How Iran Will Respond to New Sanctions
Even before US President Donald Trump began threatening to re-impose sanctions on Iran, foreign investors looking to do business there were wary. Iranian President Hassan Rouhani failed to get his pro-market agenda off the ground, and now international political developments are playing into Iranian hardliners' hands.
PRINCETON – Since December 2017, Iran’s currency, the rial, has lost one-third of its value. And on April 10, the exchange rate’s rapid depreciation prompted the government to halt domestic foreign-exchange transactions and outlaw foreign-currency holdings of more than €10,000 ($12,000).
This government’s move represents a radical change of course, following three decades of relatively liberal economic policymaking, during which the authorities have permitted private-sector foreign-exchange transactions and even capital flight. Iran is not just anxious about the reinstatement of US sanctions after May 12, when US President Donald Trump is expected to make good on his campaign promise to withdraw from the 2015 Iran nuclear deal. Rather, the country is already adapting to a new world in which the prospect of rapprochement with the West is fading.
With the threat of renewed US sanctions having already created a rial crisis, the Trump administration is using the nuclear deal, formally known as the Joint Comprehensive Plan of Action, to try to force Iran to accept more restrictions on its nuclear program, as well as on its ballistic missile program. Given that Iran came to the table to negotiate the JCPOA less than a year after an earlier exchange-rate collapse – by 200% as of October 2012 – it is not entirely unreasonable to believe that the government will bow to Trump’s demands.
But 2018 is not 2012. Iranians today are far less optimistic about repairing relations with the West, and particularly with the US. So, if the US does renege on its commitments under the JCPOA, it would be difficult, if not impossible, for Iran’s leaders to justify further concessions.
Iranians are also less optimistic about President Hassan Rouhani’s ability to deliver greater prosperity, as large protests in December and January showed. With Rouhani’s hopes for market reforms and closer integration with the West dashed, he may be forced to change course, by adopting Iranian Supreme Leader Ayatollah Ali Khamenei’s “preference for the East over the West.”
That would certainly suit Iran’s hardliners, who have long railed against Rouhani’s pro-market, pro-globalization reforms. Their preferred strategy, which is now gaining traction, is to move toward a “resistance economy.” First proposed by Khamenei in 2012, this approach relies on import substitution and favors domestic over foreign investment, in an effort to reduce Iran’s reliance on Western economies and strengthen its resilience against international sanctions.
The need for a resistance economy had seemed to disappear with the JCPOA. After two years of negative growth, the Iranian economy rebounded strongly in 2016, as international sanctions were lifted. Owing largely to a doubling of oil exports, the economy grew at a rate of 12.5%. But the recovery has since slowed considerably. In 2017, the growth rate returned to about 4%, and is expected to remain low for the next several years.
Likewise, while the Iranian economy has created 600,000 new jobs each year since the JCPOA took effect, this has not been enough to absorb Iran’s massive youth bulge. In fact, unemployment is now at an all-time high, especially for young, college-educated Iranians. According to the 2016 census, among college-educated 20-29-year-olds, 36% of men and 50% of women are unemployed.
One reason for the inadequate supply of jobs is that Iran’s leaders have failed to improve the country’s environment for private investment. In 2018, Iran ranked 124th in the World Bank’s “Doing Business” rankings, which was unchanged from the year before. With powerful entrenched interests standing in the way of liberalizing reforms, Iran’s economy remains as anti-competitive as ever.
Still, much of the blame for Iran’s lackluster performance belongs to Rouhani’s economic team, which has proved no match for the economy’s mounting problems. If Rouhani ever held the key to the door of prosperity, as he was fond of saying in his 2013 presidential campaign, he failed to locate the keyhole in time.
Nearly five years after Rouhani’s election, Iran’s banking system is still insolvent. Burdened by non-performing loans accumulated during the 2000s real-estate boom, Iranian banks have been unable to lend for investment since 2012, owing to sanctions. To attract deposits, banks have been offering interest rates of ten percentage points or more above of the inflation rate, while using new deposits to pay previous depositors. The government has identified and closed a few of these Ponzi schemes. But for the rest of the country’s insolvent banks, the only option has been to wait for another real-estate boom.
Making matters worse, persistently high interest rates have pushed fixed investment down to around 20% of GDP, which is at least ten percentage points lower than what is required to bring down unemployment. Meanwhile, public investment, at less than 3% of GDP, is hardly enough to pay to maintain and repair existing infrastructure. And with prospects for substantial inflows of foreign capital dimming, there is little likelihood of an investment rebound.
Even before Trump’s election, foreign investors approached Iran cautiously, signing projects but holding back on actually committing funds. According to the International Monetary Fund, in 2016, $12 billion in foreign funding had been promised for various projects, but only $2.1 billion had been invested. And now that the government has imposed new restrictions on capital flows, the country’s attractiveness to foreign investors will fall further.
Capital controls are of course in keeping with the “resistance economy” favored by conservatives, one of whom recently stoked fears of capital flight by declaring that $30 billion had left the country in only a few months. In fact, a more likely figure is $10 billion.
In any case, depending on whether and how fast the JCPOA falls apart in the coming months, capital controls will be just the start of a great reversal. As economic decision-making shifts from markets to the government, Rouhani’s attempt to create a competitive, globalized Iranian economy will come to a grinding halt.
How Europe Can Save the Iran Nuclear Deal
Europe cannot afford to let the 2015 Iran nuclear deal fail. That's why Donald Trump should be confronted with a choice: either uphold the agreement, in exchange for European support on regional issues and Iran’s missile program; or scrap the deal and risk the loss of European cooperation and the emergence of a nuclear-armed Iran.
LONDON – This week, a senior German official pointed out to me that, “The Iran nuclear deal is the last firewall preventing military tensions in the world’s most combustible region from spilling over into thermonuclear war.” That language is unusually apocalyptic, but it reflects a genuine fear that US President Donald Trump could soon dismantle a crucial line of defense that Germans and other Europeans are proud to have built.
European leaders have been on the back foot since January, when Trump gave them a deadline of May 12th to “fix the terrible flaws of the Iran nuclear deal,” or he would re-impose sanctions on Iran. Trump’s main objections to the deal are that it does not address Iran’s misbehavior in the region or its ballistic missile program, nor does it prevent Iran from restarting its nuclear program after 2025. And now that Trump has installed a hawkish new foreign-policy team – with John Bolton as national security adviser and Mike Pompeo as secretary of state – European diplomats fear the worst.
Over the past few months, the German, French, and British governments have been frantically assembling a package of measures – including potential sanctions on Iranian elites – to address Trump’s concerns. And both French President Emmanuel Macron and German Chancellor Angela Merkel have now visited the White House to persuade Trump that it is better to build on the deal than blow it up.
In the short term, the Europeans are hoping that their proposed measures will allow Trump to declare victory while remaining in the deal. They have reminded Trump that a diplomatic solution to the North Korea nuclear crisis could very well depend on whether he unilaterally abandons America’s commitments to Iran under the Joint Comprehensive Plan of Action (JCPOA).
In the long term, though, European leaders’ ability to save the deal will depend on the extent to which they can act in their own interests, rather than being a hostage to the caprices of the Trump administration.
It is fitting that the Iran issue has come to the fore around the 15th anniversary of the start of the Iraq War. For European diplomats, that disaster and the success of the JCPOA have come to represent two foreign-policy extremes. Iraq was post-Cold War Europe’s darkest hour, with European countries lined up against one another to support or oppose the war, even though none had any real influence over US decisions.
The JCPOA, by contrast, is seen as modern Europe’s shining success. Desperate to avoid another war in the Middle East, Europeans, starting in 2005, began to define their own interests in the region. With the two-pronged goal of preventing Iran from acquiring nuclear weapons and avoiding another war, they devised various carrots and sticks to shape Iranian and US actions.
To Iran, European diplomats offered a choice between two futures: one in which Iran would freeze its nuclear program and end its international isolation; and one in which it would maintain its program and face ever-harsher sanctions, and possibly war. At the same time, the Europeans, having convinced Russia and China to back their strategy, approached the US with another stark choice: either join an international coalition to apply diplomatic pressure on Iran, or pursue dubiously effective military measures on your own.
Today, European leaders’ overarching goals in the Middle East are to de-escalate the hegemonic struggle between Iran and Saudi Arabia, prevent nuclear proliferation, combat terrorism, and stanch the flow of refugees into Europe. But many of these goals are now being actively undermined by the Trump administration, which has made a show of siding with Israel and Saudi Arabia against Iran in regional conflicts from Yemen and Iraq to Lebanon and Syria.
Diplomats in some EU member states have started to worry that attempts to placate Trump could force them into self-defeating positions, thus reprising the relationship between British Prime Minister Tony Blair and US President George W. Bush in 2003. As one official confided to me, the introduction of new sanctions will make it even harder to keep Iran committed to the JCPOA, let alone engage with it on other regional issues.
Nevertheless, the European approach so far has been carefully calibrated both to win over Trump and preserve Iran’s commitment to the deal. Needless to say, this requires a delicate balance. If the Europeans give Trump too much, they will be playing into the hands of US hardliners.
At the same time, they will be empowering the hardliners in Iran. In a recent interview, political scientist Nasser Hadian of Tehran University told me that moderate Iranian leaders such as President Hassan Rouhani and Foreign Minister Javad Zarif have already been left in a weak position, with hardliners now saying, “We told you so.” In Hadian’s view, the greatest danger is that Europe will try to appease Trump “at any cost,” when it should be working “on a plan B to save the deal without the US.”
Among other things, a plan B would offer Iran economic relief if the US were to re-impose sanctions, conditional on Iran’s continued compliance with the JCPOA; and it would provide the basis for a larger strategy of engaging with Iran and other stakeholders to de-escalate regional conflicts. Of course, it would be better for everyone if Trump agrees not to abrogate the nuclear deal. But to persuade him of that, Europe must show that it is willing to go it alone.
To that end, Trump should be confronted with a clear choice: either preserve the JCPOA, in exchange for European support in addressing regional issues and Iran’s missile program; or scrap the deal and risk the loss of European cooperation and the emergence of a nuclear-armed Iran. As my German interlocutor put it, “Trump must be told that he cannot have his cake and eat it.”
The Dangers of Nuclear Bombast
US President Donald Trump has refused to recertify the 2015 Iran nuclear deal, an agreement that he once predicted would "lead to a nuclear holocaust." Unfortunately, by creating more perverse incentives for hostile regimes to pursue nuclear armaments at all costs, Trump has made the nightmare scenario he fears even more likely.
MADRID – In the summer of 2012, the international relations theorist Kenneth N. Waltz published an article titled “Why Iran Should Get the Bomb,” in which he argued that a nuclear-armed Iran would reestablish a desirable balance of power in the Middle East, by acting as a counterweight to Israel.
Later that year, Waltz also argued that the strategy of combining sanctions with diplomacy was unlikely to dissuade Iran from developing its nuclear capacity. “Short of using military force,” he wrote in Foreign Affairs in September 2012, “it is difficult to imagine how Iran could be prevented from acquiring nuclear weapons if it is determined to do so.”
Waltz was wrong in two ways. First, by defending nuclear weapons as a source of regional or global stability, he profoundly underestimated the danger that they could fall into the hands of terrorists or be used because of a miscalculation.
Second, Waltz failed to foresee the success of the nuclear negotiations with Iran (or their “failure” from the perspective of those who actually wanted a nuclear-armed Iran). Waltz died in 2013, but if he were alive today, he would undoubtedly point out the loose ends of the Joint Comprehensive Plan of Action that Iran, the P5+1 (the five permanent members of the United Nations Security Council, plus Germany), and the European Union adopted in 2015. Yet he also would have to recognize that the JCPOA goes further than what he and many others had thought possible, demonstrating the power of diplomacy, especially to those who had advocated military means.
The JCPOA was a landmark of multilateralism. Despite that – or, perhaps, because of his disregard for multilateralism in all forms – US President Donald Trump has called it the “stupidest deal of all time,” and predicted that it would “lead to a nuclear holocaust.” Countless analysts, such as Stephen M. Walt of Harvard University, have shown these claims to be completely unfounded and hyperbolic in the extreme. But that didn’t stop Trump from refusing in October to “recertify” the JCPOA.
Trump’s move leaves it up to the US Congress to decide whether to re-impose nuclear-related sanctions on Iran, which would amount to a violation of the agreement. Even if Congress decides to do nothing on this front, Trump’s anti-Iran rhetoric and other Republican initiatives in Congress have strained the JCPOA and left it vulnerable.
The JCPOA’s collapse would generate significant risks for the Middle East and the world. A newly restarted Iranian nuclear program would add a worrisome dimension to Iran’s strategic rivalry with Saudi Arabia. In fact, the two countries’ cold war already seems to be heating up. Saudi Arabia – whose audacious young crown prince, Mohammed bin Salman, has Trump’s full support – recently accused Iran of an “act of war” after a missile was launched from Yemen toward Riyadh.
At a time when the US is already in a nuclear standoff with North Korea, the last thing it needs is to raise a similar risk in the Middle East. Fortunately, Germany, China, France, the United Kingdom, Russia, and the EU have all committed to defending the JCPOA, distancing themselves from the Trump administration’s reluctant stance.
Trump’s foreign policy is adding to a long list of perverse incentives in the area of nuclear proliferation. Consider the 2003 US-led invasion of Iraq, which was launched on the pretext that Saddam Hussein was hiding weapons of mass destruction. He wasn’t. And when he was brought down, the other two members of US President George W. Bush’s so-called axis of evil, Iran and North Korea, concluded that not having nuclear arms made them vulnerable to American attempts at regime change. This conclusion was further reinforced in 2011, with the US-assisted overthrow of Libyan leader Muammar el-Qaddafi, who had abandoned his nuclear program eight years earlier.
In North Korea, Kim Jong-un came to power a few weeks after Qaddafi’s summary execution at the hands of rebel fighters, which undoubtedly influenced his approach to international relations. Rather than making Kim back down, Trump’s threats of “fire and fury” have further convinced the North Korean leader that his survival and that of the Kim dynasty depend on nuclear weapons. Punishingly tight sanctions alone will not change his mind. Kim seems perfectly willing to subject the North Korean people to privations of every kind in order to remain in power.
Of course, there are notable differences between North Korea and Iran. The most obvious is that Iran’s nuclear program did not take off, whereas North Korea – which, unlike Iran, withdrew from the Non-Proliferation Treaty – already has an estimated 60 nuclear warheads, and seems to be making progress toward a nuclear-tipped intercontinental ballistic missile capable of reaching the US mainland. In short: an all-out military conflict with North Korea would entail immediate global risks.
But giving diplomacy a chance will require Trump to abandon his incendiary rhetoric and maximalist positions, and work constructively with Chinese President Xi Jinping. Having recently consolidated his power at the 19th National Congress of the Communist Party of China, Xi will probably assume a more proactive role in international conflict resolution, especially in areas that affect China directly. An effective global leader must be able to confront his ally and offer a hand to his adversary when circumstances call for it.
Finding a strategy that credibly contains the North Korean threat is the only way to ensure that South Korea and Japan do not make the regrettable choice of joining the nuclear club. As Waltz observed, nuclear arms have a tendency to spread. But that does not mean we should resign ourselves to proliferation, let alone play down its catastrophic potential. International security depends on preserving diplomatic success stories such as the JCPOA, which are crucial to avoid contagion and to put an end, once and for all, to dangerous spirals of antagonism and polarization.
Trump’s War Psyche and World Peace
Donald Trump is not the first leader with a severe personality disorder – characterized by intolerable feelings of inadequacy and an overwhelming need for approval – to gain power. But such leaders have usually gained control in smaller countries that lack the world’s most powerful military.
NEW YORK – When Donald Trump took office early last year, many pundits believed that he would settle into his presidency and pivot to normality. But a large number of America’s mental health experts didn’t see it that way. They warned that Trump evidently suffers from a mental impairment that would worsen under pressure, possibly leading him to launch a war, even a nuclear war. And now, with the dangers of a Trump-led war with North Korea or Iran rising, the world needs to head off America’s president before it’s too late.
In the view of many professional psychologists and psychiatrists, Trump is not merely a bully, a showman, and a liar; he is more likely a mentally impaired individual who is impulsive, aggressive, and relentlessly driven to manipulate and blame others. These professionals have called for an urgent, independent evaluation of Trump’s mental capacity that goes far beyond the simple cognitive screen that he received earlier this year when undergoing a physical examination at Walter Reed Army Medical Center.
To some laypersons, and obviously to many Americans, symptoms of mental impairment can appear to be strengths. A lack of self-control can be mistaken for candor. Aggression and manipulativeness can be mistaken for deal-making skills. Yet to mental health professionals, these traits are danger signs. Individuals who display such behavior are often masking intolerable feelings of powerlessness, inadequacy, and an overwhelming need for approval that can curdle into violent destructiveness under pressure.
This would not be the first time, of course, that a leader with a severe personality disorder has gained power. But such leaders have usually gained control in smaller countries that lack the world’s most powerful military. Still, the record of such episodes is grim: Idi Amin, Saddam Hussein, Pol Pot, and many others were able to wreak murderous mayhem.
Unlike those leaders, Trump can plunge the world into a devastating nuclear war at his personal command. In recent months, he has repeatedly threatened to use this power. Trump believes that by threats, sanction, and bravado, he can force North Korea to relinquish its nuclear weapons. In fact, if Trump pushes the North Korean regime into a corner, he is more likely to provoke a war. The South Koreans understand this, but they are being pressured by the US to take a hard line. The recent Olympics thaw in relations between North and South Korea is promising, but not the end of the story. Trump will most likely stir up tensions soon again; he can’t help himself.
Iran is the second flash point. Trump is surrounded by hardliners in his administration who are seeking a showdown with the Islamic Republic. Israel’s government, led by Prime Minister Binyamin Netanyahu, is pushing the US in the same direction. Again, Trump or his advisers may believe that bravado will cause the Iranians to back down from their regional assertiveness in Syria and Lebanon; but this is unlikely, in part because Iran can count on Russia’s tacit backing.
Trump’s obsession with winning and inability to accept a balance of power constitute a dire threat. His declaration on Twitter in January that he is “a very stable genius” is a sign of weakness, not strength. Such statements are an alarm, not a reassurance.
As Special Counsel Robert Mueller’s investigation continues to raise the emotional and political pressure on Trump, the president’s temptation to resort to war could rise dramatically. The danger is that Trump’s emotional compulsions could become all-consuming, rendering him incapable of choosing any other course than violence.
Trump’s impairments usually involve great efforts by him and others to keep his inner wounds covered. People around him often display excessive fawning or comply with exceptional demands in order to “contain” him. Such is the reported atmosphere at the White House, where his aides apparently work hard to keep America safe from their boss.
Given the warning signs, the US Congress should move urgently to remove Trump’s unilateral ability to launch a war, especially a nuclear war. The Constitution is clear: According to Article I, Section 8, Congress, not the president, has the power to declare war. Presidents have relentlessly usurped that power in recent decades, and Congress, unfortunately, has acquiesced. But, with Trump in power, it is especially urgent – a matter of survival – that Congress clearly and explicitly reasserts its constitutional authority.
America’s traditional allies should also be on guard against blindly following the US to war. We are in a period of great danger. We do not need a new war on the Korean Peninsula or in the Middle East to establish a balance of power, stability, and mutual recognition of all sides’ security interests. We need diplomacy. But Trump may be psychologically incapable of that, because he predisposed to attack, rather than compromise. Global forces for peace need to resist.