Recent Development: President Trump announced on Friday that he would not certify Iran’s compliance with the Joint Comprehensive Plan of Action (JCPOA or nuclear deal). On the same day, the US Treasury designated Iran’s Islamic Revolutionary Guard Corps (IRGC) under Executive Order 13224 for supporting terrorist groups – falling short of declaring the IRGC as a Foreign Terrorist Organization (FTO) - and applying sanctions on four separate entities suspected of having ties with the paramilitary group.
Analysis: Nine months after entering the White House and pledging to curb Iranian influence in the Middle East and renegotiate the nuclear deal, the new strategy outlined by Trump is underwhelming and sends mixed signals as to Washington’s resolve to confront Iran directly and actively counter its growing regional influence. On the one hand, for the first time Trump has expressed in deeds, and not merely in words, his dissatisfaction from the nuclear deal . On the other hand, he avoided taking steps that could result in the collapse of the deal. He did not even commit to allocate more resources to countering Iranian influence in the Middle East by targeting the IRGC more aggressively. Indeed, the new strategy falls short of re-imposing new sanctions on Iran, kicking the ball further down the road – a move whose only purpose may be for Trump to save face after failing to leave up to his campaign promise to eliminate the deal once he enters office.
According to several sources quoted anonymously in the US outlets who attempted to refute the claim that the announcement on the new strategy is merely a face-saving move, the Trump administration seeks to add three new triggers to the US legislation tackling the deal. These three triggers - more specifically, a refusal by Iran to negotiate an extension of the deal’s “sunset clause” (i.e. the gradual expiration of current nuclear-related sanctions), development by Iran of an intercontinental ballistic missiles, and evidence suggesting that Iran could manufacture a nuclear bomb in less than a year - will lead to the automatic reimposition of US sanctions that were lifted under the nuclear deal. Should Congress acquiesce, this course of action, according to Trump, may serve to force Tehran to start negotiating an addendum to the nuclear deal as well pressure it to make compromise on its ballistic program. Whether Congress will eventually pass such a legislation, however, is far from certain as this will require the full backing of Republican lawmakers and of number of Democratic lawmakers.
The Trump administration also did not go all the way in terms of toughening its stance against the IRGC. As we noted above, it chose not to designate the IRGC as an FTO, rather preferring to use executive order 13224, which does not designate the IRGC as a terrorist organization per se but focuses on its support for other terrorist organizations. Such a course of action provides the US administration more leeway to decide how to sanction the IRGC, rather than applying automatic sanctions over all of its affiliates and any entities working with it. This is not to say, however, that this designation is insignificant. In fact, despite the focus of the media over the decertification of the nuclear agreement, the aforementioned designation may turn out to be more effective in terms of increasing the pressure on Tehran. Indeed, the designation opens the way for the US to start designating multiple branches and affiliates of the IRGC as terrorist organizations – instead of directly doing so by using the FTO label. Considering that the IRGC controls large sections of the Iranian economy, such a decision has the potential to be extremely damaging to Iran. A US decision to implement a broad interpretation of the IRGC designation by sanctioning any entity working with or for the revolutionary guards, would be akin to reimposing nuclear-related sanctions on Iran. What’s more, even if the US does not decide to extensively target all entities tied to or working with the IRGC, several financial institutions may preemptively suspend all deals with any such entities even remotely tied with the IRGC. This was for instance the case in Lebanon, when Lebanese banks began closing a high number of accounts of individuals suspected of being part of Hezbollah after the US imposed new sanctions on the Shi’ite organization. For this reason, the designation will effectively slow down the return of foreign companies to Iran, and delay any of the benefits Iran was expecting to obtain as a result of its signing on the nuclear deal.
Faced with such threats, the Iranian leadership continues to be divided over how to react to Trump’s new steps. The moderate camp represented by President Rouhani has adopted a legalist and non-confrontational approach. Rouhani seeks to convince other parties to the deal – European countries in particular – not to follow Trump’s steps and to commit to compensate for the economic damage that will potentially be caused to Iran by encouraging European investment in the country. To that end, moderate figures have repeatedly stated that Iran would continue to abide by the deal even if the US decides to withdraw from it, hoping that such statements would prompt a similar commitment from Europe and reassure foreign companies.
While Rouhani’s first goal was attained as European countries have all stated their commitment to the deal, the second seems more challenging : If the US does decide to impose new sanctions, whether as part of its withdrawal from the nuclear deal or its designation of the IRGC for supporting terrorist organization, European companies will further hesitate to invest in Iran regardless of the assurances that they might be given from their own governments. Thus far, however, the US merely threatened to do so and the deal remains intact, while actual sanctions against the IRGC have remained limited, at least as of now. Tehran can simply wait to see whether Congress falls in line with Trump’s new Iran strategy and whether the White House will in fact commit to broadly sanctioning the IRGC.
Domestic considerations, however, may push Supreme Leader Ali Khamenei to allow for a limited response by the IRGC even before Congress begins deliberating over whether or not to re-impose sanctions. That said, Khamenei is unlikely to allow the IRGC to cross what can be perceived by the US as red lines. In other words, we should not expect the IRGC to carry out a direct attack against American interests in the region, despite the IRGC commander’s threat to this effect last week.
In our view, Iran’s response to Trump’s speech is likely to be limited and indirect, through its proxies in the region. Most significantly, the proxies could retaliate against US forces, particularly in Iraq where such forces are particularly exposed to Iranian-affiliated forces. Yet Iran would likely have done so regardless of the fate of the nuclear deal as part of its efforts to push US forces out of the country. Second, Iran will most certainly double down on its ballistic missiles program, as was the case every time in the past the US threatened or did impose new sanctions. Yet as long as the US threats remain on paper – which they are at this time – Khamenei most likely will allow Rouhani to continue with his moderate approach in an attempt to isolate Washington.