The key to Obama's Iran deal might not actually work

Ayatollah Ali KhameneiReutersKhamenei may like the Iran nuclear deal better than he’s letting on in public.

Despite US Secretary of State John Kerry’s broken femur, the signing of a comprehensive nuclear agreement with Iran appears to be on track.

Despite his continued vitriolic rhetoric, Iranian Supreme Leader Ali Khamenei has likely given his negotiating team permission to step down from hardline demands. These include negotiating leeway on International Atomic Energy Agency access to nuclear scientists, the phased yet front-loaded removal of nuclear-related sanctions.

So the most imposing barriers to a nuclear agreement have already been cleared. But it’s still uncertain how a critical mechanism for ensuring a deal’s long-term success will actually work.

A nuclear deal is predicated on the assumption that the US and its partners can quickly reestablish economic leverage over Iran in case the country fails to fulfil its obligations under the agreement.

Without the ability to quickly re-impose UN economic sanctions, the US and its negotiating partners, which include the 5 permanent members of the UN Security Council and Germany (the P5+1) will be left with unilateral sanctions, military action, or paramilitary measures (a Stuxnet-like computer bug, for instance) to prevent Iran from developing a nuclear bomb.

Rapid sanctions re-imposition, or “snapback,” is important for deterring Iranian misbehavior without forcing P5+1 members to resort to that kind of escalation. Just as importantly, it allows the US and its allies to punish Tehran within the framework of a deal.

Snapback is designed to be a coercive mechanism that won’t wreck the entire deal. When President Barack Obama says a deal won’t be made solely on the basis of trust, snapback is part of what he’s talking about.

But there’s one huge problem: The key to ensuring Obama’s biggest second-term policy priority may not be as workable as the president says it is.

UN security councilMario Tama/GettyThe UN Security Council

If Iran violates the agreement, UN sanctions can be ramped up without having to go through the contentious and time-consuming process of passing a new United Nations Security Council resolution.

The question is how to ensure this will actually happen since Russia and China are concerned that a snapback mechanism that calls for automatic sanctions re-imposition circumvents their UN Security Council vetoes.

So, according to a May 31st Reuters report, the sides are working towards a compromise: “As part of the new agreement on sanctions snapback, suspected breaches by Iran would be taken up by a dispute-resolution panel, likely including the six powers and Iran, which would assess the allegations and come up with a non-binding opinion.”

For Iran sanctions expert Mark Dubowitz, this recommendation is already red flag as it would likely still allow anti-sanctions P5+1 members like Russia and China to delay or even veto a snapback, making it something other than an automatic punishment.

“I don’t think the Russians spent 70 years seriously protecting their veto power at the UNSC to now all of a sudden in any way surrender it to any Western-designed mechanism,” Dubowitz, Foundation for Defence of Democracies executive director, told Business Insider. “

You have to assume that if the Russians agree to this it’s because they figured out a way to game it in order to protect their interests … and to ensure that this doesn’t become a precedent for any future snapback sanctions regime.”

Vladimir Putin

Dubowitz sees the snapback compromise as a way of getting around possible divisions between the US and its partners, while making it seem as if the US can still pressure Iran.

But Dubowitz doesn’t think it accomplishes either, calling it an “illusion.”

“It’s an attempt by the administration to persuade Congress and the American people that they believe in the use of economic coercion, when snapback would run against China and Russia at the Security Council, and it would run up the against the wall of the marketplace,” he said.

The wall of the marketplace is based on the idea that Iran is likeliest to cheat on an agreement at a time when its economy recovers from the worst effects of the current round of sanctions. At that point, international banks and business interests possibly belonging to P5+1 or EU countries will have reentered the Iranian market — meaning that in a snapback scenario, the P5+1 would be effectively sanctioning their own companies.

And this would happen at a point, years after the deal is signed, when the Iranian economy would be equipped to absorb the blow of any sanctions snapback anyway.

“In the early stages, if Iran engages in a substantial violation, I see sanctions snapback as potentially a viable instrument of peaceful coercion to enforce the deal,” Dubowitz says. But he doesn’t think snapback will have much sting 10 or even 5 years into an agreement that’s meant to permanently prevent Iran from going nuclear.

This doesn’t mean that snapback is toothless. Recent precedent around US sanctions enforcement is actually fairly encouraging: Sam Cutler, a policy advisor at Ferrari and Associates and expert on sanctions law, believes that critics of the snapback’s deterrent potential misunderstand how global financial institutions measure risk in a time when the US Department of the Treasury’s Office of Foreign Asset Control wields such broad power.

“A lot of reporting talks about sanctions as this sort of great game, government-to-government issue where really it’s mostly a private sector risk calculus debate,” Cutler told Business Insider.

In his view, the current round of sanctions and even the possibility of snapback will be enough to prevent foreign banks and companies from jumping into the Iranian market too quickly — and that the power of the US Treasury and Justice departments are enough of a guarantee that “snapback” could have some sting.

“The US has a very significant ability to effect the calculation of financial institutions and if they process transactions,” Cutler added. Banks will “have a game plan for cutting off access again,” in light of ongoing sanctions snapback and money-laundering risks.

Bnp paribasREUTERS/Charles PlatiauThe massive fine levied on BNP Paribas suggests that US snapback sanctions could have some real sting.

Snapback at the UN level requires cooperation from the other P5+1 members. But if the US really wanted to snap back on its own, it would have an impact: As Cutler notes, a $US9 billion money laundering and sanctions-busting fine like the one levied against BNP Paribas in 2014 would have been unthinkable within banks’ compliance departments just a few years ago.

Consequently, the US government has proved its serious enough about enforcement to be able to get international financial and regulatory institutions to fall in line behind its policies.

“All over the world regulators are focused much more on money laundering, and Iran is going to be a risky bet for the foreseeable future,” says Cutler.

That leaves another problem, though. Snapback is meant to smooth over disagreements between the P5+1 countries. It reimposes UN sanctions, which are more like authorizations for countries to sanction a specific target.

But it’s easy to imagine snapback exacerbating tensions within the P5+1, however powerful US regulators may have gotten. The US could decide a violation warrants snapback, and its European partners could disagree — with unknowable political and economic consequences on both sides of the Atlantic.

AP902375648827AP ImagesFrom left, European Union High Representative for Foreign Affairs and Security Policy Federica Mogherini, Iranian Foreign Minister Javad Zarifat, an unidentified Russian official, look on as British Foreign Secretary Philip Hammond shakes hands with US Secretary of State John Kerry as they arrive at the Swiss Federal Institute of Technology.

“The real test is if a snapback sanction is viable is if a US president is willing to snapback sanctions against major European financial institutions and energy and industrial companies in a scenario where the Europeans disagree with a US president over how significant an Iranian violation has been,” Dubowitz said.

It’s far from certain that the US would get its way. The very architecture of US and European sanctions law would complicate things.

Dubowitz recalled a 1996 controversy over the US imposition of sanctions on Iran and Libya. European countries whose companies were invested in Iran and Libya were concerned about US legal exposure from the recently passed Iran-Libya Sanctions Act.

A brewing trans-Atlantic dispute was only resolved when the Clinton administration signed an executive agreement specifically exempting European companies from the law. Several European countries have actually passed laws prohibiting companies from complying with US sanctions.

The insurance policy for Obama’s Iran deal assumes that US political and economic power will be enough to keep the P5+1 united while holding off an Iranian nuclear breakout.

However, it’s far certain that the snapback plan will be able to accomplish either.

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