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President Donald Trump is expected to announce this week whether the U.S. will remain committed to the Iran nuclear pact, the abandonment of which could trigger a diplomatic crisis and jolt oil markets.
Sources close to the administration cited by the Associated Press predict that Trump will leave the Joint Comprehensive Plan of Action (JCPOA) in place for the time being and waive nuclear sanctions on the Islamic republic as he did on October 13, despite his well-known opposition to the agreement. During his campaign, Trump promised to dump it, calling the it "the worst deal ever."
The JCPOA, enacted in 2015 by Iran, the five permanent members of the United Nations Security Council and Germany, allowed the lifting of international sanctions on Iran in exchange for compliance with restrictions on its nuclear program. Between January 12 and 17, sanctions on foreign oil purchases, insurance, shipping, banking, and oil and gas investment are due for waiver.
Any U.S. disruption to the deal could shake oil markets, according to a report by Citigroup's global commodities team published Tuesday. A snap-back on sanctions would cause the "dislocation of at least 500,000 barrels a day of Iranian crude oil exports, especially those going to Korea and Japan as well as to some European countries."
This would trigger an initial $5 per barrel rise in crude oil prices, Citi wrote, "as customers losing oil under U.S. pressure scramble for replacements at a time when OPEC and other producers have put a lid on their output."
In October, Trump left the deal's fate to Congress after refusing to certify Iran's compliance, despite the International Atomic Energy Agency (IAEA) reporting in November that the country was "operating within the essential limits on its nuclear activities" imposed by the JCPOA. The U.S. president is required to recertify Iran's compliance to its terms once every 90 days.
This time around, Trump is likely to concede that Iran is complying with the deal but that it's not in the U.S.'s national security interest, said Richard Nephew, a former coordinator for sanctions policy at the U.S. State Department and senior fellow at the Brookings Institute. Congress then has a following 60 days to either re-impose sanctions on Iran or do nothing.
"The only real outstanding question is what Donald Trump thinks and will choose to do. Contacts within his administration ... have reported that the decision is effectively a 'coin flip' now, " Nephew wrote in a commentary for Columbia University's Center on Global Energy Policy on Tuesday. Voices in both Congress and the national security establishment have been urging the president to safeguard the deal, according to several reports, although new non-nuclear sanctions appear likely.
"Any deal that comes out of Congress is likely to include tougher sanctions or other punitive measures against Iran given bipartisan support for such measures," Ryan Turner, lead risk analyst at Protection Group International, told CNBC on Wednesday. However, he noted, the U.S. is only one of six international signatories to the deal. "Lawmakers can amend the domestic legislation but cannot change the deal itself without the backing of other parties, which is unlikely to materialize."
New sanctions would likely be aimed both at Iran's missile program and its activities in the region, despite opposition from other deal signatories, the Citi report said. Iran's (IRGC) and Shia militant group Hezbollah, which the U.S. designates as a terrorist organization, are the predominant targets.
"Although too small to directly impact the economy, [the sanctions] will serve to further damage much needed investor sentiment towards Iran," Pat Thaker, regional director for the Middle East and Africa at the Economist Intelligence Unit, told CNBC Thursday. Iran remains mired in deficit, and while the country's economy grew more than 7 percent in the year following the JCPOA's enactment, foreign investment flows are far from reaching government targets.
Thaker expects the state to bunker down and financial sector reform "to go into reverse" in the event of an abrogation of the deal. Still, she said, "I expect the nuclear deal to largely remain intact, with the U.S. instead focusing on increasing non-nuclear sanctions."
International bodies are urging the president to tread carefully, as moves to punish Iran could backfire. Iran's Atomic Energy Agency said Wednesday that "a reimposition of sanctions by the United States would be a violation of Tehran's nuclear deal with world powers," and that Iran could greatly increase its enrichment of uranium, according to Reuters.
"The not-so-subtle threat is one that could materialize in a worst case scenario, which could see Iran use Trump's decision as justification to pull out of the agreement and restart its nuclear program," Turner said.
The foreign ministers of Germany, France and the U.K. on Thursday issued statements urging the U.S. to remain faithful to the JCPOA, insisting that the agreement was essential to international security. Federica Mogherini, the EU's top diplomat, said that it "made the world safer and prevented a potential nuclear arms race in the region."
Still, opponents of the deal argue that a continued suspension of sanctions would only reward a regime that has ramped up its missile testing in recent months and continues to violate human rights. Thousands of Iranians have been arrested at the hands of security forces following more than a week of all over the country, and at least 21 have died. The protests introduce an unexpected dynamic to the Trump administration's deliberations, providing a potential excuse to re-impose sanctions.
The Tea Party Patriots Citizens Fund, a right-wing political action committee, has long pushed for termination of the deal, issuing a statement Thursday saying: "Iran has failed to live up to its obligations under the deal and continues to pursue the development of ballistic missile technology in defiance of UN resolutions."
The Trump administration has described Iran as living up to the "letter" but not the "spirit of the deal." Robert Litwak, director of international security studies at the Wilson Center and a National Security Council member during the Clinton administration, explained what this meant.
"The letter is the deal, while the spirit refers to everything outside the deal, such as Iran's support for Hezbollah and role in Syria," Litwak told CNBC. "Jettisoning the nuclear deal because of Iran's objectionable behavior in other areas will only make addressing those challenges more difficult."
Critically, he said, repercussions of a U.S. walkout could reverberate far beyond Iran itself and further complicate other geopolitical challenges. "Abrogating the nuclear deal with Iran would set a bad precedent, particularly as the United States seeks to resume nuclear diplomacy with North Korea."