As tensions between the United States and Iran and international concerns about potential conflict persist, attention has focused on potential mechanisms to achieve de-escalation. Some analysis has centered on statements from President Donald J. Trump and Secretary of State Mike Pompeo welcoming direct talks with authoritative Iranian officials without preconditions. Another strand of analysis has focused on proposals by a wide variety of leaders to serve as or send mediators to Tehran for talks on the crisis. To date – with the backing of Trump – Japanese Prime Minister Shinzo Abe has visited Iran for direct talks and French President Emmanuel Macron has sent a high-level envoy to try to calm tensions. In addition, foreign ministers or other high officials from Germany, the United Arab Emirates, Qatar, Oman, and Iraq have visited Iran to try to play a mediation role.
Despite calls by the Trump administration to “meet [U.S.] diplomacy with diplomacy,” none of the mediators has come upon a formula that has reversed the slide toward potential U.S.-Iranian conflict. Iran has refused U.S. appeals to talk directly with the administration unless and until the United States returns to the 2015 multilateral nuclear agreement, the Joint Comprehensive Plan of Action, and again suspends U.S. sanctions on Iran’s core economic sectors. For its part, the administration has given no indication that it is willing to ease any sanctions on Iran, unless as part of a revised JCPOA that incorporates U.S. demands to address the broad range of Iran’s objectionable behavior. And there has been no shrinkage in the extensive list of actions that the United States demands Iran must take as part of any new agreement, including withdrawal from Syria and cessation of the vast materiel support Iran gives to the numerous armed factions in the Middle East. As tensions have escalated since May, the administration has continued to add sanctions on Iran, including sanctioning Supreme Leader Ayatollah Ali Khamenei and Foreign Minister Mohammad Javad Zarif. The sanctioning of Zarif, in particular, seemed to signal that the administration is not expecting direct talks with Tehran any time soon.
With few indications that diplomacy will bear fruit, Iran has undertaken provocations – in the Gulf and in modest violations of the JCPOA restrictions – indicating that it is willing to risk conflict to bring about an alleviation of the sanctions pressure. The reimposition of U.S. economic sanctions in 2018 has driven hundreds of major international companies out of the Iran market and again shut Iran out of the international financial system. And the termination of U.S. sanctions exemptions in May on the purchase of Iranian oil has caused Iran’s oil exports to plummet to about 10% of the 2.5 million barrels per day level of exports that Iran achieves when no sanctions apply. The administration appears to believe that sanctions pressure will cause Iran’s economy, and possibly its political structure, to collapse and force Iran’s leaders to capitulate to U.S. demands, but there is no evidence that such outcomes are likely.
The diplomatic deadlock between the United States and Iran places the burden for preventing conflict on the European countries and some of the other trading partners of Iran. Even as they work with the United States to secure shipping in the Gulf from Iranian attacks, these countries are exploring options to preserve the JCPOA by providing Iran with significant economic benefits. Receiving economic benefits from Europe and other trading partners could diminish Iran’s propensity to undertake provocative actions, because what matters to Iran’s leadership is that the pressure on Iran’s economy be relieved. At the same time, Iran’s suspected attacks and tanker seizures in the Gulf, coupled with its moves to violate some JCPOA restrictions, risk driving the European countries closer to the U.S. position and causing the JCPOA to dissolve entirely.
With the perceived risk of conflict in the Gulf growing, the European Union countries appear to be accelerating and expanding their efforts to develop a mechanism to alleviate economic pressure on Iran. The EU has set up the Instrument for the Support of Trading Exchanges, or Instex, as a barter arrangement matching Iranian importers and exporters with European suppliers and importers. After a long delay due to organizational and legal hurdles, Instex has begun processing its first transactions for nonsanctionable goods such as food and medicine. Recognizing Iran’s dissatisfaction about the limited scope of Instex’s operations, EU officials reportedly are considering expanding its scope to oil transactions. That expansion could help calm Tehran’s recalcitrance, but even consideration of that step caused a warning from the U.S. Treasury Department that Instex oil transactions risk U.S. sanction. The U.S. threats are likely to deter the EU from trading Iranian oil through Instex and instead, Instex officials are in the process of accelerating transactions by making advance payments to European exporters – an indirect means of providing the trade financing that European banks have refused to entertain.
Potentially even more significant is that China and other Iran trading partners have indicated a willingness to join Instex operations, a development that could dramatically increase Instex’s effectiveness in benefitting Iran’s economy. China also has significant potential to alleviate Tehran’s economic difficulties in that it has been the largest buyer of Iranian oil. Since the expiration of the oil sanctions exemptions in May, China has reduced its purchases of Iranian oil significantly, but China’s leaders have indicated they will continue to buy Iranian oil and could increase those buys in coming months.
The EU and other countries have additional options they might consider, and which would not be easily affected by any U.S. penalties. After the Trump administration withdrew from the JCPOA, the EU announced it would provide Iran with about $20 million in development assistance. This was a very small amount, but it established a principle that could be expanded on in current circumstances. The EU, or potentially economically healthier countries such as China, could significantly increase development aid to Iran, either as grants or loans. Furnishing such funds to Iran could ease Tehran’s recalcitrance and Gulf tensions, although the financial demands of such a program on the donor countries would likely argue against this serving as a long-term solution. Still, development aid could potentially buy time for a more permanent solution to emerge in the form of a U.S.-Iranian negotiation that either restores the JCPOA or produces an alternative acceptable to both sides.