Why Trump’s Iran sanctions could backfire on US goals to stabilize Afghanistan’s economy

Key Points
  • The Chabahar port project underway on Iran's southern coast aims to develop a transport corridor to Afghanistan, boosting the war-torn nation's trade.
  • International investors and financiers of the Indian-backed port are now in limbo amid fears of punishment by U.S. secondary sanctions for doing business in Iran.
  • Penalties blocking the project's funding could threaten the longtime U.S. policy objective of stabilizing Afghanistan through economic development.
A Sikorsky helicopter lands near Marines with Fox Company, 2nd Battalion, 8th Marines, Regimental Combat Team 7, and Afghan National Security Forces provide security during Operation Nightmare in Nowzad, Afghanistan, June 6, 2013.
US Marine Corps photo

Afghanistan is at risk of become an unintended victim of the Donald Trump administration's sweeping sanctions against Tehran, announced as part of the U.S. decision to withdraw from the 2015 Iran nuclear deal in early May.

A major port complex is being developed on Iran's southern coast that is set to provide a transport corridor to Afghanistan, granting the landlocked country new access to Indian Ocean trade.

But international players leading investment and financing of the Indian-backed port are now in limbo amid fears of punishment by U.S. secondary sanctions for doing business in Iran.

Iran deal exit putting new strain on trans-Atlantic alliances, says expert
Iran deal exit putting new strain on trans-Atlantic alliances, says expert

The Chabahar Port project, whose development is being led by India, has been touted as having the potential to boost Afghanistan's trade by millions of dollars. It also aims to lay the infrastructural foundations to develop the impoverished country's largely untapped mining industry, which is estimated to be worth billions. India relies on Iran for overland access to Afghanistan, and sees increased trade there as a way to reduce neighboring Pakistan's leverage in the country.

Nearly 17 years after the U.S. invasion to topple the Taliban, Afghanistan remains crippled by poverty, unemployment and terrorism. The Pentagon has supported for years Indian engagement with Afghanistan's debilitated economy, which relies heavily on foreign aid, even if it required operating via Iran.

Imposing policies that would penalize this investment, since it requires transacting with Iran, could threaten the longtime U.S. policy objective of stabilizing Afghanistan through economic development.

"This policy of isolating Iran runs directly counter to U.S. interests in Afghanistan," said Marcus Chenevix, MENA researcher at TS Lombard. By potentially forcing Afghanistan to sever links with one of its largest trading partners, he said, "the Trump administration is hitting the beleaguered Afghan economy with yet another shock at a time when the government is already struggling against a reinvigorated Taliban."

A trilateral memorandum of understanding signed in 2016 between India, Iran and Afghanistan committed $21 billion to the project — $9 billion for the actual port in Chabahar, and the remaining $21 billion for developing Afghanistan's iron ore export capabilities. "This deal was all about Afghanistan," Chenevix said.

Iranian workers transfer goods from a cargo container to trucks at the Kalantari port in city of Chabahar on May 12, 2015. Chabahar, located on the coast of Sistan-Baluchistan (south-east), is open to the Oman Sea and the Indian Ocean. It is Iran's gateway to Pakistan and Afghanistan in the east, the Central Asian countries to the north, and Turkey and the Gulf countries in the west.
ATTA KENARE | AFP | Getty Images

Ashraf Haidari, director-general of policy and strategy at Afghanistan's Ministry of Foreign Affairs, spoke to the need for the project for security reasons, and stressed the potential for the country to become a land bridge for south and central Asia.

"This would earn Afghanistan much in transit revenues, directly boosting our stagnating economic growth," Haidari told CNBC. "And that should create the job opportunities we sorely need for our youth, effectively preventing their recruitment and exploitation by terrorist networks, including the Taliban, al-Qaeda and ISIS."

Resurgent Taliban

The Taliban is more powerful now than at any time since the U.S. invasion, and is said to wield influence over two-thirds of the country.

Describing the sanctions in relation to Afghanistan, David Brewster, a senior research fellow at the National Security College of Canberra, told CNBC: "It's really an own-goal by the United States."

[Chabahar] should create the job opportunities we sorely need for our youth, effectively preventing their recruitment and exploitation by terrorist networks.
Ashraf Haidari
Director-General of Policy and Strategy, Afghan Foreign Ministry

Afghanistan is still beholden to the illegal opium trade, which the International Monetary Fund (IMF) estimates is worth $2 billion annually. It's also a major source of revenue for the Taliban. The Chabahar port and trade corridor would ostensibly create more opportunities for Afghan exporters and farmers, on whose behalf Afghan officials have been lobbying Washington for sanctions exemptions — so far to no avail.

"The ripple effect on Afghanistan, India and Pakistan from much more combative U.S. policy on Iran has either not been thought through or considered merely of secondary importance," said Hasnain Malik, director of frontier markets equity strategy at London-based investment bank Exotix. "The prospects of stabilizing Afghanistan, and ultimately withdrawing U.S. troops, requires the cooperation of all regional powers, including Iran."

In this respect, he said, it's in Afghanistan's interest to have access to as many ports as possible — currently it is beholden to Pakistan, with which it's had frequent disputes and border closures.

'Malign activities and behavior'

The 2015 Iran nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA) and signed between Iran, the U.S. and five other world powers including Russia and China, lifted economic sanctions on the Islamic Republic in exchange for curbs on its nuclear program.

The Trump administration has long derided the deal, and now plans to inflict "the strongest sanctions in history" on Tehran in response to what it called Iran's destabilizing activity. That includes frequent ballistic missile testing, human rights violations and military involvement in foreign conflicts in Syria and Yemen, among others.

A U.S. State Department official told CNBC the the sanctions "are meant to disrupt Iran's malign activities and behavior and stop funding for its nuclear activities," adding that, "We are in discussions regarding our withdrawal from the JCPOA and the re-imposition of Iran sanctions with all of our allies and partners."

Iran has its own destabilizing engagement in Afghanistan, although less overtly than in other countries. Tehran has been quietly providing military aid to the Taliban for somewhere near a decade, in the form of "light arms, rifled-propelled grenades (RPGs), and even military training for Taliban forces on Iranian soil," according to a RAND Corporation report from 2014. Iran's government, particularly its Revolutionary Guard Corps, aggressively opposes any U.S. presence in Afghanistan.

President of Afghanistan Ashraf Ghani, Prime Minister of India Narendra Modi and President of Iran Hassan Rouhani shake hands after they signed Chabahar transit agreement in Tehran, Iran on May 23, 2016.
Anadolu Agency | Getty Images

The RAND report also cited Iran's billions of dollars in trade and aid with Afghanistan, although the trade balance is heavily lopsided in favor of Iranian exports, mostly due to the former's underdeveloped industrial base.

Iran's support for the Taliban, meanwhile, is dwarfed by its support for anti-American Shia militias in the region, some of whom were responsible for the killing of hundreds of U.S. troops in Iraq.

Potential for backfire

But asked if the sanctions would effectively deter Iranian interference, regional experts were unconvinced.

"By isolating Iran from the global economy, the U.S. is lowering the cost of bad behavior by the Iranian government… a globally isolated economy has nothing to lose," said Chenevix. "By simply imposing sanctions... the Trump administration is making it easier for Iranian hardliners to take over Iran's foreign policy."

Malik agreed, suggesting that sanctions may have the opposite intended effect. "Higher oil prices, because of regional risk, could offset the economic effects of lower Iranian oil exports," he said, warning that hardliners, who favor foreign intervention, are likely emboldened by the nuclear deal's dismantling.

Haidari, meanwhile, at the Afghan Foreign Affairs Ministry, remains optimistic that Chabahar's backers may yet win an exemption from Washington.

"We are confident that an exception could be made in this case," he said, "so that any impending U.S. sanctions would not undermine India's well-intentioned, win-win investment in the implementation of our trilateral agreement."