Why the U.S.-Iran Conflict Is Now Coming to a Head

By David Wainer (Fortune)

In 2015, Iran agreed to limit its nuclear program, bowing to harsh international sanctions. For the past year, it’s continued to abide by those terms despite U.S. President Donald Trump’s decision to withdraw from the accord and reimpose U.S. sanctions. Now Iran is threatening to walk away. It’s told the Europeans who signed the pact that if they can’t find a way to ease its economic isolation in 60 days, it will abandon limits on uranium enrichment, shortening the time the country would need to accumulate sufficient material for a nuclear bomb. 

1. What provoked Iran’s moves?

The U.S. stepped up its economic pressure on Iran in early May by allowing the expiration of waivers that had permitted eight governments to buy Iranian oil. The Trump administration’s aim is to drive Iran’s oil exports, which account for almost half of the country’s sales abroad, to zero. Already, U.S. sanctions have pushed Iran’s economy into recession, with the International Monetary Fund predicting a 6 percent contraction this year after 4 percent last year. The downturn is an embarrassment for President Hassan Rouhani, who championed the nuclear deal as a way to end Iran’s isolation and revive its economy.

2. What’s enriching uranium got to do with the economy?

Nothing, directly. Iran is threatening to resume enriching uranium beyond levels permitted in the 2015 accord as a way to push France, Germany, the U.K. and the European Union to do something to relieve the effects of the U.S. sanctions. Those countries share the desire to restrain Iran’s nuclear activities and to do so through dialogue. Also, Iran considers the limitations on its nuclear program a constraint on its sovereign rights, though it has always denied pursuing a nuclear weapon. It was willing to go along with the restrictions in exchange for sanctions relief, but the U.S. withdrawal left Iranians feeling they’d been duped.

3. How does the U.S. stop others from trading with Iran?

As with other sanctions campaigns, U.S. leverage rests with the central role American banks — and the U.S. dollar — play in the global economy. Any country, company or bank that violates the terms of the U.S. sanctions could see its U.S.-based assets blocked or lose the ability to move money to or through accounts held in the U.S. In essence, the Trump administration has bet that nations, banks and businesses worldwide would rather do business with the U.S. than Iran, a wager that has proven correct as major European companies have mostly stayed away.

4. What have European countries proposed to do about that?

European signatories devised a special mechanism to facilitate trade with Iran that would circumvent a global financial system that is largely dominated by the U.S. The idea basically comes down to using a barter system in which Iran would accrue credits for its exports to Europe which it could then use to purchase goods from European businesses. But Instex, as the vehicle is known, isn’t yet fully operational and would likely offer only limited relief.

5. What’s at stake in the conflict?

The stability of the Middle East. European officials frequently cite their inability to prevent U.S. President George W. Bush’s administration from starting the Iraq war in 2003 as a key reason for trying to salvage the Iran deal. The U.S. and Iran are still far from declaring war on each other, and U.S. Secretary of State Michael Pompeo responded cautiously to Iran’s announcement, saying “it was intentionally ambiguous.” But tensions are mounting. Less than a day after Iran’s declaration, the U.S. imposed new sanctions prohibiting trading in its metals. Just before the ultimatum, the U.S. said it was deploying an aircraft carrier and B-52 bombers to the Persian Gulf in response to unspecified threats from Iran. Israeli Prime Minister Benjamin Netanyahu has already warned that his country would confront any Iranian move to develop a nuclear weapon.

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