As a candidate for President, Donald J. Trump was widely reported to despise the Iran nuclear agreement, which is known as the Joint Comprehensive Plan of Action. As President, he responded to reports of Iranian missile tests by putting Iran “on notice.” While observers have speculated whether that portends a naval escalation in the Persian Gulf or the Gulf of Aden, or perhaps some form of probation, the most likely next steps in our view will not include tearing up the nuclear agreement.
As threatening as those tests are, they are not likely a violation of the nuclear agreement. Ballistic missile launch tests would clearly have been a violation of a 2010 UN Security Council Resolution, which required that Iran “shall not” conduct launch tests. But as part of the JCPOA, the language of that prohibition was watered down. The UN resolution adopting the nuclear agreement terminated the 2010 resolution, and now states that "Iran is called upon not to” conduct launch tests.
To use a well-known international trade term of art, that is a bit mushy. “Called upon not to” is not as strict as “shall not.” That may be one reason for the mushy “on notice” language of President Trump’s warning to Iran. And that may also be a reason President Trump won’t tear up the nuclear agreement: there has not been a clear violation yet on the Iranian side.
Although (as we have outlined here) President Trump has the authority to end the agreement unilaterally even without an Iranian violation, we think the more likely response to the missile tests will be increased sanctions. On February 3, 2017, the Department of Treasury added 13 individuals and 12 companies to the prohibited party lists under the Iran sanctions. Look for that trend to continue.
Some critics have accused Treasury’s move of imitating the approach of President Barack Obama. But there are many good reasons for a President’s foreign policy actions to move at a more measured pace than a candidate’s speeches would suggest. In our assessment, there are legitimate critiques of the nuclear agreement, including the dilution of the ballistic missile testing prohibitions and the fact that the sanctions relief came all at once. But there are also good reasons to keep the agreement in place, not least because it probably significantly delays Iran’s progress toward a nuclear weapon, which is good for international security.
Meanwhile, we fully expect the Trump Administration to increase the pressure on Iran. The Administration will certainly be looking at more sanctions, including sanctions that targeting the international network of shell companies created by Iran’s Islamic Revolutionary Guard Corps (perhaps by adjusting the rule stating that companies owned less than 50% by Iranian interests are not generally subject to sanctions), and addressing foreign companies’ use of the U.S. financial system in connection with Iranian business.
We continue to recommend that companies in international business take steps to gain a clear understanding of their exposure to current and future Iran-related sanctions. Developments in these areas will bear close watching.