It's Crunch Time for Trump vs. the World on Iran Sanctions

(Bloomberg) -- In the six months since President Donald Trump quit the Iran nuclear deal, he’s been demanding that Tehran -- and the rest of the world -- bend to his will. Come Monday morning, he’ll see how that plan is working out.

Nov. 5 is the day when sweeping U.S. sanctions on Iran’s energy and banking sectors go back into effect after Trump’s decision in May to walk away from the six-nation deal with Iran that suspended them. The deadline is the culmination of a campaign by Trump’s team to drive companies out of Iran’s markets, and early indications are they can claim at least a partial victory.

Iran’s oil exports already have fallen by about a million barrels a day, and countries including India and South Korea are said to have reached agreements with the U.S. to cut back purchases. Total SA, Boeing Co. and Munich Re are among dozens of companies that have sworn off Iran’s market.

The American president’s goal is to inflict so much economic pain that Iran abandons its nuclear program permanently and also quits what his administration calls its “malign activity” in the region and beyond. He’s vowed to exploit the U.S. financial system’s global reach to ensure other countries fall into line or risk being barred from the vastly bigger U.S. economy.

It’s a moment fraught with risk for Trump as well. His approach has alienated American allies and adversaries, all of which maintain that the 2015 nuclear deal remains the best shot for containing Iran. The government in Tehran remains defiant even as it continues to abide by the deal’s restrictions on its nuclear program. And Trump will have to decide how much to punish anyone who doesn’t comply -- from European central banks to strategic allies like India and major powers like China.

“We’ll find out if it works,” said Ivo Daalder, president of the Chicago Council on Global Affairs and a former U.S. ambassador to NATO. “I find it hard to believe that this will be more effective than having everybody on our side.”

Long-Term Results

The U.S. effort against Iran ultimately will hinge on how successful the administration is over the long-term in getting countries to stop buying Iranian oil that the International Monetary Fund says accounts for almost 80 percent of the Islamic Republic’s tax revenue.

It's Crunch Time for Trump vs. the World on Iran Sanctions

While Secretary of State Michael Pompeo has said “it is our expectation that the purchases of Iranian crude oil will go to zero from every country or sanctions will be imposed,” he confirmed Friday that waivers are being given to eight governments that say they depend on Iranian oil but show they’re cutting back.

The eight include Japan, India and South Korea, according to a senior administration official. China -- the leading importer of Iranian oil -- is still in discussions with the U.S. on terms, but is among the eight, according to two people familiar with the discussions who asked not to be identified.

“These sanctions are far tougher than have ever been imposed on the Islamic Republic,” Pompeo said on a conference call with reporters.

Under the waivers, U.S. law requires countries to bar any of their currency from going to Iran. Instead, they must pay for oil by putting funds into an escrow account, which Iran can use to pay for food and medicine or other consumer goods not covered by the sanctions.

“We want to achieve maximum pressure, but we don’t want to hurt friends and allies,” National Security Adviser John Bolton said on Oct. 31. Behind the scenes, Bolton argued that the waivers were too generous, according to a person familiar with the administration’s internal discussions.

Some countries have vowed to continue their imports. Many others -- such as India, Italy and Spain -- are already cutting Iranian imports as they look for other suppliers.

The Trump administration also must maintain the balancing act of slashing Iranian exports while avoiding political blame for forcing up global oil prices. So far that’s not been a problem: Oil fell to the lowest in more than six months Thursday on signs U.S. supply is accelerating and on expectations that the U.S. sanctions won’t succeed in wiping out Iran’s exports.

“You don’t want to move too aggressively too rapidly, drive up the price of oil and have Iran generate more revenue from higher prices despite having fewer barrels sold,” said Mark Dubowitz, the chief executive of the Washington-based Foundation for Defense of Democracies who has advised Pompeo’s team and helped Congress write the sanctions now being reimposed.

“Your overall goal is zero oil revenues, not zero barrels,” he said.

Coming Decisions

The Trump administration still has some big decisions to make. Among them is whether to penalize companies or countries for conducting financial transactions with Iran over the global financial-messaging service Swift. That’s been the source of friction, with Bolton arguing for a hard line, while Treasury Secretary Steven Mnuchin maintains that would be counterproductive and further anger U.S. allies.

The U.S. also will have to decide how to confront its allies in the European Union if they try to deliver on talk of creating a mechanism to help companies conduct financial transactions with Iran while insulating them from U.S. sanctions.

“The Europeans are going to need some companies that are willing to test out whether the system is viable and whether the cover they’re offering is worthwhile,” said Bryan Early, a professor at the State University of New York at Albany and author of a book on how countries thwart sanctions. “I think a lot of companies would just prefer to avoid that altogether.”

‘Win After Win’

State Department officials have downplayed the notion of a trans-Atlantic rift, calling it a conceit entertained by the media.

“While the press obsesses over ‘America alone’ and a trans-Atlantic rift, our policy of economic pressure continues to rack up win after win after win,” Brian Hook, Pompeo’s envoy for Iran and the leader of the campaign to cut off its economy, said in an email.

The administration has latitude in deciding what to do next. It isn’t expected to impose sanctions automatically on every country, business or bank that continues to do business with Iran.

“I have every expectation that they will conduct enforcement actions and they will plan to make an example of certain financial institutions and importers of Iranian oil,” said Elizabeth Rosenberg, a former Treasury official who’s now a senior fellow at the Center for a New American Security in Washington. “I hear them loud and clear, and they don’t bluff.”

Premature Boast

Ultimately, the success of Trump’s gamble is whether it achieves his goal of changing Iran’s behavior and forcing it to the bargaining table.

Trump took a premature victory lap in June, saying Iran already was changing and “they’re a much, much different group of leaders.” But Pompeo said in an Oct. 31 radio interview that the U.S. had seen “no indications of any change” in the country’s behavior so far.

The same day, Iranian President Hassan Rouhani said his country won’t back down.

“Nov. 4 this year translates into a new instance of oppression by America,” Rouhani said, according to the state-run Fars news agency. “Our people need to rest assured that the government is not afraid of U.S. threats.”

©2018 Bloomberg L.P.