The Iran Action Group Puts Muscle Behind Trump’s Iran Bluster

(Bloomberg Businessweek) -- During a press conference at the United Nations General Assembly on Sept. 26, President Trump made clear how he feels about the criticism he’s gotten from other countries over his decision to pull out of the Iran nuclear agreement and resurrect stifling sanctions in November. “It doesn’t matter what world leaders think,” he said. “Iran’s going to come back to me and make a deal.”

One reason he’s so sure? An obscure but highly effective group with a name that sounds like it was pulled from the title of a 1980s action flick: the Iran Action Group.

As Trump, Secretary of State Michael Pompeo, and national security adviser John Bolton have lashed out against Iran’s leaders and the European Union for trying to preserve the nuclear deal Trump quit in May, a handful of employees from the U.S. State and Treasury departments has quietly toured the globe, visiting world capitals and corporate headquarters to persuade foreign governments and companies to shun the Iranian market. The choice they present has been simple: Do business with America, the biggest economy in the world, or do business with Iran and face sanctions and banishment from the U.S. financial system.

“What we have now is a big game of chicken,” says Anthony Rapa, a lawyer at Kirkland & Ellis who focuses on sanctions compliance. Rapa is impressed thus far with how effective Pompeo’s team has been in isolating Iran. “Whatever you might say about the president and his rhetoric, the people running this file know what they’re doing.”

Members of the Iran Action Group have visited more than 30 countries so far, meeting with senior officials and company representatives. They lay out the U.S. view of Tehran’s “malign behavior” in the Middle East and around the globe. But their real goal is to convey in detail just how far the U.S. is prepared to go to inflict economic pain—chiefly through secondary sanctions—on companies that expect to get a reprieve if they keep up business ties with Iran.

So far they’ve been persuasive. A so-called Divestment Tracker kept by the group lists 80 or so companies, ranging from Total and Munich Re Group to KLM Royal Dutch Airlines and Mazda Motor, that have backed out of the Iranian market over the past several months. More important for Iran, which derives 80 percent of its tax revenue from oil sales, exports of its oil products have fallen 40 percent from a high point of 2.8 million barrels a day in April, the month before Trump backed out of the nuclear accord.

That decline surpassed even the most bearish forecasts. “Iran exports are going to drop more than what the market expected only a couple of months ago,” says Ben Luckock, co-head of oil trading at Trafigura Group, one of the world’s largest commodities merchants. “When we add every country that we think will continue buying, we struggle to see exports much more above 1 million barrels a day.”

The Iran Action Group’s cast of characters includes a former explosives ordinance expert, Jason Shell; David Tessler, a mild-mannered sanctions expert with two tweets to his name; Michelle Giuda, who was once Newt Gingrich’s spokeswoman and was also a national gymnastics champion at the University of California at Los Angeles; and a former New York ad man, Len Khodorkovsky, whose family fled the Soviet Union when he was a child and who now coordinates Pompeo’s anti-Iran messaging campaign.

Their leader is Brian Hook, a foreign policy wonk who worked for the George W. Bush adminstration and advised Mitt Romney’s 2012 presidential campaign. Hook wielded vast power under Pompeo’s predecessor, Rex Tillerson, serving as his policy brain. While his current mandate isn’t as expansive, he’s been given valuable real estate, moving into an office along the State Department corridor known as Mahogany Row. Working a few doors down from Pompeo, he’s essentially taken control of the department’s policy toward Iran.

The group’s effort is putting to the test the proposition that the U.S. economy and dollar are so central to the global economic system that American sanctions alone will isolate Iran’s economy. That runs counter to the conventional wisdom that Obama-era sanctions against Iran were effective only because other nations participated, particularly U.S. allies in Europe. “I’ve felt for a long time that we’ve underestimated our ability to use U.S. tools when they’re viewed as a leg to isolate financial and economic rogue behavior,” says Juan Zarate, chairman of the Financial Integrity Network and a former deputy national security adviser to Bush. “The argument that our power was slipping away, our ability to maintain sanctions was fading, was a really inaccurate portrayal of where we were.”

Trump is going further than any previous president in using American financial power as a weapon—in direct confrontation with his allies, daring them to keep doing business with Iran, even if that brings the threat of U.S. economic punishment and denial to the American market, which is 60 times the size of the Iranian economy. As far as Hook is concerned, the question is settled. “Very few companies are going to choose Iran over the United States,” he said at a briefing in late September. “That’s just the economic reality.”

Hook and his crew have vowed to cut Iranian oil exports to zero, betting that other producers, such as Saudi Arabia and Kuwait, can make up for lost supplies and keep oil prices steady. But markets are already spooked. The price of Brent crude, the global oil benchmark, hit a four-year high of $85 a barrel in early October, up from $55 a year ago.

Rising oil prices could expose the Iran Action Group to what many regard as its biggest threat: Trump himself. With the midterm elections only a month away, the president may be concerned that higher oil prices will hurt Republicans at the polls. He inveighed against rising prices during his speech before the UN General Assembly on Sept. 25, saying, “We are not going to put up with it—these horrible prices—much longer.” The risk is that the president will reverse course on Iran, as he did with North Korea, pivoting from belligerence to dealmaking. “Trump appears at first as though he’ll never capitulate, but it’s a negotiating tactic, and he ultimately wants to do a deal with Iran,” says Scott Modell, a former CIA officer and managing director at Rapidan Energy Group. “He would be just fine freezing some aspects of Iran’s bad behavior for now and entering into prolonged talks in search of a broader deal, particularly because it’s his best chance of keeping U.S. gasoline prices under $3 per gallon.”

What are the other threats to the strong-arm approach? Countries such as India and China pose the biggest challenge. Both are major importers of Iranian oil. While China may be willing to spurn the U.S., India is more inclined to cooperate. “The fallout from going alone is serious,” says Wendy Sherman, the Obama administration’s undersecretary of state who led the negotiating team for the Iran deal. “You take a country like India, which has an election coming up. They want good relations with the United States, no question. But they also don’t need an energy crisis.”

And no matter how successful the Iran Action Group’s campaign is, there’s no guarantee Iran will concede. The goal, the State Department says, is to inflict so much economic pain that Iran is compelled to come back to the negotiating table and agree to a deal that not only limits its nuclear program, but also curbs what the U.S. says is Iran’s sponsorship of terrorism, its ballistic missile ambitions, and its overall power in the region.

The 12 demands Pompeo has laid out would amount to a wholesale reshaping of Iran and reorientation of its priorities. That’s probably asking too much. Iranian leaders are “very astute and very savvy, and they are very tough negotiators,” Sherman says. “It’s a resistance culture.”

To contact the editor responsible for this story: Eric Gelman at egelman3@bloomberg.net

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