Obama Administration Puttering on Sanctions Relief Risks Derailing Iran Accord

Surprise, surprise -- the nuclear accord between the U.S., other major world powers, and Iran is under threat. But the source of this risk might upset expectations: it is the Obama administration that has failed to resolve persistent ambiguities with the U.S. sanctions relief and, as a result, major foreign banks continue to refuse to handle transactions involving Iran, frustrating the expectations of Iran's people for economic reprieve and plaguing the ultimate sustainability of the nuclear accord.

Recent developments signal the danger ahead. Last week, Iran's Supreme Leader Ayatollah Ali Khamenei publicly alleged that the United States was failing to "respect its commitments" under the nuclear accord, particularly by "using roundabout paths to prevent the Islamic Republic" from achieving economic re-integration with the rest of the world. Specifically, the Supreme Leader decried the reticence of foreign banks to re-engage with their Iranian counterparts, chalking it up to pernicious efforts by U.S. sanctions authorities to undermine the benefit of the sanctions relief for Iran.

The Supreme Leader is wrong to believe that the United States is seeking to undermine the value of the sanctions relief for Iran. Nonetheless, the Supreme Leader's public comments do signal the despair to which Iran has fallen as European banks refuse to provide financial support for the stepped-up business interest in Iran. This despair is a serious danger for the nuclear accord: if Iran fails to see practical benefit to the nuclear bargain it has struck with the United States and other major world powers, then its commitment to the nuclear accord may well erode. Moreover, this despair will herald a perception in Iran that President Rouhani -- who has sought to steer the Islamic Republic on a path towards political and economic re-integration with the rest of the world, including the United States - has failed in his efforts to rehabilitate Iran's political image and economic well-being. The consequences for Iran's own internal development could well be devastating.

The Obama administration should not sit on its hands as this problem festers. Failure to take action and resolve the lingering ambiguities regarding the application of surviving U.S. sanctions could end up derailing the nuclear accord and upsetting President Obama's signature foreign policy achievement.

Simple solutions do exist. For starters, the Obama administration should provide clear guidance on how major foreign banking institutions can re-engage with Iran all the while remaining compliant with surviving U.S. sanctions. That means providing in precise detail what due diligence measures U.S. authorities expect foreign banks to take when re-engaging with their Iranian counterparts and handling transactions for which Iranians are counter-parties. Banks need both a road map and a check-list, and only the Obama administration can give it to them.

Second, the Obama administration should provide public encouragement for major European and Asian banks to re-connect with their Iranian counterparts - much as Europe's political leaders are doing right now. While the U.S. continues to prohibit its own banks from engaging with Iran, the United States has a serious interest in ensuring that Iran receives the benefit of its bargain under the nuclear accord.

Everyone is watching Washington, too. This month, the UK Prime Minister David Cameron sent an unusual letter to one of the UK's largest banks -- Barclays -- encouraging it to conduct Iran-related transactions. Barclay's response was illustrative: so long as the U.S. maintains its own trade embargo with Iran, Barclays said, the bank will be reluctant to re-engage their Iranian counterparts and handle funds transfers on behalf of Iranian parties. In other words, it doesn't much matter what the UK's political expectations are; what matters is what the United States is doing. That is why public notice of encouragement from high-level U.S. officials -- rather than the persistent but small private meetings with U.S. bureaucrats -- will move the needle and raise the confidence-level of foreign banks interested in resuming financial transactions with Iran.

Finally, the Obama administration should consider relieving additional sanctions on Iran in order to assuage concerns over the unworkability of the sanctions relief. For instance, banks are having trouble dealing with the fact that their Iran-related transactions cannot dollar-clear a U.S. bank, thereby forcing them to screen off all Iran-related dealings. In discussions I have had with bank officials, the costs of such restructuring are prohibitive, particularly insofar as no one is racing to take up Iran-related business in the first place.

One step that the administration could take is to reinstate the license authorization for "U-turn" transactions, where U.S. banks are authorized to process funds transfers for the benefit of Iranian parties but only where such funds transfers were initiated and received by a non-U.S., non-Iranian banks. The U-turn license - as it was known -- was revoked in November 2008 and only then in order to isolate Iran's financial system for purposes of winning concessions on its nuclear program. By reinstating the U-turn license, which would allow foreign banks to engage in dollar-clearing for Iran-related transactions -- the Obama administration would resolve the unrelenting practical issues that have arisen for banks in processing Iran-related transactions.

Without taking steps such as these, the Obama administration will continue to frustrate Iran's expectations and risk the nuclear accord in the process. When it comes to U.S.-Iran relations, perceptions matter; and the perception in Iran right now is that the U.S. -- whether acting out of malice or negligence -- is hindering the practical benefit to Iran of the sanctions relief. Should this perception grow in Tehran that the United States is not a good-faith actor with which Iran can deal, both the historic nuclear accord and the progress in relations between the two bitter adversaries will be placed in bitter peril.