Iran Paid for Su-35 Jets, But Russia Won’t Deliver Them

Earlier this month, Brigadier General Hamid Vahedi, Iran’s air force commander, ended weeks of speculation about the imminent delivery Russian Sukhoi Su-35 fighter jets. “Regarding the purchase of Su-35 fighter jets [from Russia], we need them, but we do not know when they will be added to our squadron. This is related to the decision of [Iran’s] high-ranking officials,” he stated in an interview on state TV.

Vahedi's comments sparked speculation about dysfunction in the Russia-Iran partnership, including that Israel had successfully convinced Russia to postpone delivery of the advanced fighter jets to Iran.

While officials in Tehran continue to pursue a partnership with Russia, it is increasingly clear that Russian officials see their relationship with Iran as little more than a card that can be played according to their needs.

Russia’s potential sale of Su-35 jets to Iran has been connected to the deeper military cooperation between the two countries since the Russian invasion of Ukraine in February 2022. Iranian drones are being used by Russian forces to bomb Ukrainian cities. The first drones were transferred from Iran to Russia around one year ago.

But Iran has been waiting for far more than a year to receive the Su-35, which would prove a major upgrade in capabilities for Iran’s aging air force, largely comprised of American jets in service since before the 1979 revolution.

According to one current and one former diplomat with direct knowledge of the matter, Iran made “full payment” for 50 Su-35 fighter jets during the second term of President Hassan Rouhani. The officials requested anonymity given the sensitivity of Iran’s arms purchases. According to the former diplomat, at the time of purchase Russia had promised to deliver the Su-35s in 2023. Neither source expects that the deliveries will be made this year.

A third source, a security official, speaking on background, expressed disappointment that Vahedi’s “uncoordinated interview” had called attention to the fact that the deliveries were now in doubt. Iranian officials feel embarrassment over Russia’s failure to adhere to commitments.

The delay in the delivery could be traced to the strong relationship between Russia and Israel. In June, Axios reported that Israeli officials confronted Russian counterparts over Russia’s growing military cooperation with Iran and the possibility of Russia providing Iran advanced weapon systems. Israeli Prime Minister Benjamin Netanyahu disclosed the “open and frank” dialogue with Russian officials in a closed-door hearing with Israeli lawmakers on June 13.

In the view of the former diplomat, due to their arrogance, Iranian hardliners “fell into the trap” of believing that they were an equal partner to Russia, simply because “the Russians are queuing up to buy arms from them.”

The drone transfers have contributed to Iran’s political isolation, giving Western officials the impression of deepening cooperation between Russia and Iran, even as the Iranian Foreign Ministry continues to claim that Iran remains a neutral party in the Ukraine war. According to the security official, neutrality remains the consensus position of the Iran’s Supreme National Security Council, but he warned that country’s military brass may not all share that same view.

Notwithstanding the ambitions of Iranian generals, Russia continues to treat Iran far worse than an ally. Earlier this week, Russia issued a joint statement with the Gulf Cooperation Council (GCC), affirming the United Arab Emirate’s claims on three Iranian islands: the Greater Tunb, the Lesser Tunb, and Abu Musa. The statement enraged Iranian officials. Ali Akbar Velayati, a senior advisor to Iran’s Supreme Leader, called Russia’s assent to the statement “a move borne of naivety.” Iran’s foreign minister and its government spokesperson stressed in statements that Iran will not tolerate claims on the three islands from any party. The officials had made such statements before—a China-GCC joint statement from December 2022 caused a similar public outcry.

As Iranian officials are forced to defend their ties with Russia once again, a question remains. Why does Iran have so little leverage over Russia, even after the Russian invasion of Ukraine? The answer lies in the mindset of Iranian officials.

Back in May, Iran’s Supreme Leader, Ali Khamanei, declared that “Dignity in foreign policy means saying no to the diplomacy of begging.” The slogan “diplomacy of begging” has become popular among conservatives and the hardliners, who have used it to condemn the signing of the Joint Comprehensive Plan of Action (JCPOA) and to accuse former Iranian foreign minister Javad Zarif of begging the West for sanctions relief. But if begging the West for sanctions relief is wrong, why are hardliners eager to beg Russia for the Sukhoi jets?

Tehran’s ties with Moscow were never built on trust. They were built on mutual fears and mutual needs. Were the administration of President Ebrahim Raisi to realize that looking to the West does not preclude political and economic relations with Russia and China, Iran could strengthen its position in the Middle East and regain leverage in its relationship with Russia. Until then, the Russians will continue to look at their relationship with Iran as a nothing more than playing card.

Photo: Wikicommons

SIPRI Has Overstated Iran's Military Spending For Years

SIPRI—the Stockholm International Peace Research Institute—produces the world’s most authoritative data on global military expenditure and the arms trade. The SIPRI Yearbook, a flagship annual publication, offers civilian and military leaders around the world a way to compare military spending between countries and to gauge which countries are investing in greater military power.

This year, the SIPRI Yearbook includes some significant statements about Iran’s military expenditure—which is estimated at $24.6 billion. In a factsheet summarising key trends, SIPRI’s researchers declared “Iran increased its military spending by 11 percent, making it the 14th largest military spender in 2021. This is the first time in 20 years that Iran has ranked among the top 15 military spenders.”

We are accustomed to thinking about Iran as a major military spender because we frequently hear about the country’s military, its missile programme, and its nuclear weapons ambitions. But on closer examination, SIPRI’s figures for Iran do not add up.

Iran is a country that is under the most significant sanctions programme in the world and its economy has stagnated for a decade. But SIPRI’s data suggests that Iran is spending even more than Israel, ranked 15th in the world with $24.4 billion in military expenditure in 2021. The comparison with Israel—a country in which the military is constantly procuring the most advanced military equipment in the world, including from foreign manufacturers—is clarifying. If Iran were indeed spending even more money, what could it possibly be spending all that money on? Iran produces nearly all its military hardware domestically, has basically no heavy armour, no modern air force, no modern naval fleet, and few advanced weapons systems. The country’s defence is primarily assured by a ballistic missile programme, which while impressive, is not a programme that costs nearly $25 billion to operate.

So where did SIPRI go wrong? The answer is simple and reflects a common mistake made by researchers who rightly want to put Iranian financial data into a comparative framework. To produce global rankings and to make data on military spending comparable over time, SIPRI converts local currency expenditures into US dollars. In 2021, SIPRI calculated Iran’s total expenditure in local currency at IRR 1033 trillion. In an email exchange, a SIPRI researcher clarified for me that SIPRI defines military expenditure using the following formula:

Military expenditure = Ministry of Defence and Armed Forces Logistics Total + Armed Forces General Staff Total + Artesh Joint Staff Total + Sepah Joint Staff (IRGC) Total + Armed Forces Social Security Organization Total

This is a reasonable formulation and corresponds to how Iranian sources calculate military spending. So there is no reason to doubt SIPRI’s calculation of military spending in local currency terms.

For most countries, the next step in the analysis involves finding the average dollar exchange rate for the given year and dividing the total expenditure by that figure. But Iran does not have a single exchange rate and SIPRI’s researchers picked the wrong one. Over the years, they have relied upon data for Iran’s official dollar exchange rate published by the World Bank and sourced from the Central Bank of Iran. This was also confirmed in my email exchange with the SIPRI researcher. On face, this seems like the right approach—SIPRI is using an “official” rate from an authoritative source. But in Iran, the official exchange rate does not reflect market prices. It is a subsidised exchange rate that is only used for the importation of certain essential commodities, such as wheat and medicine. Since 2019, the official exchange rate has been capped at IRR 42,000. This is the rate that SIPRI mistakenly used to calculate Iran’s total military expenditure for 2021.

The exchange rate that ought to have been used is the exchange rate defined within the government budget itself. The Iranian government balances its budget by relying in part on foreign exchanges revenues, principally earned through the sale of oil. Prior to the budget for the Iranian calendar year 1395, which was submitted in November 2015, the official exchange rate was indeed the reference rate used in the budget. But after several years of sanctions pressure, the Central Bank of Iran could no longer prop up the value of the currency. So while the official exchange rate was kept low as a means to subsidise the purchase of key imports, a separate exchange rate was defined in the budget. The rates have diverged dramatically since.

Each budget includes a revenue target from the sale of oil and a target volume of oil sales. By comparing these two numbers with the price of oil fixed in the budget, it is possible to arrive at the dollar exchange rate on which the budget depends. This exchange rate, which we can call the budget exchange rate, expresses how many rials the Iranian government estimates it can spend for each dollar it earns. It is therefore a much better exchange rate to use when trying to account for different levels of purchasing power between countries when it comes to government expenditure.

For the draft budget in the Iranian calendar year 1401, which was submitted in November 2021 and forms the basis of SIPRI’s 2021 expenditure estimate, the budget exchange rate was IRR 230,000—a rate five times higher than the IRR 42,000 official rate. In other words, SIPRI’s 2021 yearbook overstates Iran’s military spending by a factor of five. Using the budget exchange rate, Iran’s total military expenditure is just $4.5 billion, a total that places Iran outside of the Top 40 military spenders in the world. The below chart compares the military expenditures reported by SIPRI using the official exchange rate and expenditures calculated according to the budget exchange rate.

In the last few years, annual inflation in Iran has been as high as 40 percent, leading to a sharp increase in nominal expenditures. But by using the official exchange rate, which has been capped since 2019, SIPRI has failed to account for the impact of inflation on relative prices between the dollar and rial. In some respects, this is a surprising mistake for the researchers to make, as analysts of Iran’s military expenditures have warned about the difficulty of pinning down real expenditures given Iran’s topsy-turvy economy. In 2018, Jennifer Chandler, a researcher at IISS noted that in “large increases in local currency, impressive as they might seem, do not necessarily reflect an over-prioritisation of the regime on defence spending.”

Another way to examine whether Iran is spending more on its military is to simply convert from nominal to real spending in the local currency, avoiding the pitfalls represented by the exchange rate. To do so, we can deflate the nominal military spending using Consumer Price Index data published by the Central Bank of Iran. This analysis reveals that Iran’s military spending has been flat for two decades, just barely keeping up with inflation.

The Iranian government does take its defence seriously. But it has developed the means to ensure that defence cheaply by focusing on specific capabilities such as ballistic missiles and drones and by relying on proxies as part of a “forward defence” strategy. Iran’s military does not look like a military backed by $24.6 billion dollars of spending in a single year—where are the next generation fighters, battle tanks, and naval vessels? Yet, regional actors and Western governments continue to assess that the Iranian military poses a significant threat, even while real military expenditures have been flat. To put it another way, Iran has been able to maintain its military spending in the face of sanctions in part because it has long been parsimonious. This raises questions about the wisdom of trying to throttle Iran’s economy to address security threats.

The mistake SIPRI has made is understandable given the scope of the yearbook project and the difficulty of accounting for the peculiarities of each country’s economy. Yet, Iran is likely the country whose military spending is under the greatest international scrutiny, meaning that the impact of the mistake is profound. The exaggerated military expenditures unwittingly reported by SIPRI have reinforced the view of the Iranian military as especially large and threatening. The figures have also been used by a wide range of actors, including Iran’s regional rivals, to justify their own increases in military spending and the acquisition of advanced weapons systems. In this way, the presumed value of military spending has overshadowed the sober assessment of military capabilities. Encouragingly, SIPRI have told me they will “definitely investigate” the exchange rate issue. They will be forced to do so because of a planned change in Iran’s foreign exchange policy that will see the subsidised rate eliminated altogether during this budget year. But while a correction would be welcome, the damage has already been done.

Photo: IRNA

Removing the IRGC from the FTO List Risks Nothing

As we wait for the resumption of the Iran nuclear negotiations, reports indicate that the “final hurdle” is Iran’s demand for the removal of a key sanctions designation. Iranian negotiators are seeking the removal of the Foreign Terrorist Organisation (FTO) designation placed on the Islamic Revolutionary Guard Corps (IRGC), part of Iran’s armed forces. The FTO designation was imposed by the Trump administration in April 2019.

President Biden will probably lift this designation to clear the way for the mutual restoration of the Joint Comprehensive Plan of Action (JCPOA). The restoration of the JCPOA would see Iran’s nuclear programme once again placed under the strictest monitoring and verification regime ever devised, ending a four-year period of growing concerns over possible Iranian proliferation. But even with the enormous security gains on offer, Republic lawmakers and other critics are suggesting that the removal of the FTO designation is an unacceptable concession to make.

The arguments being made against the removal of the FTO designation are weak. More judicious critics of the move concede that little is at stake. Matthew Levitt of the Washington Institute for Near East Policy has written that the designation “was largely symbolic” and that its removal “would have few if any legal implications.” Still, he considers removing the FTO label to be a “terrible idea”—a determination that reflects how politics can trump pragmatism in American policymaking.

Levitt makes four arguments as to why Biden should not remove the FTO designation. First, he argues that Iran is treating the removal of the FTO designation as a red line because the leadership “wants something it can point to when attempting to persuade investors that it is not really involved in terrorism.” Levitt ignores the fact that the Iranian leadership has not demanded the undoing of October 2017 designation of the IRGC as a Specially Designated Global Terrorist (SDGT). Nor has Iran insisted that its status under US law as a State Sponsor of Terror be rescinded. Iran is obviously not seeking to change the minds of foreign investors, whose decisions to engage in the Iranian market will remain predicated on significant due diligence to avoid transacting with IRGC entities, all of which will remain under sanctions. Iranian negotiators are seeking the removal of the FTO designation to demonstrate to the IRGC’s leadership that a constructive stance towards diplomacy with the United States can bear fruit. It is precisely because the imposition of the FTO designation was politically symbolic that its removal is being sought.  

Second, Levitt argues that because Iran has insisted that the “nuclear negotiations must remain focused on its nuclear activities alone,” it would be a mistake to “provide relief from any terrorism-related sanctions.” Doing so would “undermine the efficacy of other non-nuclear sanctions.” But this argument is undercut by the Trump administration’s own messaging. The White House statement on the FTO designation makes clear that the move was not imposed as a discrete action to counter Iranian terrorism, but rather as a means to “significantly expand the scope and scale of our maximum pressure on the Iranian regime.” A central feature of the “maximum pressure” campaign was the “sanctions wall,” a rapid expansion in the scope of the Iran sanctions programme intended to make it more difficult for President Biden to re-enter the Iran nuclear deal.

Given that the FTO designation was symbolic and that its removal will not meaningfully change the legal status of the IRGC, the designation was clearly imposed with another goal in mind. The FTO designation was a non-nuclear sanctions measure imposed to make nuclear diplomacy more difficult. If removing the designation is necessary to secure the tremendous national security benefits of the JCPOA, then doing so is justified. In fact, failing to remove the designation would undermine the efficacy of US sanctions policy because it would prove that presidents can tie the hands of their successors in ways that make diplomacy nearly impossible to conduct.

On a related note, Levitt claims that “to protect the credibility of US sanctions authorities worldwide… the IRGC should not be removed from the FTO list until there is evidence it has ceased terrorist activities.” This is, on face, the most logical argument being made by those opposed to the removal of the FTO designation. The IRGC will almost certainly continue to engage in its “forward defence” activities, including support for proxies that the US considers terrorist groups, in the aftermath of the nuclear deal. At the same time, removing the designation would not increase the threat posed by the IRGC. Speaking to reporters last week, CENTCOM commander General Kenneth McKenzie explained that he did not expect the removal of the FTO designation on the IRGC to impact US forces. “In terms of the way we think about [the IRGC], in the terms of the way we think about the threat, and what they do on a daily basis across the theatre, I don't think much would change,” he stated.

Given that any operational impact will be limited, there are two reasons why the removal of the FTO designation is warranted absent a change in behaviour. First, the removal of the FTO designation cannot be construed as a signal that the IRGC has ceased its support for terrorism. The organisation will remain subject to wide range of sanctions, including the SDGT designation and there will be no change in messaging from the Biden administration on this point. Second, the US government also assesses that the IRGC has major influence over Iran’s national security doctrine. That the nuclear negotiations have reached this late stage clearly demonstrates that there is a consensus among Iranian policymakers, including among the ranks of the IRGC, that restoring compliance with the JCPOA is in the country’s interest. Returning to Levitt’s concern over the credibility of US sanctions, a symbolic move to recognise the IRGC’s inherent support for the successful conclusion of the Iran nuclear negotiations is sensible, especially as the Biden administration aims for future dialogue on a wider set of security concerns.

Finally, Levitt points to a “serious messaging problem” and claims that “America’s partners and allies in the region” would be dismayed if the US were to “take pressure off the [IRGC] by delisting it.” Israeli Prime Minister Naftali Bennet and Foreign Minister Yair Lapid have written a joint letter urging President Biden not to scrap the FTO designation. Reports claim that UAE leaders are “shocked” that the FTO designation may be removed. But these various protests appear to be part of the horse-trading by partners and allies that has long burdened Biden’s efforts to restore the nuclear deal. By seeking to impose political costs at this late stage, regional leaders are aiming to extract their own concessions from the Biden administration as part of their acquiescence to a nuclear deal that looks increasingly likely.

Even so, GCC leaders have yet to directly comment on the possibility that the FTO designation will be removed. The possibility of removal became public knowledge in the summer of last year. The GCC issued a joint statement with the United States in support of the JCPOA last November. It is highly unlikely that the GCC leaders would treat the removal of the FTO designation as a kind of red line given their interest in maintaining a regional security dialogue that includes bilateral engagement with Iran. Senior Saudi and Emirati officials have held meetings with Iranian officials, including those linked to the IRGC, over the past year. Consider also that the UAE just hosted an unrepentant Bashar al-Assad, leaving the Biden administration “troubled.” Clearly, regional leaders are ready to set optics aside when there are hard security benefits to be gained.  

Given the noise about the FTO issue over the last few weeks, the Biden administration is already paying a political cost for the anticipated removal of the designation. But the administration should not lose sight of what will be gained. Removing the designation in no way changes the legal or political status of the IRGC, but it does enable the restoration of the Iran nuclear deal. For those who care about US national security, the choice is clear.

Photo: IRNA

Iranian Bankers Fear IRGC Terrorism Designation Dooms Vital Financial Reforms

Reform-minded Iranians, especially those inside the ailing banking system, are worried that the US government’s step to designate Iran’s Islamic Revolutionary Guard Corps (IRGC) as a terrorist organization has doomed a years-long effort to get the Islamic Republic off a consequential global blacklist.

The administration of Iranian President Hassan Rouhani has been working hard to meet the requirements of the action plan set by the Financial Action Task Force (FATF), the intergovernmental organization established with the mandate of combatting money laundering and terrorism financing.

The required reforms have caused deep political divisions, with opponents arguing that Iran will be compromising its sovereignty should it appease the FATF, while porposents argue that failing to pass the required legislation will eliminate final links Iran maintains with foreign financial institutions while under US sanctions.

Undaunted even as death threats were made against them, a majority of Iran’s parliament voted to pass all four FATF bills over the course of several months. The supervisory Guardian Council then ratified two of the laws, while two others were considered deficient. The council and parliament have failed to find a consensus on adjustments to these two bills, which pertain to regulations that deter terrorist financing and organized crime. Now the powerful Expediency Council must vote to break the deadlock on ratification.

Meanwhile, the clock is ticking for Iran to show progress on the FATF action plan. At the end of its February plenary sessions, the FATF announced, “If by June 2019, Iran does not enact the remaining legislation in line with FATF Standards, then the FATF will require increased supervisory examination for branches and subsidiaries of financial institutions based in Iran.”

When the Trump administration took the controversial move to designate the IRGC a Foreign Terrorist Organization (FTO), the first time the FTO designation had been applied to a part of a foreign state, the condemnations in Iran came swiftly.

As Rohollah Faghihi reports for Al Monitor, hardliners opposed to engagement with the West pointed to the FTO designation to show the futility of the FATF reforms. The day after the FTO designation was announced, Expediency Council member Gholamreza Mesbahi-Moqadam said the designation has decreased the chances that the FATF bills woild be ratified. “The move has strengthened the council’s [unfavorable] stance about the FATF and the chances of the bills not being approved has increased,” he said. Others have even placed the chances of ratification at zero.

Members of Iranians banking community, who have been advocating for FATF reforms for years as part of a larger drive for modernization of the financial sector, share in this pessimism. A senior Iranian banker speaking to Bourse & Bazaar on condition of anonymity agreed that the FTO designation has harmed the odds of the bill passing, by shifting the environment away from constructive discussion and cooperation towards sloganeering.

“The designation has major political implications, the full scope of which has yet to become clear, but I find it unlikely that the bills will be approved under current circumstances,” the banker said. “Essentially whenever the situation gains an emotional aspect, decisions also become largely emotional.”

Several high-level Iranian officials have also confirmed that the FTO designation will have an impact on the FATF bills. Secretary of the Expediency Council Mohsen Rezaei, who counts himself among those opposed to the bills, has said the FTO designation will be factored in forthcoming decisions based on “national interests.”

Meanwhile, Laya Joneydi, Iran’s Vice President for Legal Affairs, suggested it was a mistake to conflate decision-making about the FATF bills and the FTO designation since the two issues are “fully separable.” She did, however, point out that the designation will prompt the Rouhani government to consider any new “reservations” about the two bills.

A source inside the Central Bank of Iran also confirmed to Bourse & Bazaar on condition of anonymity that the IRGC designation should be expected to have an impact on the FATF bills.

“The central bank has always been in favor of having the bills pass into law, but we have already concluded all expert reviews of the bills and now everything depends on the views of the Expediency Council. At at the moment it seems the number of council members opposed to the bills is higher,” the source said.

Central Bank Governor Abdolnasser Hemmati has on multiple occasions voices his support for enacting the bills into law, saying Iran needs to do more to comply with international financial standards. In his latest remarks in early March, he said safeguarding and strengthening what little international banking ties Iran retains is a “necessity.”

In late February, Rouhani mounted his strongest support yet for the bills, saying “we cannot give the country to 10-20 people and say we follow your decisions”. The president called on the Expediency Council to facilitate passage of the bills lest Iran lose its already tenuous link to the global financial system.

But not everyone inside Iran’s isolated banking system is pessimistic about salvaging the FATF action plan.

“The bills will certainly face delays, but we predict that they will ultimately be signed into law,” a senior member of a banking sector association told Bourse & Bazaar on condition of anonymity.

The official likened the situation surrounding the issue to the Iran nuclear deal, noting that many analysts thought such a multilateral agreement could never be reached given opposition from hardliners.

“I believe some members of the Expediency Council harbor doubts about some of the contents of the FATF bills but are not opposed to them outright. Those doubts will be cleared in time,” the official said.

The question remains whether the FATF will continue to show patience as Iran’s complex domestic politics slow the pace of reform even further.

Photo: IRNA

Economic War on Iran is America’s New ‘Forever War’

This article was originally published in the Asia Times.

The administration of US President Donald Trump last week designated the Islamic Revolutionary Guard Corps, part of Iran’s armed forces, as a Foreign Terrorist Organization. A White House statement boasted that it was “the first time that the United States has ever named a part of another government as an FTO” and declared that the “action will significantly expand the scope and scale of our maximum pressure on the Iranian regime.”

In a briefing related to the announcement of the new designation, Secretary of State Mike Pompeo told reporters that he hopes “other governments and the private sector will now see more clearly how deeply the IRGC has enmeshed itself in the Iranian economy through both licit and illicit means”.

While there is no doubt that the Trump administration is waging a self-described “financial war” on Iran, designating the IRGC as a terrorist organization has little to do with adding new economic pressure, despite the administration’s claims. As sanctions attorney Tyler Cullis has argued, the IRGC and the wider Iranian economy are already subject to a “veritable labyrinth of US sanctions” meaning that “the designation of the IRGC as an FTO has limited, if any, immediate practical consequence.”

While the new designation does introduce increased criminal liabilities for those individuals or entities that can be shown to have provided “material support” to the IRGC, legitimate businesses were adequately deterred from engaging with the IRGC because of risks stemming from pre-existing sanctions designations.

Building a Sanctions Wall

The new designation may have limited economic impact, but it has certainly proved politically provocative. In Tehran, leaders from across political lines were unified in their condemnation of the designation and in their solidarity with the IRGC. In Washington, officials at the Pentagon and Central Intelligence Agency reportedly consider the move counterproductive, possibility putting US military and intelligence assets in the Middle East at risk of blowback. In Paris, French President Emmanuel Macron has called for all sides to practice restraint. He also spoke to Iranian President Hassan Rouhani by phone to reassure him of European support for the nuclear deal, which the US abandoned in May 2018.

In Baghdad, Iraqi Prime Minister Adel Abdel Mahdi told reporters that his government had tried to persuade the Trump administration not to proceed with the designation, noting that any escalation “would make us all losers.”

With the future of both the Iran nuclear deal and prospects for US-Iran diplomacy at stake, a political fallout is the clear intention behind designating the IRGC a terrorist organization. In an op-ed in The Wall Street Journal published just a week before the designation, the head of the hawkish Foundation for Defense of Democracies called for the Trump administration to create a “sanctions wall” that would hobble efforts by a potential Democratic president to re-enter the Iran nuclear deal in 2021. Mark Dubowitz has been among the most vocal proponents of designating the IRGC as a Foreign Terrorist Organization.

To understand how the FTO designation helps build a “sanctions wall,” it is important to consider how such a designation fits into the recent development of US sanctions powers. Today’s financialized sanctions were largely developed in response to the “forever wars” of the US invasions of Afghanistan and Iraq and the realization that the “war on terror” could not be won through conventional military conflict.

With public sentiment turning against further military deployments, and with the threat of terrorism expanding in part because of the fallout of the US invasions in the Middle East, the Treasury Department was tasked to develop new sanctions powers intended to weaken terrorist organizations by cutting their access to financial resources. As described by Juan Zarate, who served as deputy national security adviser for combating terrorism under president George W Bush, the US sought to develop its means of “financial war,” in which sanctions would “increasingly become the national-security tools of choice for the hard international security issues facing the United States.”

By the time Barack Obama took office as president, the use of sanctions in the “global war on terror” was overtaken by a new national-security imperative: addressing the perceived threat of Iranian nuclear proliferation. Suddenly, sanctions tools that had been developed primarily to target terrorist financing were being turned against governments, in part by leaning on the formal designation of countries like Iran as “state sponsors of terror.”

Building a Stigma

The application of sanctions seemed sensible – the US would leverage its primacy in the global financial system in order to block the assets of terrorist organizations and their state sponsors, while also putting their commercial enablers in legal jeopardy. Obama saw “diplomacy, backed with strong sanctions” as a direct alternative to reliance on military brinksmanship – ”a failed policy that has seen Iran strengthen its position.”

But there were unintended effects. While the US was tightening its sanctions on Iran, American officials toured the world warning companies that, despite their extensive due diligence, the opaque nature of the Iranian system meant an ever-present risk that routine commercial transactions could see funds diverted to designated groups that finance terrorism.

The stigma that arose around Iran’s economy and particularly its financial sector was so great that when Obama’s bet on diplomacy and sanctions finally paid off in the form of the historic JCPOA (Joint Comprehensive Plan of Action) nuclear deal, he ultimately proved unable to deliver Iran the economic benefits of sanctions relief promised as part of the agreement, bringing it to the brink of collapse. Even though the US lifted a large proportion of its sanctions on Iran as a matter of legal fact, companies and the banks Tehran needed remained fearful to engage, rendering the practical impact negligible.

Opponents of Obama’s nuclear deal were quick to recognize this fact. When Trump came into office having promised to tear up a “decaying and rotten deal.” some even argued that his administration could advance its anti-Iran agenda while remaining in the JCPOA on the basis that Iran was receiving no meaningful benefits. Eventually Trump did withdraw from the agreement, but as hawks opposed to engagement with Iran look to the post-Trump future, whether that future arrives in 2021 or 2025, there is a clear desire to exploit the ways in which sanctions themselves have proven a liability to diplomacy.

In this way, given the lack of practical impact, the designation of the IRGC as a terrorist organization has little to do with the activities of the corps as a military force, concerning though they may be.

Rather, by designating part of Iran’s state as a terrorist organization, a label that extends to millions of conscripts, those who wish to build a “sanctions wall” are seeking to close a political feedback loop. Not only does the FTO designation aim retroactively to justify the whole architecture of US sanctions on Iran, but even if the political circumstances between Washington and Tehran change in the future, sanctions will continue to be justified as a matter basic definitions. A future US administration seeking to lift sanctions on Iran will not merely need to argue the political expediency of that decision – it will now be forced in effect to “redefine” the most powerful force in Iranian national security, a tall order after 40 years of entrenched animosity.

What the FTO designation makes clear it that “financial war” on Iran is America’s new “forever war.”

Photo Credit: IRNA

Political Risks Outweigh Legal Impact of IRGC Terrorism Designation

This article was originally published by The Black List.

The Trump administration announced the designation of the Islamic Revolutionary Guards Corps (IRGC)—a branch of Iran’s armed forces—as a Foreign Terrorist Organization (FTO) pursuant to section 219 of the Immigration and Nationality Act (INA).  In the White House press statement, President Trump called the designation “unprecedented,” underscoring that it represents “the first time that the United States has ever named a part of another government as a FTO.”   

Trump underlined that the designation “will significantly expand the scope and scale of our maximum pressure on the Iranian regime.” Secretary of State Mike Pompeo echoed those remarks in his own press conference announcing the designation, noting that the designation “will help starve the regime of the means to execute [the IRGC’s] destructive policy.” Helping amp up the designation action, US officials (dubiously) argued that the designation will target more than 11 million people comprising the IRGC’s network.

Hyperbole aside, the practical effect of the FTO designation is negligible at best. Considering the multiple sanctions programs under which the IRGC is currently designated, the FTO designation appears entirely superfluous, exerting no additional substantial pressure against the IRGC.  

On the other hand, the risks to the US from the designation could be severe. As long reported, the Department of Defense and the CIA have been steadfastly opposed to designating the IRGC an FTO—viewing the designation as fraught with consequences for US troops and without material benefit for the United States. Their opposition appears to have been overcome, however, by those in the White House and State Department who have rallied to increase the pressure-in substance or rhetoric-against Iran regardless of the potential consequences.

Legal Authority for FTO Designation and the Sanctions Consequences

12 U.S.C. § 1189 authorizes the Secretary of State to designate an organization an FTO if the Secretary finds that the organization is a foreign organization that engages in terrorist activity that threatens US nationals or US national security. The Secretary’s intent to designate a foreign organization an FTO is first communicated to members of the Congress, along with the findings and factual basis for the Secretary’s decision to designate the organization, which explains the apparent delay between President Trump’s announcement and the formal designation of the IRGC as an FTO.  

The immediate consequences of an FTO designation are limited in scope.  Pursuant to 12 U.S.C. § 1189(2)(C), the Secretary of Treasury is given discretionary authority to require US financial institutions to block all financial transactions involving assets of an FTO. In addition, all members of an FTO are prohibited from entering the United States under 12 U.S.C. § 1182(a)(3). This latter provision could be used to block Iranian persons who performed mandatory military service in Iran from entering the United States. This could explain the “11 million people” claim by members of the Trump administration.

Preexisting US Sanctions Targeting IRGC

The IRGC is already designated under multiple U.S. sanctions authorities—most of which cover the ground of an FTO designation. For instance, the IRGC is designated under:

• E.O. 13224 as a Specially Designated Global Terrorist;

• E.O. 13382 as a WMD Proliferator;

• E.O. 13553 as a human rights abuser; and

• E.O. 13606 as a human rights abuser as well.

These designations have significant U.S. secondary sanctions consequences. For instance, 31 C.F.R. § 561.201 exposes foreign financial institutions that conduct a significant financial transaction with, or provide significant financial services for or on behalf of the IRGC or a person designated pursuant to E.O. 13224 or E.O. 13382, to correspondent or payable-through account sanctions. In addition, the Iran Freedom Counter-Proliferation Act subjects foreign banks to correspondent or payable-through account sanctions, and foreign persons to menu-based sanctions, for engaging in significant transactions with Iranian persons, which would include the IRGC.

Due to the serious secondary sanctions consequences inherent in dealing with the IRGC, OFAC has long given the IRGC its own program tag “[IRGC]” to aid foreign persons seeking to comply with U.S. sanctions targeting the group.  

In addition, multiple US statutory authorities require the President to identify officials, agents, or affiliates of the IRGC and to impose sanctions with respect to them. These reporting requirements ensure that the U.S. remains hyper-focused on the IRGC and its activities and prepared to impose additional designations as warranted.

Practical Consequences of FTO Designation

Amidst this veritable labyrinth of US sanctions targeting the IRGC, the designation of the IRGC as an FTO has limited, if any, immediate practical consequence.  For instance, the blocking of the IRGC’s assets is already mandated by the executive authorities under which the IRGC is designated—some of which also impose visa requirements.  Iranian persons who formerly served in the IRGC have long been subject to intensified scrutiny from US immigration authorities and have often been denied entry on these grounds.

The sole possible additional consequence arising from an FTO designation is the extraterritorial criminal jurisdiction afforded over foreign persons acting outside the United States that knowingly provide material support to an FTO.  18 U.S.C. § 2339B states that persons who knowingly provide material support or resources to an FTO or attempt or conspire to do so are subject to fine or imprisonment of not more than twenty (20) years (unless death results from the prohibited act). Material support is defined broadly to include any property or service.

18 U.S.C. § 2339B(d)(1) expressly provides for extraterritorial criminal jurisdiction, stating that there is jurisdiction over an offense “if . . . after the conduct required for the offense occurs an offender is brought into or found within the United States, even if the conduct required for the offense occurs outside the United States.” This means that foreign persons providing material support to an FTO are subject to criminal prosecution in the United States, even if the foreign person has no legal status in the United States; acted outside of the United States; and the conduct did not touch or otherwise have effects within the United States.

This provision could lead foreign parties conducting business with Iran to exercise even more heightened due diligence with regard to their dealings. Yet, the consequences of dealing with the IRGC are already especially dire, and foreign parties doing legitimate trade with Iran are likely to have taken steps to ensure the absence of IRGC-related parties.       

So What’s the Purpose...?

Considering the negligible benefits of an FTO designation, the Trump administration appears to have two things in mind through its designation of the IRGC: (1) to invite an Iranian response that could collapse the nuclear deal and risk a broader conflict with the United States; and (2) to use the threat of criminal prosecution to deter even legitimate business with Iran, as members of the Trump administration have long claimed that the IRGC controls broad sectors of the Iranian economy. This latter element could also be used to constrain a future President from re-entering the Iran nuclear accord and complying with its terms, considering the potential political pitfalls inherent in rescinding the FTO designation.

Indeed, chief proponent of the FTO designation and close adviser to the Trump administration Mark Dubowitz of the Foundation for Defense of Democracies stated that the designation “just layers on top of all of the current sanctions an additional and more expansive, punitive measure that will deter more business and . . . diminish current business that’s still ongoing between the Europeans and the Iranians, and the Asians and the Iranians.” The purpose of this, he earlier wrote, is to “make the case for dismantling these sanctions [hard],” thereby “block[ing] [the next administration] from delivering sanctions relief to Iran” consistent with the Iran nuclear accord.

Such motivations—if accurately depicting internal deliberations by the administration—would prove a grave abuse of the FTO designation process and the broader use of US sanctions authorities to target activities anathema to US security interests.   

Photo Credit: IRNA

Closure of Tehran Bazaar Reflects Fierce Elite Competition, Not Popular Politics

The closure of Tehran’s Grand Bazaar yesterday, and the closure of the consumer electronics bazaar the day before, seemed to be part of the regular and widespread protests that have roiled Iran over the last few months, spurred by economic volatility. Many saw the bazaar’s closure and subsequent protests as a meaningful escalation, a sign that perhaps popular discontent was spreading to key institutions and that coalitions were forming that could challenge the government more directly. After all, the bazaar has historically been seen as the heart of Iranian civil society, an institution where people of all walks of life could cross paths. As a physical institution, it was long a rare incubator for solidarity: “the rooted nature of the market… establish[es] the necessary foundation for communal allegiance, with its confined nature fostering long-term and face-to-face interactions among bazaaris.”

But this conception of the bazaar is an artifact of an earlier time. The bazaar in Iran today can no longer claim to be what historian Roy Mottahedeh eloquently described as “the assessor that sets the valuations politicians must use when they trade.” Over the last few decades, the bazaar has been cleaved from Iran’s civil society, no longer standing at its heart, but rather in isolation, losing its former role as a cite for broad civil society politics, and acting instead in its economic self-interest as the recent protests so transparently expose. Understanding this transformation is fundamental to an assessment of the recent protests. 

The networks of the bazaar that linked the merchants to civil society were deliberately disrupted and broken following the 1979 Islamic revolution. As detailed by Arang Keshavarzian in his seminal Bazaar and State in Iran, the new revolutionary government, concerned about the continued role of the bazaar as a site of contentious politics, sought to constrain the role of the bazaar in civil society via two processes.

First, those bazaar merchants loyal to the revolution and the new Islamic Republic were co-opted into the state, offered positions as the heads of ministries and bonyads. The regime rewarded namely the members of the group of the Islamic Coalition Association (ICA), a small segment of bazaar merchants, who had “financed and organized many political rallies and events… became part of the new ruling elite.” Incorporating these bazaaris into the regime gave them new incentives and power, changing their relations with the bazaar—indeed, they are no longer referred to as bazaaris by other merchants but instead called dawlati, meaning “of the government.” Personal gain motivated the separation from the bazaar. With the economy under state control, officials were in the position to take advantage of power for personal gain, with, “direct access to rents via exclusive importing licenses, tax exemptions, subsidized hard currency, and control over procurement boards and industrial establishments. The bazaaris who have established patronage channels have used them for personal and exclusive ends, and not as a tool for the benefit of the entire bazaar.”

Second, a new kind of profiteering was introduced to the bazaar. During the Iran-Iraq war, the government of the Islamic Republic saw its coffers emptying rapidly. Iran’s economy was increasingly cut-off from global markets for goods and services as a result of economic sanctions.  Some goods were unavailable, others became more expensive. Turning a crisis into an opportunity, elements in the bazaar began to engage in smuggling both in order to gain access to goods that would be sold for high prices in the market, but also to engage in profiteering and to secure rents that could be funneled to quasi-state institutions. Dawlatis in the bazaar enjoyed state-sanctioned access to black market goods that they could sell at market for large profits. They could also benefit from preferential access to foreign currency.

To be clear, these changes did not make the bazaar apolitical. On the contrary, the merchants continued to mobilize in a coordinated fashion, but with a new and more self-serving outlook. Bazaar closures like those seen this week are relatively rare, but did occur numerous times during the the Ahmadinejad years, with notable closures in 2008, 2010, and 2012. It would be easy to assume that these closures were due to the general economic malaise and popular dissatisfaction that marked Ahmadinejad’s tenure, but the fact that the bazaar did not engage in any significant mobilization in 2009, when sustained mass-protests emerged in response to Ahmadinejad's disputed reelection, demonstrates that civil society solidarity was not the motivating factor. The merchants of the contemporary bazaar do not mobilize for the people. They only mobilize for their own interests.

These is a clear line that can be drawn from the bazaar mobilizations of a decade ago to those of today. The Ahmadinejad years saw the rise of a new kind of rentierism in the Iranian economy, where quasi-state entities extended their role in Iranian enterprise. Iran’s Islamic Revolutionary Guard Corps (IRGC) ambitiously expanded their industrial operations, taking advantage of free-flowing contracts and financing made available by the Ahmadinejad government. A new kind of corporatist rentierism was emerging. Rather than rely on smuggling and arbitrage, quasi-state groups leveraged political connections to provide more valuable products and services to the economy than mere market commerce, sensing an opportunity as the Iranian private sector was squeezed by international sanctions and international companies reduced their presence in the market.

The nascent rivalry between the bazaari class and the IRGC would have been unthinkable in at the outset of the bazaar’s post-revolution transformation, but as IRGC generals saw opportunities develop in the boardroom, new fault lines have emerged, particularly in light of Rouhani’s pursuit of economic reform.

President Rouhani was elected in 2013 on a mandate to liberalize the economy through two interrelated processes: improve monetary policy and overall transparency in the economy and boost foreign trade and investment. He has been a vocal critic of the IRGC and its role in the economy. But it should be noted that corporatist rentierism is not entirely incompatible with liberalization. Rouhani has always positioned himself as giving the IRGC leaders a choice—they can either engage in business or serve proudly in the military, but they cannot do both. Faced with this choice in a liberalizing environment, an entity with links to the IRGC that is a beneficial owner of a company can either profit by offloading its shares in that company to a non-IRGC linked firm (phenomenon which has been observed in several cases) or it can clean itself of its IRGC links in order to position itself to benefit from expected foreign trade and investment. The availability of these options also help explain why liberalization has received a relatively robust endorsement from the supreme leader, Ayatollah Ali Khamenei, including a recent statement that parliament must “must independently make legislation on issues such as terrorism or combating money laundering.” Khamenei’s concern is mostly about the pace of liberalization and the provisioning of its fruits, not its intended structural effects.

Importantly these structural effects threaten the bazaar as it operates today. The fundamental source of rents in the bazaar is arbitrage. Access to goods is secured at a low price, either through smuggling or manipulation of the foreign exchange markets, and then goods are sold at a high price. The disproportionate economic muscle of the bazaar network, stems from rents generated by high-value items such as gold and jewelry and electronics.

As the consumer electronics bazaar shut in protest over the currency fluctuations, Mohammad-Javad Azari Jahromi, the Iran’s Minister of Information and Communication Technology, sought to expose the predatory arbitrage. He disclosed that while consumer electronics sellers in the bazaar were sold a total of EUR 220 million of foreign currency at the official exchange rate in order to purchase stock, only approximately EUR 75 million of mobile phones were imported. So two-thirds of the foreign currency provided cannot be accounted for.

The implication is that approximately EUR 145 million in foreign currency was siphoned-off to be sold at the black market rate, likely allowing the traders to nearly double their investment in the foreign exchange. As demonstrated by Jahromi’s resolve to expose such fraud, these types of activities would become impossible if the Rouhani administration can successfully implement the liberalization measures currently being pursued. Whether it is improving tax collection mechanisms, bettering customs controls, raising accounting standards, introducing stronger financial crime laws, or instituting tighter controls on foreign exchange, including a unified rate, such reforms would spell the end of the bazaar’s cash generation, now seen as a drag on the economy at large. 

Meanwhile, IRGC-linked development companies are among those building a plethora of malls across Iran, slowly eroding the bazaar’s long-standing role as the a pillar of Iran’s consumer-driven economy. Ironically, in undermining the bazaar in this way, the Islamic Republic is achieving something the Shah had always sought to accomplish. In 1979, the bazaar mobilized against the Shah largely due to his declared dislike for their “worm-ridden shops” and his attempt to curtail their economic influence. In his own words, the Shah “could not stop building supermarkets. [He] wanted a modern country.” But he never got the chance to render the bazaar obsolete.

Four decades later, economic liberalization and modernization is finally chipping away at the bazaar’s customer base as consumers habits see hours spent in malls and supermarkets rather than in the labyrinthine bazaar. The benefactors of this shift in consumer habits are both Rouhani and his private sector supporters and the opportunistic elements of the IRGC. The losers are the elite traders of the bazaar.

To be clear, not all merchants are part of the predatory elite. There remain plenty of humble grocers and shoe-sellers and spice merchants who can count themselves among those under relentless economic pressure. For these merchants, participating in a closure is not always a matter of choice. Journalist Reihaneh Yasini, in her reporting from the bazaar on Monday, spoke to merchants who described being ordered to shut their shops unwillingly. One young bazaari said, “It was about 11 o’clock when some people came by and said everyone must close their shops. We got scared and also closed.” Another added, “They were angry. They said they would use bricks to smash the windows. They appeared to me to be people complaining about rising costs. It was right for us to close the shop after this happened, though in reality closing the shop has little cost for us. Our sales are so low that closing the bazaar for one day will make little difference to us.”

It is unlikely that the closures were spontaneous. This has not been the historical norm for mobilizations at the bazaar and accounting for historical trajectories and the intense competition of Iran’s present-day economy, the bazaar’s mobilization is best understood as a manifestation of elite competition. Bazaar elites sought to co-opt the voices and slogans of a frustrated and economically insecure population in order to undermine their political opponents and put the brakes on threatening reform processes.

In this sense, the bazaar closures may follow the same playbook as some of the initial mobilizations in Mashhad at the end of last year. These tactics must be called out. There is a very real risk that genuine civil society frustrations are becoming instrumentalized by elites in an effort to preserve the kind of predatory economic activity that has led to so much economic suffering among the Iranian people. Outside observers must remember than the success of civil society protests in Iran depends principally on the independent collective action and claims-making of those mobilizations, not merely on the spectacle of the protests themselves.

Photo Credit: Thomas Cristofoletti

Killing Iran’s Economy Won’t Help the U.S.

The Trump administration has announced a set of seemingly aggressive policies against Iran, including decertifying the nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA). The thrust of the “new” U.S. policy on Iran appears to be the imposition of additional sanctions against organizations such as the Islamic Revolutionary Guards Corps (IRGC). Critics of the JCPOA claim that new sanctions will not only “fix” the JCPOA, but also help roll back Iran’s increasing influence in the Middle East. Both assumptions are wrong.

The JCPOA has been effective in constraining Iran’s nuclear program, a fact confirmed by the International Atomic Energy Agency and the other parties to the JCPOA, namely the United Kingdom, France, Germany, Russia, and China. The Trump administration’s actions not only risk undermining an effective agreement, but are unlikely to change Iran’s regional policies or weaken the Iranian regime at home. Iran’s economy is likely to be damaged by any new U.S. sanctions, with foreign investment having already slowed in response to Trump’s rhetoric. The biggest losers will not be the Iranian regime but the Iranian people,  whose striving the U.S. has long hoped would bring about a less antagonistic Iran.

The IRGC is responsible for Iran’s impressive expansion across the Middle East. Iran is a primary power-broker in Iraq, Syria, and Lebanon; Tehran also wields substantial influence in Afghanistan and even in relatively far off countries such as Yemen. The IRGC is also a major economic player in Iran. So it may seem to make sense that sanctions against the IRGC would help curtail its power in the Middle East. Yet the opposite is true.

Money is not the IRGC’s only motivation in shaping Iran’s regional policies. Rather, a combination of revolutionary zeal, fear of external enemies, Iranian nationalism, and regional instability have also fueled the IRGC’s successes in the region. Yes, it does take substantial funding for Iran to expand its power. Tehran not only funds Hezbollah and the Assad regime in Syria, but a myriad of pro-Iranian groups in Iraq, Afghanistan, and Palestine. But Iran was able to expand its regional power even under the severest of sanctions imposed prior to JCPOA. The rise of the Islamic State and state collapse in places such as Syria have allowed Iran to exploit fear and instability to expand its power. The region’s Shi’a populations, while not always ideologically aligned with Iran, have little choice but to turn to Tehran for protection in the face of extremist Sunnis. Iran does not need billions of dollars to be powerful given the IRGC’s ability to mobilize historically disaffected Shi’a to their cause.

New U.S. sanctions are also likely to undermine President Hassan Rouhani’s attempts to liberalize the economy. Opponents of the JCPOA often claim that “moderates” such as Rouhani are indistinguishable in terms of goals and ideology from the IRGC. No one in Iran’s political establishment can be considered pro-American; yet to ignore or deny political realities in Iran does a disservice to American interests. Rouhani’s government was able to negotiate the JCPOA in spite of Supreme Leader Ayatollah Ali Khamenei’s deep suspicions. The Iranian president hoped that the sanctions relief promised by the JCPOA would help liberalize Iran’s economy and attract substantial foreign investment, decreasing Iran’s dependence on energy exports and potentially weakening the IRGC’s grip in key economic sectors.

To be sure, economic liberalization may enrich Rouhani’s faction and regime insiders largely opposed to American influence in the region; but millions of middle class Iranians who envision better U.S.-Iran relations will also benefit from privatization, foreign investment, and the attendant new job opportunities. U.S. sanctions against the IRGC, which could slow the process of liberalization, will ultimately punish all Iranians, including those who want better ties with Washington. Khamenei’s claims that America can never be trusted will appear increasingly as fact rather than mere political rhetoric. The Trump administration’s efforts to decertify Iran and undermine the JCPOA without justification will reinforce the Iranian public’s suspicions of U.S. intentions. This also would quiet any segment of the Iranian public that might object to Iran’s nuclear pursuits at high cost to the economy.

The IRGC will not stop its expansionism in the Middle East because of sanctions. And sanctions will not weaken the Iranian regime at home. Sanctions may have worked in building American leverage before the JCPOA. But, political conditions in Iran and America’s standing both in the Middle East and across the globe have changed considerably in the last few years. The U.S. is losing its credibility among the Iranian public and U.S. allies who helped negotiate the JCPOA. And Iran is more powerful in the Middle East than before, especially as international powers such as Russia, regional states such as Iraq, and even Turkey turn to Iran as the region’s decisive actor. The biggest losers will be the Iranian people, caught between punitive U.S. policies and a illiberal regime.

Photo Credit: Thomas Cristofoletti

Iran Sanctions Policy Increasingly Throttles Free Trade in Ideas

This article was originally published in LobeLog.

In 1988, as legislators were creating the legal basis for the modern use of economic sanctions as a tool of American foreign policy, an important amendment was added to two laws, the Trading With the Enemy Act (TWEA) and the International Emergency Economic Powers Act (IEEPA). The so-called Berman Amendment was devised to withdraw the president’s authority to use sanctions to prohibit the import or export of informational materials, whether directly or indirectly.

Former Representative Howard L. Berman (D-CA), who put forward the amendment, felt that support for access to information was a cornerstone of American foreign policy and should not be undermined by any program of economic sanctions. He stated: “The fact that we disapprove of the government of a particular country ought not to inhibit our dialog with the people who suffer under those governments…. We are strongest and most influential when we embody the freedoms to which others aspire.” In 1994, the provisions in the Berman Amendment were expanded in the Free Trade in Ideas Act in response to the fast changing media landscape. The definition of “informational materials” came to apply “regardless of format or medium of transmission” to “any information or informational materials.”

Since then, American sanctions policy has generally sought to ensure that the targeting of commercial and financial channels does not inhibit the transmission of information. This is perhaps best exemplified in the case of the sanctions regime levied on Iran, the most extensive ever devised. Even in the case of Iran, exemptions exist in the sanctions regulations for activities such as, publishing, journalism, Internet communications, and even organizing events. In addition, more specific permissions are granted in the form of so-called General Licenses issued by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). These include General License D-1, which permits the use of certain software or hardware for personal communications, and General Licence G, which licenses the export or import of educational services to and from Iran. Companies can also apply for specific licenses, which have been awarded to enable publishing, research, and communications activities that may be more commercial in nature, but are still consistent with the notion of “free trade in ideas.”

However, recent developments suggest that American regulators have lost sight of the absolute importance of protecting informational exchange. On October 13, the U.S. Treasury designated Iran’s Islamic Revolutionary Guard Corps (IRGC) as a “Specially Designated Global Terrorist” (SDGT) As several sanctions designations had already blocked the IRGC, the new action made little difference to the prohibitions around commercial and financial dealings with the Guards. But the push for a terrorism designation did have one new and substantive outcome.

In the FAQ note issued to clarify the new designation, OFAC explains that the new designation draws upon a counterterrorism authority, Executive Order 13224, which was not previously applied to the IRGC. As a result of this new authority, the IRGC “may not avail themselves of the so called ‘Berman exemptions’ under the International Emergency Economic Powers Act (IEEPA) relating to personal communication, humanitarian donations, information or informational materials, and travel.”

This represents one of the first instances in an Iran sanctions designation in which OFAC has specifically clarified that the provisions of the Berman Amendment do not apply. Sanctions experts are quick to point out that, despite the new designation, OFAC will necessarily prioritize enforcing possible illicit financial support for the IRGC above the possible transmission of information, which could be as innocuous as usage of social media platforms or distribution of news media. But if the loss of the exemptions is the only substantive legal consequence of the new designation, then the stakes are actually quite high. As sanctions attorney Clif Burns sharply observed in a blog post, “It is now a federal crime for a U.S. person to give a copy of The Bible to anyone in the IRGC.”

American policymakers may not harbor any sympathies for members of the IRGC, but the manner in which the designation affects informational exchange is emblematic of a general failure in US sanctions policy to adequately consider or protect the free trade in ideas with people and entities, even those on the opposing sides of an adversarial relationship. Beyond the nefarious IRGC, members of Iranian civil society also see their access to information increasingly restricted. In August, Iranian apps were removed from both Apple’s App Store and Google Play, causing an uproar among Iranian users. In September, the online-course platform Coursera began to limit a wider range of content for users based in Iranian, citing sanctions regulations.

For now, the likes of Apple, Google, and Coursera are making voluntary decisions to limit their service provision to Iranian users. But the moves were likely spurred by the marked shift in Iran policy between the Obama and Trump administrations. These companies may have changed their policies in accordance with a stricter interpretation of General License D-1, which had previously been used to justify providing Iranian users access to these online platforms. During the Obama years, the “spirit” of OFAC’s enforcement mandate was clear and informational exchange was in fact encouraged within the scope of exemptions and general licenses.

It may seem tenuous to link the IRGC’s new designation with the recent experiences of Iranian Internet users. But in both cases, the overall disposition of American sanctions policy has clearly moved away from the political and ethical intentions behind the Berman Amendment. Even if the impact on information flows is so far inadvertent and primarily reflective of voluntary actions by the companies operating informational platforms, OFAC could absolutely be doing more to provide comfort around the general permissibility of informational exchange.

The consequences of any reduced “trade in ideas” with Iran will be profound. The United States is limiting its means to influence decisionmaking within the IRGC at precisely the same moment that it is undermining the ability of Iranian civil society to freely access informational services. It is unclear how removing the Berman exemptions for the IRGC weakens the organization. If anything, it may make it harder for Iranian and foreign stakeholders to help influence key reforms that would help mitigate the IRGC’s political and economic might.

For example, with the new designation, a non-governmental organization with a so-called U.S. nexus (such as funding that originates in the United States, or U.S. nationals on the staff) can no longer seek to treat IRGC affiliates as subjects in any research or technical-assistance programs. This is particularly concerning as Iran’s government seeks to push forward with a program of economic liberalization and attempts to induce the IRGC to sell assets and reduce their economic footprint. The Rouhani government needs foreign assistance to cleave the IRGC from its role in the economy, but that assistance may now be prohibited if the informational materials in question are ultimately earmarked for IRGC affiliates.

In March of this year, American University in Beirut agreed to pay a penalty of $700,000 to settle claims in a civil suit brought by the United States. The penalty was tied in part to the provision of “material support” to Jihad al-Binaa, an organization linked to the SDGT-designated Hezbollah, on a university database “for the stated purpose of connecting Non-Governmental Organizations (“NGOs”) with students and others interested in assisting them.” The IRGC has a much wider range of affiliated entities than most organizations designated under counterterrorism authorities, including commercial entities, welfare organizations, and educational institutions. If even listing these entities in a database can be seen as tantamount to material support, warranting an enforcement action, then the SDGT designation could significantly reduce the scope for responsible dialogue with the IRGC, whether direct or indirect.

Considering the fundamental role that both government-backed and independent research and technical assistance programs played in fomenting political and economic liberalization in formerly embargoed countries such as the former Soviet Republics, China, and Vietnam, any policy that blocks informational exchange will deprive the United States of some of its best foreign-policy tools.

There are times when blocking economic relations is necessary. But there is no situation in which the total denial of the free trade of ideas is sensible. The Berman Amendment is much more than a quirk of sanctions policy. It is among the most lucid formulations of liberalism in American foreign policy. In devising its approach to Iran, the Trump administration would do well not to lose sight of how the exchange of ideas has long made American foreign policy great.

Photo Credit: Rouzbeh Fouladi

In Reprieve for Multinational Business, Trump to Stave Snapback of Iran Sanctions

Following a lengthy interagency review, Donald Trump will today unveil his new Iran policy, bringing to an end months of speculation as to his administration's intentions. Despite Trump’s view of the Iran Deal as “the worst deal ever,” early reports make clear that Trump will not be withdrawing from the Joint Comprehensive Plan of Action (JCPOA).

Despite recent political uncertainty, underlying commercial momentum has remained strong in 2017. Trade between Europe and Iran nearly double in the first half of 2017, compared to the same period the year prior. The Iranian government reports that commitments of foreign direct investment have risen 55% in the last Iranian calendar year. The spectre of decertification has been seen as a risk to this steady growth.  

On Thursday, the Trump administration provided background briefings to European diplomats and the members of the press outlining the content of the pending announcement. While specific details of the new strategy remain embargoed until shortly before Trump’s speech, which will be made at 12:45 EST, reporting by the Julian Borger of The Guardian and the Matthew Lee of the Associated Press, outlines a strategy that is less damaging than had been feared.

While President Trump will formally decertify Iran’s compliance with the JCPOA, he will do so not in denial of Iran’s technical compliance with the agreement, which has been subject to eight confirming reports by the International Atomic Energy Association (IAEA), but rather on the basis of America’s national security interest, in accordance with a specific provision for decertification stipulated in the Iran Nuclear Agreement Review Act (INARA).

The move to decertify will push the issue of the Iran Deal to Congress. The Trump administration is seeking new amendments to INARA in an attempt to address perceived “flaws” in the JCPOA. These include new provisions relating to Iran’s ballistic missile program and the activities of Iran’s Islamic Revolutionary Guard Corps (IRGC) that would automatically trigger the snapback of secondary sanctions in the event of a violation. Importantly, the administration is also seeking an amendment to INARA to remove the requirement for Trump to certify Iran’s compliance every 90 days, a move widely seen as a face-saving maneuver for an administration beset by infighting on the issue.

Crucially for multinational businesses active in Iran, the administration will not be recommending Congress reimpose the sanctions removed as part of the implementation of the JCPOA, which would have been tantamount to America’s withdrawal from the deal. The administration has also decided not to designate the IRGC as a terrorist organization, a move which would have risked drawing the Iranian government into an escalation.

As such, Trump’s announcement will have little immediate bearing on the ability of multinational companies to continue to trade and invest in Iran. Business leaders had long expected Trump to eventually decertify Iran’s compliance and had proceeded with commercial contracts accounting for such a move. In a recent survey of business leaders,  68% of Iranian respondents and 63% of non-Iranian respondents considered snapback a likely or very likely outcome of decertification. The fact that the administration is not recommending the reimposition of secondary sanctions will be seen as a reprieve. The question that now remains is the extent to which Congress wishes to redefine the scope of compliant trade and investment through amendments to INARA.

In what some business leaders see as a silver lining of the turmoil caused by the decertification issue, it may be that more definitive action by Congress could actually help safeguard the implementation of the JCPOA and by extension the operations of multinational businesses in Iran. For example, removing the rolling certification requirements would reduce political uncertainty surrounding the deal and its continued implementation. 

Moreover, that Trump is not withdrawing from the agreement demonstrates that coordinated diplomacy can protect the JCPOA in Washington, and by extension, protect market access. In response to rising political uncertainty, and in the lead-up to today's announcement, European governments and the European business community significantly increased their level of direct dialogue on matters related to Iran Deal implementation. This dialogue helped ensure that the missions of the European diplomatic corps and the business community were mutually reinforcing. The progress made by businesses in engaging in Iran, with notable deals signed this summer by many of Europe’s industrial giants, helped underline the strategic value of the JCPOA for Europe beyond the realm of security issues.

The diplomatic efforts will need to continue. Congress is expected to make its determinations regarding the amendments to INARA within the next two months. There is significant risk that Congress could introduce new provisions to INARA that make compliance politically untenable for the Iranian government, which will see possible automatic snapback as a kind of booby trap. However if Congress takes a more sensible approach, the Iran Deal may yet emerge stronger than before. The new Trump strategy is minimal in its prescriptions. European leaders, must step in to define what a workable Iran policy looks like for all parties.  

Photo Credit: Wikicommons