated 4.5% level. Iran is also wary of falling afoul of Washington’s secondary sanctions. As well as reflecting the ascendancy of hardliners in Iranian domestic politics, these moves appear to form part of a risky strategy. Such strategy aims at forcing the EU to do more to help Iran’s ailing economy. The fact that the European Union has consistently vowed to save the Iran deal is now used as a bargaining chip.

On June 28, it was announced that the Instrument in Support of Trade Exchanges (INSTEX) was finally operational. This is Europe’s main mechanism for saving the Iran deal. Despite this development, Europe is unlikely to ramp up INSTEX significantly to include the purchase of oil. This was part of Iran’s main conditions for staying in the deal.
Rouhani under pressure

To say that Hassan Rouhani, the President of Iran and champion of the JCPOA, is under pressure, is something of an understatement. In taking the bold step of signing the JCPOA in 2015, Rouhani staked his political credibility on deal’s success. He also counted on the deal’s ability to transform Iran’s economy.

Rouhani was already in trouble when the much-hyped economic benefits of the JCPOA proved somewhat illusory for most Iranians. However, the situation has dramatically worsened with President Trump’s decision to exit the deal in May 2018. Not only that, but the US also decided to reimpose hard-hitting sanctions. In particular, Trump’s decision to threaten buyers of Iranian oil with sanctions has reduced Tehran’s oil sales to record lows. As a result,exports to Asia alone fell by up to 78.5%.

Now, Rouhani’s hardliner opponents who were always somewhat sceptical of the deal have the perfect narrative. They have the opportunity to portray Rouhani and his moderate allies as being naïve. They have also blamed them for the country’s economic crisis. Rouhani’s approval ratings have reportedly fallen as low as 10%.

Given the political and economic context, Iran’s violations of the JCPOA are hardly surprising. Those like the prominent moderate Heshmatollah Falhatpishe, who urged his colleagues to give INSTEX more time, simply no longer carry much weight.

INSTEX represents a direct alternative to US dollar-dominated global financial system and theoretically, a more independent EU foreign policy. Although it remains symbolically significant, it is highly unlikely to come up with the goods. At its core, INSTEX is an attempt to provide European companies with a means of trading with Iran. As such, European companies would not have to rely on US dollar transactions. This also shields companies from Trump’s sanctions. Furthermore, instead of monetary transactions, companies will engage in a barter system to conduct trade. This means both sides end up exchanging goods of an equivalent value.

So far, only a few million Euros has been dedicated to the scheme. This sum has been used to exchange food and medical goods – the trading of which is permissible under US sanctions. From the EU perspective, INSTEX seems to be more about facilitating deals that US sanctions permit, but which are not occurring because of a reluctance to test the waters and draw Trump’s ire.

It is highly unlikely that INSTEX in its current form will satisfy Iranians. This is evident in how some officials in Tehran have likened the mechanism to a ‘car without gas.’ At the same time, it also unlikely that the EU will be willing to use INSTEX to buy Iranian oil. Neither it is likely for the EU to provide credit as Tehran has demanded.

Washington has made it clear that it will sanction any EU entity or company that violates US sanctions. Faced with a choice between access to Iran or the far larger US market and financial system, the decision is a no brainer for most European companies. Given the mediocre state of the EU economy, few executives or politicians would be willing to risk jobs in pursuit of EU foreign policy goals.

Regional Bloc Response

There are also larger geopolitical factors at play. Trump has been an ardent critic of NATO. Undermining US objectives vis-à-vis Iran could give the mercurial leader the excuse he needs to scale back Washington’s commitment to the alliance. Of perhaps more immediate and tangible concern is Trump’s ongoing threat to impose tariffs on EU cars and parts. The end result would be devastating for Germany, whilst also hitting France, Belgium and Spain hard.

Accordingly, despite the frantic work of EU diplomats to make INSTEX meaningful, it is likely that the best Iran will be able to hope for is a modest expansion of the scheme. Such expansion would include more EU and perhaps some non-EU states. This is despite some fantastical behind-the-scenes talk of cooperating with Russia and China  to use INSTEX to buy oil via a triangular trading system. Both of these countries have their own reasons to more or less abide by US sanctions.

Iranian diplomats seem to have grossly overestimated the EU’s willingness to confront the US and save its most significant foreign policy achievement to date.

What does this mean for the future of the JCPOA?

With Europe unlikely to heed Iran’s pleas, Iran will have less and less incentive to abide by the remaining clauses of the deal that have not been already violated. In the immediate term, it is possible that Iran will reinstall some centrifuges. It could also begin preliminary work on reconverting the Arak facility so that it can once again produce plutonium. Centrifuges are needed to enrich uranium, whilst plutonium can be used to make nuclear bombs.

Even so, it is likely that at least for now, Iran will refrain from highly provocative steps. For instance, it is unlikely that it will withdraw from the Nuclear Non-Proliferation Treaty. It will probably not enrich uranium to levels anywhere near what would be needed to reach the nuclear breakout stage either. Such moves would clearly risk war with Israel and the US. These would equally invite in more economic pain by triggering EU sanctions.

Furthermore, Iran is also cognisant of the fact that Trump may be voted out in 2020. Additionally, key Democratic contenders have committed to re-entering the JCPOA. On the one hand, Tehran’s moves seem to be deliberately designed to show defiance. On the other hand, such moves are also capable of being scaled back at an opportune time. Ideally, Iran wants to avoid triggering EU ‘snapback’ sanctions. With Iran walking a diplomatic tightrope with little margin for error, tensions will almost certainly remain high over the short term.

First published in Global Risk Insights. Cartoon by Paresh Nath.

Henry Storey is currently completing his Master of International Relations degree at the University of Melbourne and interning at the Humanitarian Advisory Group. Henry is a political risk analyst at Foreign Brief and an editor at Young Australians in International Affairs and has also been published on multiple platforms including The Strategist and Outlook - Australian Institute of International Affairs. Henry’s primary area of expertise is Middle Eastern politics, but he also likes to dabble in events closer to home in the Asia-Pacific region.