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Tehran hasn’t benefited much from the nuclear deal. But the real problem is its own economy.
By Elizabeth Rosenberg and Richard Nephew
The Iran nuclear deal was destined to be controversial in its negotiation, conclusion and implementation. Nowhere is the deal more complex than in the area of sanctions relief. But blaming sanctions for the failure of a windfall for Iran to materialize — as critics and supporters alike are saying — misplaces attribution and undermines prospects for the deal’s success.
Iran has already received some benefit from the nuclear deal. The stabilization of its economy, which began after President Hassan Rouhani was elected, has permitted some reforms and economic regeneration. But expectations of the deal were high and have yet to be satisfied. Iranians have struggled to access $100 billion of their assets unfrozen under the nuclear deal; even Secretary of State John Kerry says they have wrangled only $3 billion of this sum. Moreover, most foreign companies and banks are hanging back, unwilling to do deals in such a high-risk jurisdiction.
The finger-pointing has already begun: Iranian critics of the deal blame Rouhani and his diplomats for having been suckered. In the United States, some critics are crowing that Iran’s struggles prove that had President Barack Obama stayed the course on sanctions, Iran would be collapsing. And, they decry any indication that the Obama administration should expand sanctions relief for Iran to aid Iranian reformers and ensure the nuclear deal is sustained.
The reality is that Iran was always going to have trouble reconnecting with the global economy thanks to systemic weaknesses in its economy and its regulatory structure. No amount of sanctions relief would change that. But the U.S. still should work with Iran to overcome those problems and reap benefits from the deal. Further isolating Iran’s banking system would serve only to undermine the nuclear deal and potentially damage the U.S. financial system.
Fundamental economic challenges in Iran run deep. Basic banking problems — including corruption and illiquidity of banks, and banks’ inability to follow modern standards for financial disclosure, taxation, capital requirements and due diligence — exist in many emerging markets. But Iran is an extreme example because of what the International Monetary Fund has called a “high” number of nonperforming loans, weak central bank liquidity, and a history of supporting terrorism and allowing security services to involve themselves in the financial system (complicating any due diligence process). Moreover, a cumbersome bureaucracy and regulatory regime help make Iran No. 118 on the World Bank’s ease of doing business index.
Iran has augmented these difficulties by involving its banking sector in ongoing regional destabilization in countries such as Yemen and Syria. Supporters of the deal cannot argue that Iran has abandoned its support for terrorism, or that it is reasonable for international investors to be wary about going back there. The incentives for doing so are particularly muted when prolonged low oil prices make Iran’s largest economic sector relatively unattractive.
Iran’s economic troubles are largely its own responsibility, but residual U.S. sanctions — particularly those that threaten foreign banks’ access to the United States if they do business with actors in Iran who have been found to support terrorism or violate human rights — just make them worse. This was also true during the period of the most intensive sanctions implementation several years ago. But, by taking Iranian complaints about sanctions at face value, deal supporters and critics are strengthening Iran’s case that the United States is to blame for the limited benefits Iran is receiving from the deal. But for that, the fault largely falls on the Iranian regime.
That said, the United States can and should do more to ensure that Iran gets what it paid for. This is essential to keep the deal — and its nuclear constraints — in place. The U.S. should allow its citizens and companies to help Iran clean up its financial system by providing advice to prevent money-laundering and implement reporting requirements on suspicious transactions, as the international Financial Action Task Force has urged Iran to do. The administration should also help foreign companies manage their responsibilities for due diligence in Iran by ensuring their access to U.S. expertise and guidance. Leaders of the U.S. Treasury and State departments should also urge their European and Asian counterparts to more publicly and intensively help companies understand how to do business with Tehran while avoiding entanglement with illicit, corrupt actors there.
For its part, Congress should oversee the deal, ensuring that it delivers the security benefits the White House promised to the American people. Lawmakers should avoid refighting the battles over the accord of the past year by attempting to pass cynical new sanctions legislation.
The stakes are high, not just for U.S. national security but for our economic security as well. One particularly dangerous proposal in Congress would restrict the use of dollars by foreign banks. If enacted, this could diminish the attractiveness of the U.S. financial system to foreign businesses. The current preferred global use of the dollar for lending, trade, investing and storage of value, is a tremendous benefit to the U.S. economy, but it is not a god-given right. It is a function of an international system that U.S. leaders helped to create, fund and sustain in no small part through the rigorous practice of economic openness, competitiveness, soundness and the ubiquity of the dollar. If U.S. leaders give away this advantage, aided by imposition of proposed new global rules for the dollar tied to Iran, the advantage may be impossible to recapture.
At present, sanctions are not a core problem with the nuclear deal. But U.S. policymakers risk making them so and undermining nuclear diplomacy if they mistakenly ascribe too much of Iran’s economic woes to Western sanctions. They also risk American economic power if they abuse this asset with new international restrictions on the use of the dollar. As we implement the Iran nuclear deal, ensure that it is strongly enforced and soundly monitored, we must remember that though the economic and security stakes for Iran are significant, they may be no less so for us, as well.
Elizabeth Rosenberg is director of the Energy, Economics and Security Program at the Center for a New American Security. Richard Nephew is a senior research scholar at the Columbia/SIPA Center on Global Energy Policy.
