U.S. Reimposes the Second Round of Iran Sanctions

The U.S. has officially pulled its second foot out of the Joint Comprehensive Plan of Action, commonly called the Iran deal, a multilateral treaty concluded in 2015 by the U.S., U.K., Germany, France, China, EU, and Russia to halt Iran’s development of nuclear weapons. On Monday, the Treasury Department imposed sanctions on Iran’s energy, shipping, shipbuilding, and financial sectors—thus fulfilling Trump’s May 8 announcement that the U.S. would reimpose the sanctions that had been in place prior to the Iran deal. Specifically, the May announcement said the administration would reimpose within 180 days all sanctions that had been previously lifted under President Obama’s Executive Order 13716, which was issued at the conclusion of the JCPOA. An estimated 700 individuals, entities, and aircraft are now subject to U.S. sanctions, including over 300 targets not previously sanctioned and more than 50 Iranian banks and their foreign subsidiaries.

This is the second tranche of sanctions that the U.S. has reimposed on Iran; the first tranche came in August 2018. Treasury Secretary Steven Mnuchin has called this second round “the toughest U.S. sanctions ever imposed on Iran.”

Additionally, the Office of Foreign Assets Control (OFAC), the division within Treasury charged with administering U.S. sanctions, has moved those persons defined as the “Government of Iran” or an “Iranian financial institution” from the “List of Persons Blocked Solely Pursuant to E.O. 13599” to the “Specially Designated Nationals and Blocked Persons List” (“SDN”) list. As a result of this change, U.S. persons remain prohibited from engaging in transactions or dealing with the government of Iran as well as Iranian financial institutions (barring receipt of a specific license from OFAC). However, non-U.S. persons will now also be subject to secondary sanctions should they engage in “significant transactions” with the Iranian government or an Iranian institution (see FAQ 638).

In short, unlike primary sanctions which apply broadly to those persons engaged in transactions with a U.S. nexus, secondary sanctions apply to those persons who engage with someone on the primary sanctions list. Ambiguities persist regarding what qualifies a transaction as “significant” for the purposes of secondary sanctions. Furthermore, the wind-down for General License H, which previously granted U.S. owned or controlled businesses the ability to conduct certain activities with the government of Iran or persons subject to the jurisdiction of the government of Iran, is now complete (see FAQ 623).

Given the impact these new sanctions are likely to have on Iran’s crude oil exports, the U.S. granted eight waivers to Italy, Greece, Japan, South Korea, Taiwan, and Turkey in addition to Iran’s biggest oil shoppers, India and China. These waivers or “significant reduction exemptions” permit these countries to continue buying oils from Iran for 180 days (subject to renewal). As Special Representative for Iran Brian Hook explained last week, any time Iran sells oil to one of the eight importing countries the money will go into escrow account in the importing nation’s bank. Iran will then be able to spend down the credits to buy limited goods, such as food and medicine. Meanwhile, the U.S. will be “monitoring these escrow accounts very closely.” The U.S. has also issued three waivers to continue conversion work at three Iranian nuclear facilities including Bushehr, Fordo, and Fordow power plants.

Pursuant to Trump’s May National Security Presidential Memorandum (NSPM-11), the Treasury Department reimposed the first tranche of sanctions in August. Those sanctions limited Iran’s purchase or acquisition of U.S. dollars; its trade in gold and precious metals; as well as ‘significant’ transactions related to the Iranian rial. At that time, the President also issued Executive Order 13846, pursuant to the International Emergency Economic Powers Act (50 U.S.C. §1701 et seq.), which reimposed relevant provisions of those executive orders that had been revoked by Obama’s 2016 EO 13716, such as EO 13574, EO 13590, EO 13622, and EO 13645. (Suzanne Maloney wrote an informative piece on the August sanctions for Lawfare.)

In a Monday press conference, Secretary of State Mike Pompeo said that to receive relief from the reimplemented sanctions, Iran’s leaders must abide by the 12 conditions he outlined in a speech listed in May, which range from stopping its plutonium reprocessing program to ending its proliferation of ballistic missiles to withdrawing support for the Houthi militia in Yemen, the Taliban, and al-Qaeda.

SWIFT Access

A question of ongoing speculation (and political footballing) has been whether the U.S. would deny Iran access to SWIFT (the Society for Worldwide Interbank Financial Telecommunication), a global messaging service that enables banks to share critical information about financial transactions. To be cut off from SWIFT is to be cut off from international finance.

Mnuchin reportedly opposed forcing Iran entirely off the SWIFT network on the grounds that such a move would make the provision of humanitarian assistance next to impossible and encourage Europeans to create a SWIFT replacement that the U.S. would not have access to. (See also the Washington Post’s story here.)

Nevertheless, Mnuchin made clear in an interview on Nov. 2 that while Iran would not be removed from SWIFT, the system would still be subject to U.S. sanctions should it provide messaging services to designated Iran financial institutions. He said:

SWIFT is no different than any other entity ... we have advised SWIFT the Treasury will aggressively use its authorities as necessary to continue intense economic pressure on the Iranian regime, and that SWIFT would be subject to U.S. sanctions if it provides financial messaging services to certain designated Iranian financial institutions ... we have advised SWIFT that it must disconnect any Iranian financial institution that we designate as soon as technologically feasible to avoid sanctions exposure. [And] just as was done before, humanitarian transactions to non-designated entities will be allowed to use the SWIFT messaging system as they have done before, but banks must be very careful that these are not disguised transactions or they could be subject to certain sanctions.

On Monday, SWIFT announced that it would comply with U.S. sanctions:

In keeping with our mission of supporting the resilience and integrity of the global financial system as a global and neutral service provider, SWIFT is suspending certain Iranian banks’ access to the messaging system. This step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system.

It’s worth noting that there are policymakers in the U.S. intent on further isolating Iran from SWIFT. National security adviser John Bolton argued more aggressively within the administration that the new sanctions would not work unless Iranian banks were blocked from the entire SWIFT network. Additionally, Sens. Ted Cruz (R.-Tex.), Tom Cotton (R-Ark.) and Marco Rubio (R-Fla.) have pressured Trump to cut off several Iranian banks from SWIFT network and reportedly have plans to introduce legislation which would provide mandatory sanctions against SWIFT officials if they refuse to cut off access to certain Iranian banks (as opposed to leaving to those sanctions to the executive branch’s discretion). Rep. Mike Gallagher (R-Wisc.) has plans to develop a supporting bill in the House.

Europe’s Response

On Friday, leaders from France, Germany and the United Kingdom issued a joint statement expressing deep regret over U.S. sanctions on Iran, citing 12 consecutive reports by the International Atomic Energy Agency (IAEA) that show the JCPOA is still “working and delivering on its goal.” The statement expressed Europe’s commitment to protect the countries’s ongoing economic activity in Iran through creation of a special-purpose vehicle (SPV). A SPV is a generic legal entity set up to achieve a specific goal; the idea is that Europeans could create a SPV to enable the legitimate purchase of Iranian oil, effectively bypassing American financial institutions.

In August, German Foreign Minister Heiko Maas published an editorial in Handelsblatt explaining the strategic value of creating a payment channel independent of the SWIFT payments system. Since then, Heiko Maas has even called for Europe to reevaluate its strategic partnership with the United States. Though supportive of a strong, unified Europe, German Chancellor Angela Merkel has discouraged plans to create a European alternative to the SWIFT agreement given how extremely useful it is in tracking terrorist financing. So far, no concrete details have been provided and there is evidence that Europe has struggled to find a member state to host the new financial channel. Nonetheless, an EU spokeswoman this week said that plans for the SPV were “accelerating.”

Pompeo tweeted in September that “the U.S. was disturbed & deeply disappointed to hear the remaining parties in the deal announce they are setting up a special payment system to bypass U.S. sanctions. This is one of most counterproductive measures imaginable for regional & global peace & security.” When asked by a CNN reporter Nov. 2 about how significant European transactions with Iran are likely to be, Mnuchin said “I have no expectation that there will be any transactions that are significant that go through a Special Purpose Vehicle based upon what I’ve seen” but the U.S. “would aggressively pursue our remedies” should details of a special-purpose vehicle emerge.

Experts disagree about whether the remaining signatories to the Iran deal will be able to salvage their economic activity either by using an SPV or through sheer diplomatic shaming. For example, Nora Müller—Head of the International Affairs Department at Körber Foundation—“the EU’s efforts to salvage the Iran nuclear deal may well go down in history as testimony to European impotence in the face of U.S. dominance of the global financial system.” Others, like European Parliament member Marietje Schaake believe that a more limited JCPOA could work but European leaders will still need to “get real” and talk about Iran’s “troubling role” in the region:

The impression that the EU and Tehran are in one ‘camp’ and the United States in another is deplorable … The way forward for Europe is to broaden its Iran policy to include human rights and foreign policy concerns, while taking reasonable steps to stay committed to its part of the nuclear deal.

Russia’s Response

Meanwhile, Russia has said that it will continue to support Iran in the face of new U.S. sanctions. In an interview with the Financial Times, Russia’s Energy Minister Alexander Novak said that “we do not recognise the sanctions introduced unilaterally without the U.N., we consider those methods illegal.” Russia will therefore continue its 2014 oil-for-goods program, under which Russia buys approximately 100,000 barrels of oil per day from Iran with the understanding that proceeds will be used to purchase goods and services from Russia. Some have argued that by weakening Iran, U.S. sanctions have increased Russian influence in global oil markets.

Iran’s Response

On Monday, Iranian President Hassan Rouhani called U.S. sanctions “an act of economic war.” He said “With the help of the people, and the unity that exists in our society, we have to make the Americans understand that they must not use the language of force, pressure, and threats to speak to the great Iranian nation. They must be punished once and for all.” Hours after the U.S. reimposed sanctions, Iran’s military tested new missiles as part of its air-defense system. Iranian lawmakers are also emphasizing Iranian strength. The spokesman for Iran’s Foreign ministry spokesman, Bahram Qasemi, told state TV that Iran had "the knowledge and the capability to manage the country's economic affairs" adding that there is "no possibility" that the U.S. "will attain its political goals through such sanctions.” Governor of the Central Bank of Iran (CBI) Abdolnaser Hemmati also said that the United States failed in sanctioning Iranian oil. He wrote on his Instagram page last week, “it has been clear for everyone that the United States has been defeated in sanctioning Iranian oil and minimizing it into zero level completely under any pretext.”

Meanwhile, since the U.S. withdrew from the JCPOA, Iran’s oil exports have declined by about a third, or 1 million barrels per day—nearly twice the volume what U.S. experts were expecting. Goldman Sachs predicts that Iran’s crude oil exports will continue fall to 1.15 million barrels per day by the end of the year, down from around 2.5 million in mid-2018. Because international oil producers have increased production to counteract the spike in prices caused by Iran’s reduced exports, it is unlikely Iran will derive as much revenue as initially envisioned. Prices for brent crude oil, the international benchmark, did not change much on Monday.