The coronavirus has hit Iran hard. As the country grapples with the highest mortality rate from COVID-19 across the Middle East, the Trump administration has faced widespread calls to ease U.S. sanctions on Iran. The strict bilateral sanctions, which the Trump administration has reimposed since the U.S. withdrawal from the Iran nuclear deal in May 2018, have left the Iranian economy in a deepening recession, with foreign companies and governments remaining hesitant to engage in financial and trade exchanges with Iran. Though the Department of the Treasury purports to allow exceptions to sanctions restrictions for humanitarian aid, medical equipment and pharmaceuticals, the pandemic has highlighted the cracks in this system.
In the meantime, however, other nations have stepped up to fill the void, providing some of the much needed aid to the struggling Iranian people. The international community’s will to deliver medical supplies despite potential penalties from the U.S. government demonstrates a challenge to the U.S. “maximum pressure” campaign. Several U..S. allies have deepened those cracks by developing their own mechanisms that deliver humanitarian aid and/or trade with Iran, some with the direct cooperation of the U.S. Treasury Department, others less so.
COVID-19 in Iran
Despite the early outbreak of COVID-19 in Iran, the country’s leaders have not severely limited public activity out of fear of causing further harm to the economy. Following a brief suspension of public life, low-risk economic activities have resumed across Iran, while restaurants and gyms remain closed and religious gatherings for the month-long observance of Ramadan have been canceled.
When the Trump administration withdrew the United States from the nuclear deal—known as the Joint Comprehensive Plan of Action (JCPOA)—it also reinstated sanctions prohibiting Iran from the purchase of the U.S. dollar, the trade in precious metals, the sale to Iran of automotive and aviation parts and services, and sales of oil and petrochemical products from Iran. These sanctions pervade Iranian society and have played a significant role in limiting the Iranian government’s ability to provide adequate health care in the face of this crisis. These consequences mostly hinge on the prohibition on Iran’s purchase of the U.S. dollar, the global reserve currency. This prohibition—along with potential civil and criminal penalties in the case that the Treasury Department finds U.S. entities noncompliant—discourages most companies, governments and individuals from facilitating trade with Iranian entities.
Following the U.S. withdrawal from the JCPOA, the Iranian rial has continued to depreciate. As a result, when the pandemic arrived in Iran in February and March 2020, it was nearly impossible for Iranian companies and hospitals to purchase essential medicines and medical equipment from abroad. The shortage of equipment became so severe that on March 12, Iranian Foreign Minister Javad Zarif tweeted an appeal to the international community for health care products—including 160 million protective masks, 1,000 ventilators and millions of pharmaceuticals.
Facing criticism, the U.S. government has reasserted the position that U.S. sanctions do not prohibit the delivery of humanitarian goods. In an April 16 fact sheet, the Treasury Department stressed that U.S. and non-U.S. persons may provide humanitarian goods to Iran under existing exemptions, exceptions, and authorizations in U.S. sanctions laws and regulations:
For example, most medicine and medical devices, including certain personal protective equipment and other items used for COVID-19- related treatment such as medical gowns, medical eye shields and goggles, surgical gloves, face shields, certain respirators, masks, and ventilators, already qualify for export and re-export to Iran under general licenses, without the need for further authorization from the Office of Foreign Assets Control (OFAC).
Thus, a general license covers the export to Iran of such basic supplies (that is, masks, gloves and medical gowns), but the U.S. sanctions regime requires a special license for most of the medical equipment, including some of the material included in Zarif’s appeal. Under General License 31, for example, OFAC must review license applications for some items—including HEPA filters, full face mask respirators, diagnostic medical imaging equipment, oxygen generators, decontamination equipment and pumps—on a case-by-case basis due to concerns about potential use of these items for nuclear development.
OFAC has asserted its readiness to process claims. But, according to the most recent quarterly reports from the Treasury Department, under the Trump administration, OFAC has issued a declining number of special licenses for medicine and medical devices exported to Iran—from more than 50 percent of requests approved during the first quarter of 2016 to 10 percent during the same period of 2019. OFAC has not released data that would indicate whether this trend has continued through the pandemic.
To date, a majority of the humanitarian aid is basic medical supplies that already qualify for export to Iran under general licenses, without the need for further authorization from OFAC. Some of the countries that have adhered to the sanctions and delivered supplies include Iran’s neighbors. On March 2, facilitated by the United Arab Emirates, a team of World Health Organization experts and a shipment of 7.5 tons of medical supplies landed in Tehran. The UAE later shipped 32 additional tons of medical equipment, while Azerbaijan announced plans to send $5 million in medical aid and the Georgia Pharmacy Association sent a humanitarian shipment as well. Uzbekistan, Qatar, Turkey, Kuwait and Turkmenistan have also sent supplies and pledged financial resources.
Countries farther away have also volunteered to help. China has continued to send medical supplies and test kits over the past two months—shipments that, by March 30, reached 40 tons per day. On February 28, China sent a team of health specialists and medical supplies. Japan has delivered $22.6 million in medical assistance, as well, along with funding deliveries of personal protective equipment and arterial blood gas analyzers. Lastly, Russia delivered 50,000 diagnostic tests.
Pressure to Ease Sanctions
Iran has long called for the international community to pressure the U.S. into adjusting its sanctions policy. In fact, in 2018, Iran brought suit against the United States at the International Court of Justice (ICJ), alleging a violation of the 1955 bilateral Treaty of Amity, Economic Relations, and Consular Rights between the U.S. and Iran. Pending the resolution of that case, the ICJ issued a provisional order in October 2018 requiring the U.S. to remove any impediments to the flow of certain humanitarian goods into Iran, among other measures. In response to the ruling, Secretary of State Mike Pompeo announced the United States would withdraw from the treaty, calling the decision “years overdue.” The U.S. withdrawal from the treaty ex post facto has no impact on the ICJ ruling, however. According to the letter of the law, the U.S. remains obligated to act consistently with the ICJ’s provisional order pending a final resolution of the case. However, in practice, the provisional order has not impacted the U.S. sanctions regime to the point that the ICJ would now consider U.S. sanctions to be compliant with its ruling.
In direct response to the crisis unfolding in his country, Zarif sent a letter to U.N. Secretary General António Guterres on March 12 calling on member states to disregard, as Zarif characterizes it, “the most severe and indiscriminate campaign of economic terrorism in history, imposed illegally and extra-territorially by the Government of the United States.”
The Trump administration has faced criticism from outside Iran as well. Most notably, 24 senior diplomats and defense officials from around the world—including former chief European Union diplomat Federica Mogherini and Director General of the International Atomic Energy Agency Ambassador Hans Blix—signed a letter calling for the Trump administration to take immediate measures to ease sanctions on Iran. The letter calls on the U.S. to expand the scope of humanitarian exemptions under U.S. sanctions to directly include devices and equipment necessary to effectively combat COVID-19, and to reach out to non-American banks to reassure them that they will remain in compliance with OFAC if they facilitate humanitarian assistance to Iran.
Within the United States, Joe Biden’s presidential campaign and the New York Times editorial board have called for sanctions relief for Iran. And in Congress, a group of senators, led by Elizabeth Warren and Bernie Sanders, drafted a letter suggesting adjustments to the Trump administration’s current sanctions policy. Shortly thereafter, Democratic Sens. Chris Murphy, Tim Kaine, Richard Blumenthal and others wrote a letter to Pompeo and Secretary of the Treasury Steven Mnuchin supporting the easing of sanctions and outlining some key adjustments. These stipulations would create new financial channels for Iran to purchase humanitarian goods. Even with the domestic pressure mounting, Mnuchin has not given any indication that he will be adjusting the current sanctions regime.
Developing Alternative Mechanisms
In the aftermath of the ICJ ruling, the U.S. took the position that the provisional order did not require changes in the sanctions regime, as it already allowed for humanitarian imports. Nonetheless, perhaps in an effort to address the provisional order, the U.S. Department of State and the Department of the Treasury launched the Swiss Humanitarian Trade Arrangement (SHTA) in February 2020 after lengthy negotiations between the U.S. and Swiss governments. Novartis carried out a pilot transaction in January through the Banque de Commerce et de Placements, dispatching $2.6 million in cancer and organ transplant medicine to Iran. While Swiss officials have confirmed that many companies are interested, the transactions have yet to materialize and the pilot transaction remains the only one reported.
In the face of the current regulations and potential financial penalties from the U.S. government on their citizens or firms, some foreign governments have still actively sought to facilitate humanitarian aid and trade in this unprecedented pandemic, notably France, Germany, South Korea and the U.K. While South Korea is applying for U.S. sanctions waivers and developing new mechanisms in order to facilitate humanitarian aid and trade with Iran, European governments are employing an already existing mechanism to facilitate commercial trade with Iran.
Reportedly, Iranian President Hassan Rouhani wrote to South Korean President Moon Jae-in requesting assistance from Moon’s country at the end of March. South Korea is now developing three new pathways for facilitating humanitarian trade with Iran. First, the U.S. government approved the South Korean government for a General License 8, which authorizes certain humanitarian trade transactions with the Central Bank of Iran. The private organization Korea Chamber of Commerce and Industry and the state-funded Korea Trade-Investment Promotion Agency are set to brief their local companies on facilitating humanitarian trade with Iran. Second, the South Korean government revealed that it is developing its own mechanism, the Korean Humanitarian Trade Agreement (KHTA), which will facilitate transactions with Iran through the Middle East Bank, a bank compliant with U.S. sanctions. Third, the South Korean government is also considering taking advantage of the SHTA. Although Seoul did not disclose details on the means for delivery, Moon’s government has announced plans to deliver $2 million worth of humanitarian aid to Iran, including two PCR machines for coronavirus tests, 500 disinfectors and possibly COVID-19 test kits.
Yet even as these initiatives are ongoing, the U.S. federal government and New York state have fined the state-backed Industrial Bank of Korea a combined $86 million for not meeting various anti-money laundering and compliance obligations since 2010, which centered on failing to install and maintain an adequate transaction-monitoring system. Previously, the Industrial Bank was one of two banks in South Korea, alongside Woori Bank, able to conduct trade with Tehran in line with U.S. sanctions. While this case is not directly linked to Seoul’s efforts to provide pandemic aid, it may further deter South Korean businesses from pursuing humanitarian aid and trade with Iran.
Germany, France and the U.K. have taken a different approach. They are employing INSTEX, a mechanism established in the wake of the U.S. withdrawal from the JCPOA, in order to facilitate business transactions between European-based entities and Iran. Headquartered in Paris, INSTEX is a special purpose vehicle for facilitating non-U.S. dollar and non-SWIFT (Society for Worldwide Interbank Financial Telecommunications) transactions through a barter system. Essentially, INSTEX will coordinate payments so that a European importer of goods from Iran can pay a European exporter of goods to Iran, thereby avoiding cross-border financial transactions and the risk of violating U.S. sanctions.
Although INSTEX is often criticized for being an ineffective tool for maintaining economic commitments derived from the JCPOA, European countries are seeking to employ the mechanism to deliver humanitarian trade with Iran in the face of this pandemic. European countries may also be seizing the moment to demonstrate that INSTEX can be the leading instrument for all sorts of business transactions in the months ahead. In fact, INSTEX’s first reported transaction has been as a result of the pandemic: According to the Wall Street Journal on March 31, the sale of blood treatment equipment has been processed from a German exporter with a value of roughly $548,000. European countries and Iran are said to be working on further transactions of medical goods.
For decades, the U.S. has leveraged its currency and overall position on the global stage to compel compliance with its sanctions programs. With the U.S. dollar still being the global reserve currency, efforts by traditional U.S. allies to assist Iran in the midst of the pandemic signal mounting global apprehension with the U.S. sanctions regime. Though the SHTA and the KHTA are licensed by the U.S. government, the fact that they were called for by traditional American allies is evidence of that very uneasiness. That apprehension is further illuminated in the case of INSTEX. Thus, the evolving crisis in Iran has served as a catalyst for traditional U.S. allies to apply more pressure on the U.S. Treasury Department to make way for humanitarian assistance. Though, as of this writing, all the mechanisms surveyed here have not been found noncompliant with the letter of the American sanctions regime, it is clear that the boundaries of its spirit are being pushed.