by Bill O’Grady

In May, the Trump administration withdrew from the nuclear deal with Iran, officially known as the Joint Comprehensive Plan of Action (JCPOA).  The European participants (the other signatories were the U.K., Russia, France, Germany and China) tried to convince President Trump that leaving the pact would be a mistake, but President Trump has never been comfortable with the arrangement.  Clearly, it wasn’t perfect.  The agreement did not end Iran’s nuclear threat, but merely delayed it.  Furthermore, the agreement did not force Iran to address its missile program and did nothing to slow its attempts at regional hegemony.

It has been our position that the Obama administration concluded that its superpower obligations had become overly burdensome.  Of the three areas of the world where the U.S. essentially provided security, Europe, the Far East and the Middle East,[1] the Obama administration determined that the Middle East was the least important and wanted to “pivot” to the rapidly growing Asian region.  However, to reduce America’s “footprint” in the region, the U.S. had to put a regional hegemon in place.  It appears Obama believed that Iran was the only country that could fill the role.  That decision was clearly controversial.  Iran had been at odds with the U.S. since the 1979 Iranian Revolution and the hostage crisis.  Nevertheless, the idea was not without its supporters.[2]  In fact, in an ideal situation, the U.S. would try to foster another nearly equal power in the region that would oppose Iran’s designs and they would balance each other.  Unfortunately, none of the Sunni powers appear to be strong enough for that role and Israel lacks strategic depth.  Only Turkey could act as a counterweight but the Erdogan government did not seem interested.  Although the nuclear deal did not install Iran as the regional hegemon, we suspect President Obama assumed Hillary Clinton would be his successor and she would complete the “pivot.”

Instead, Donald Trump won the election.  The Gulf States and Israel moved quickly to improve relations with Washington that had deteriorated under the previous administration.  Candidate Trump was critical of the Iranian nuclear deal and vowed to end it.  As noted above, he did so in early spring.

Although the rest of the signatories remain committed to the original agreement, the U.S. is planning to implement sanctions on Iran in two phases; the first in early August with a second round in November.  Given the universality of the dollar in global trade, only China and Russia can likely afford to remain in the pact.  The European nations[3] are too dependent on the U.S. financial system for their companies to risk sanctions by doing business with Iran.  Already, Japan[4] and South Korea[5] have indicated they will reduce or end their purchases of Iranian crude oil.  Although China could offset some of the lost investment from Europe, the Xi government probably would exact onerous terms.  Russia may be helpful in the geopolitical arena but won’t be a significant contributor to Iran’s economy.

Therefore, Iran, which views the Trump administration’s actions as hostile, is trying to effect a response.  While Iran has indicated it wants to keep the nuclear pact in place, the deal is only useful if it helps expand its economy.  And, if the U.S. intends to harm Iran’s economy, the regime has to contemplate retaliation, which may include rescinding its participation in the agreement.

This will be a three-part report in which we will examine Iran’s options for responding to the return of sanctions.  In Part I, we will discuss the possibilities that Iran ends the JCPOA and moves to build a deliverable nuclear weapon as well as increases its power projection in the region.  In Part II, we will analyze the ever-present Iranian threat to disrupt shipping in the Strait of Hormuz and perhaps elsewhere.  In Part III, we will touch on the potential for Iran to deploy a cyberattack against the U.S. along with the possibility that Iran uses allies to end sanctions and enter into direct negotiations with Washington.  We will conclude with market ramifications.

View the full report

[1] For a summary of our views on American hegemony and frozen conflicts, see Weekly Geopolitical Report, The Mid-Year Geopolitical Outlook (6/25/18)

[2] Baer, Robert. (2008). The Devil We Know: Dealing with the New Iranian Superpower. New York, NY: Penguin Random House.

[3] https://www.reuters.com/article/us-iran-oil-europe/european-refiners-winding-down-purchases-of-iranian-oil-idUSKCN1J21F0 and https://www.washingtonpost.com/world/europe/europeans-scramble-to-save-iran-nuclear-deal-but-face-new-concerns-over-us-sanctions/2018/05/09/39937066-536f-11e8-abd8-265bd07a9859_story.html?utm_term=.befb864c5230

[4] https://asia.nikkei.com/Politics/International-Relations/Japan-set-to-halt-imports-of-Iranian-oil

[5] https://www.reuters.com/article/us-southkorea-iran-oil/south-korea-suspends-iranian-oil-loading-in-july-for-first-time-since-2012-sources-idUSKBN1JW07R