How to Bring Iran to a New Deal

(Bloomberg Opinion) -- Since the resumption of U.S. sanctions on Iran two weeks ago, the rhetoric from Washington and Tehran has been predictably belligerent and defiant. Each has claimed it is open to fresh negotiations, but only if the other abandons its intransigence. Each is adamant that it will not be the first to blink.

U.S. Secretary of State Mike Pompeo has said the sanctions will remain in place until the Iranian government changes its behavior: This means, among other things, halting its ballistic-missile program and ending support for proxy groups across the Middle East — in addition to accepting more stringent constraints on its nuclear program than those imposed by the 2015 Joint Comprehensive Plan of Action. These goals seem no more realistic than President Hassan Rouhani’s demand that the U.S. sanctions be dropped and that the U.S. return to the nuclear deal with which Iran continues to comply.

For ordinary Iranians, this may all seem a little academic. Few of them experienced any of the expected dividends of the JCPOA, because although the deal provided relief from longstanding sanctions, in practice their lingering effects stymied the rebound of trade and investment. In a January 2018 survey of multinational executives active in Iran, 79 percent of respondents reported that their company had delayed market entry plans in the preceding two years. While Iran’s complex business environment certainly posed hurdles for foreign companies seeking post-JCPOA opportunities, the overhang from sanctions remained the largest impediment. Also in January, months before President Donald Trump tore up the nuclear deal, nationally representative polling showed that the majority of Iranians believed the U.S. had “not lifted all of the sanctions it agreed to lift in the JCPOA.”

This sentiment undermines the Trump administration’s hope that Iranians will, after experiencing economic pain caused by the sanctions, pressure their government to make a new deal. For most, the pain never really went away, and the prospect of sanctions relief in the future is discredited by their recent experience. Iran’s policymakers and public, alike, no longer believe that the U.S. will meet its commitments under a grand bargain.

How can Iranians trust that sanctions will successfully be lifted as part of a new deal? This question speaks to a larger set of issues at the heart of American sanctions policy, and is relevant not only to Iran but to any country under U.S. sanctions now, or likely to be in the future. American officials have spent several decades converting sanctions from a tool of diplomatic coercion into a powerful weapon of financial war. But little effort has been made to devise policy instruments that can help ‘reconstruction’ efforts when financial wars are brought to a negotiated end.

In his final speech as Treasury Secretary, Jack Lew observed that “Since the goal of sanctions is to pressure bad actors to change their policy, we must be prepared to provide relief from sanctions when we succeed. If we fail to follow through, we undermine our own credibility and damage our ability to use sanctions to drive policy change.”

The failure of the Obama administration to provide true sanctions relief stems from the fact that, by Lew’s own description, the Treasury Department relied on nothing more than “global outreach to help governments and businesses understand the sanctions relief provided” to implement its side of the nuclear deal. This outreach was ineffective, not least because the same officials who had just months previously been warning against commercial engagement with Iran were tasked with encouraging it.

Most of the pushback to the Trump administration’s sanctions policy has focused on its unilateral nature, and its excessive use of secondary sanctions. But in the case of Iran, the sanctions are now a reality. It is their removal that matters most in the context of future negotiations. The stick of sanctions can only be effective if the carrot of sanctions relief is made sweeter.

Prior to seeking a new deal with Iran, and before embarking on sanctions campaigns against other countries, the U.S. should create new instruments for the more effective lifting of sanctions. There are three areas where such a “reconstruction” instruments would need to be focused.

First, the U.S. must introduce new instruments to redress the psychological impact of sanctions, especially the lingering stigma around conducting trade and investment with the target country. A year after the JCPOA was signed, Stuart Levey, chief legal officer of HSBC Holdings PLC pointed out that U.S. Secretary of State John Kerry wanted “non-U.S. banks to do business with Iran without a U.S. repudiation of its prior statements about the associated financial-crime risks.” Levey noted that while the State Department was encouraging European banks to engage with Iran, there were “no assurances as to how such activity would subsequently be viewed by U.S. regulatory and law-enforcement authorities.” As a result, despite the lifting of sanctions, Levey declared that HSBC had “no intention of doing any new business involving Iran” — a sentiment widely shared among compliance chiefs.

Second, the U.S. must make available resources to help targeted countries overcome the institutional impact of sanctions, namely the diminished capacities for trade and investment facilitation following years of economic isolation. A new deal with Iran, for instance, should include technical assistance to help the country join the World Trade Organization, and other institutions that underpin global trade and investment. Ideally, the U.S. should commit to boosting its own trade with, and investment in, targeted countries, to help make up for the lost economic growth caused by sanctions. But this is harder to achieve because the U.S. government has limited ability to persuade American companies and investors to do business anywhere, much less in a country with a history of hostility to the U.S.

Finally, the U.S. can and should commit aid for programs that benefit those most hurt by sanctions: the poor. After the JCPOA, the European Union earmarked 50 million euros in development funding. A sizable commitment by American developmental agencies like USAID would encourage other countries to do likewise, and also send a reassuring signal to investors.

To achieve these aims, new teams with new authorities will need to be established at the Treasury Department, State Department, and Commerce Department, ideally empowered by new funding from Congress. Until such instruments are in place, not only will a new deal with Iran remain a long-shot, but the U.S. will face continued resistance to its use of financial sanctions — from allies and adversaries alike.

For now, this seems highly unlikely. The rhetoric from the Trump administration suggests it is content to remain in a standoff with Iran, especially since it imposes no political cost on the president, and little pain on the U.S. economy. But when time comes for a future U.S. president to undo the damage caused by the Trump administration, they must first prove that the damage can be undone.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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