Why Biden should not treat humanitarian trade as a concession to Iran

25 Mar 2021

Why Biden should not treat humanitarian trade as a concession to Iran

The Biden administration has boxed itself into a maximalist position that jeopardises efforts to make the Iran sanctions programme more humane. European governments should be pushed to change course.

By Esfandyar Batmanghelidj

The European Council on Foreign Relations (ECFR)

March 25, 2021

https://ecfr.eu/article/why-biden-should-not-treat-humanitarian-trade-as-a-concession-to-iran/

As part of President Joe Biden’s commitment to return to the Joint Comprehensive Plan of Action (JCPOA), US officials have sought to distance the new administration from its predecessor’s ‘maximum pressure’ policy on Iran. In a recent interview, Robert Malley, Biden’s Iran envoy, stated that “the maximum pressure campaign has failed”, adding the policy “hasn’t made life any better for the Iranian people”. But this sentiment has yet to be reflected in a new policy. Most concerningly, the Biden administration has made no major gestures towards easing humanitarian trade with Iran.

After three years of maximum pressure sanctions, there is a wide range of unilateral steps that the Biden administration could take to ease Iran’s access to food and medicine – steps that would mark a distinct break with the policies of the Trump administration, without requiring broad sanctions relief. The Biden administration’s reluctance to take these steps undermines not just current US provisions for humanitarian trade with Iran, but also the ability of European governments to fulfil their own humanitarian commitments. For example, by refusing to take what Biden administration officials have described as “unilateral” moves to ease Iran’s access to foreign reserves, the United States is creating a transactional logic around humanitarian trade. This approach is at odds with European policy, which maintains that humanitarian trade should continue to flow even in the event of a breakdown in diplomacy.

Financial sanctions are food sanctions

According to data from the Statistical Center of Iran, food prices in Iran have increased by 7 per cent since Biden’s inauguration. Since the Trump administration reimposed secondary sanctions on Iran in November 2018, food prices have risen faster than the inflation rate in two periods during which the Iranian currency was undergoing devaluation, with the most recent period beginning in September of last year. These trends reflect the ways in which US sanctions – which seek to both reduce Iran’s foreign exchange revenues and limit its access to them – place pressure on food supply chains. Food may not be subject to sanctions, but the funds Iran uses to pay for food imports very much are.

 

According to the International Monetary Fund, Iran has access to just 10 per cent of its foreign reserves – worth roughly $9 billion. The governor of Iran’s central bank, Abdolnaser Hemmati, has spearheaded an unprecedented campaign of economic diplomacy to restore trade and unlock more of Iran’s reserves. Hemmati has travelled to Muscat, Baghdad, and Seoul to seek the release of the parts of Iran’s reserves held in those countries. To an extent, Hemmati has been successful – the post-pandemic recovery of Iran’s exports has seen its currency appreciate by 16 per cent since reaching a historic low in October last year.

But, when it comes to food imports, it is the composition of the accessible reserves that counts. The post-pandemic recovery of Iran’s exports, including those of oil, means that the country is earning more renminbi, dirhams, and roubles. Nonetheless, these are not currencies the country can use to pay for all the food imports it needs. For example, Iran’s dwindling reserves of Indian rupees have led most Indian merchants – frustrated by delayed payments – to cease signing contracts for the export of rice, sugar, and tea to Iran. Similar dynamics can also be seen in Iran’s imports of critical agricultural commodities, including wheat, maize, and soybeans. In the last two years, Iran’s central bank has struggled to disburse euros and Swiss francs for these commodities in a timely fashion, leading many suppliers to cut their ties with Iranian buyers. The suppliers that stick around force less favourable terms upon Iranian importers, who absorb higher transaction costs and fees incurred when deliveries are delayed due to late payments.

Unlike other goods, food imports rely on a global supply chain that is consolidated and inflexible. If Iran cannot affordably buy Indian rice or Brazilian soybeans, it is left with few alternatives – particularly given the large quantities of the products the country needs to import to meet demand.

Ideally, Iran would simply convert and transfer reserves to where they are needed to buy food and medicine. Indeed, this is what Tehran reportedly agreed to do with Seoul last month. Under this deal, an initial tranche of funds with a value equivalent to $1 billion will be converted from won into Swiss francs and transferred to an account belonging to the Central Bank of Iran in Switzerland – thereby enabling Iran to purchase covid-19 vaccines and medical devices, and to make overdue payments to the United Nations.

Yet, despite the clear humanitarian nature of Iran’s intended purchases, this plan still faces significant hurdles. The provisions for humanitarian trade in the US Iran Threat Reduction and Syria Human Rights Act of 2012 stipulate that Iran can only use reserves held in a given country for bilateral trade, meaning that Iran can only spend its won reserves – perhaps its largest pool of foreign exchange assets – in South Korea, which is not a major supplier of medical goods or food to Iran. Iran and South Korea are seeking to transfer Iranian assets to an account that is part of the Swiss Humanitarian Trade Arrangement, a payments channel established by the Swiss government in cooperation with the Trump administration. However, the transfer would need a specific green light from the US Treasury Department. Moreover, one cannot exchange most global currencies without first converting them into US dollars. Any such transaction will need a specific licence from the US Office of Foreign Assets Control.

The United States is creating a transactional logic around humanitarian trade

The saga over Iran’s frozen reserves in South Korea exposes the shortcomings of the provisions for humanitarian trade in US sanctions regulations – which do not allow Iran to move money to where it is really needed.

Biden’s dilemma

Despite its awareness of these issues, the Biden administration appears to have boxed itself into a maximalist position that jeopardises efforts to make the Iran sanctions programme more humane. US Secretary of State Antony Blinken was recently pressed on reports that South Korea had agreed to give Iran freer access to its reserves. He responded that “until Iran comes back into compliance, they won’t be getting that relief”. Blinken’s statement suggests that any improvement in humanitarian trade will be conditioned on Iran’s return to full compliance with the JCPOA (regardless of whether this is what he meant to imply).

In Iran, such statements and a lack of action have eroded trust in the US commitment to humanitarian trade. In a recent, nationally representative survey, 70 per cent of Iranians stated that the US is “probably” or “definitely” seeking to prevent food and medicine from reaching Iran. For the moment, Iran is not facing a hunger crisis – as it has low overall dependence on imports. But Iranian families are increasingly unable to afford meat and imported fruit and vegetables. And prices and shortages are only likely to increase. Moreover, these same restrictions have diminished Iran’s ability to import desperately needed medical supplies to combat covid-19.

There is a real possibility that Washington and Tehran will fail to restore mutual compliance with the JCPOA. In this scenario, Iran will almost certainly expand its nuclear activities and the US could expand its sanctions. But, even in such a scenario, US humanitarian obligations will remain. By treating humanitarian measures as conditions of JCPOA compliance, the Biden administration is setting a dangerous precedent. The administration is closing the political space to improve the imperfect framework of licences, exemptions, and guidance designed to keep food and medicine flowing into Iran even as the country remains under the strongest economic sanctions in its history. European governments should be more vocal in pushing the Biden administration on the issue of humanitarian trade, just as they were in condemning the Trump administration for its callous disregard of the welfare of ordinary Iranians.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of its individual authors.