One surprising challenge to the Iran deal: State-level sanctions
Last summer’s historic Joint Comprehensive Plan of Action (JCPOA) agreement between Iran and the U.N. Security Council’s five permanent members and Germany, or the P5+1, means that Iran will not develop nuclear weapons. Never before has a sovereign country signed onto such severe restrictions and monitoring of its nuclear program as Iran is accepting to assure the world that any activity is for peaceful civilian purposes. This is a profound success if fully implemented — one that both avoids war with Iran and, with sanctions relief, boosts international trade as Iran gradually reintegrates into world markets.
Formal implementation of this accord began in January when the International Atomic Energy Agency verified Iran’s curtailment of uranium enrichment and broader compliance with its nuclear-related commitments. The United States dismantled nuclear-related economic sanctions, starting with secondary sanctions against foreign entities that trade, bank, insure or provide other services to Iran. Under the JCPOA, countries are now permitted to engage in trade with Iran in previously prohibited energy, shipbuilding, auto, and financial-services sectors. The United States, however, retains most of its unilateral sanctions on Iran because of its human rights record and support of terrorism, significantly limiting American firms’ engagement in the Iranian economy.
Successfully managing the sanctions aspects of the JCPOA requires sustained political commitment and finesse on the part of the U.S. government. The economic relief promised Iran in exchange for its nuclear restraint is the lynchpin of this agreement. Four months into implementation of the deal, Iran is complaining that sanctions relief has not resulted in the anticipated economic benefits, in part because of the complexity of unwinding years of patchwork sanctions and also because of resurgent opposition of powerful political forces that continue to seek to derail the agreement. One potential challenge to JCPOA implementation comes from the lesser-known economic sanctions at the state government level.
What the data shows us about state sanctions against Iran
Beyond U.S. federal sanctions by the executive and legislative branches, two-thirds of U.S. states have imposed their own sanctions against Iran. The Watson Institute for International and Public Affairs at Brown University is tracking the promulgation, implementation and expiration of these state sanctions, through the Iran Implementation Project. Our research project investigates the extent and effect of state-level sanctions on implementation of the JCPOA.
There are currently four types of state-level sanctions: contracting, public trust divestment, insurance divestment and banking prohibitions — with the most frequent being measures to block investments of pension funds and government contracts with companies doing business in Iran. Thirty-two states and the District of Columbia have some form of Iran measures on the books, but with varying levels of implementation and impact.
State-level obstacles to implementing the Iran nuclear agreement
California law prohibits state pension funds from investing in companies that do energy or defense business in Iran. The practical significance of this is considerable: California’s Public Employees’ Retirement System and its State Teachers Retirement System are among the largest such funds in the country and both are barred from holding investments in any company, anywhere, that does at least $20 million in Iran’s energy business. Research indicates that California’s public trust divestment of Iran may be as high as $3.5 billion. Its domestic insurance divestment regulation may be responsible for $6 billion more.
Likewise, Florida’s Investment Act requires withdrawal by retirement funds from companies who do oil-related business in Iran, which has resulted in well over $1 billion in divestment. While some states allow their public trusts to refuse to divest if doing so would violate their fiduciary liability, Florida’s legislation does not permit such a conditionality. Furthermore, banking sanctions adopted in 2012 prevent any Florida-chartered financial institution from maintaining correspondent accounts with international financial institutions tied to Iran’s Central Bank or involved in defense and nuclear industries.
Our research tracks these state-level statutes to see if, when and how these sanctions may end. A number of states have sunset provisions for the expiration of sanctions pegged to federal government action (e.g. Iran’s removal from the list of state sponsors of terrorism, lifting of all U.S. sanctions) but several permit the discretion of states, with the criteria for vacating sanctions varying widely.
Sanctions at the state level may well hinder U.S. implementation of the JCPOA, as well impinge upon the president’s constitutional authority to conduct foreign policy. The Iran deal requires the United States to “actively encourage officials at the state or local level to take into account the changes in the U.S. policy … and to refrain from actions inconsistent with this change in policy.” Last month, the State Department sent letters to each U.S. governor urging states to review and revise their sanctions accordingly. Recognizing that state sanctions are attempting to “incentivize Iran to change its behavior in certain ways,” the letter argues that since the JCPOA agreement is addressing the same concerns, state level divestment and contracting bans on Iran are not needed.
So far North Carolina’s governor has strongly rejected this request from the Obama administration. Several other states will probably refuse to lift their own sanctions with the ultimate outcome possibly dependent on legal challenges. In the past, the U.S. Supreme Court has upheld the executive branch’s constitutional role in implementing foreign policy by compelling preemption of state sanctions. If the current court takes on this question, perhaps the answer will change. Our research project will continue to track changes, including judicial-level challenges.
State-level obstacles to implementing the Iran nuclear agreement are so far not illegal, but they may well complicate the JCPOA. States are not well-equipped to engage in foreign policy, and in the case of sanctions against Iran, such action could provide further fodder to Iran’s charges of the United States failing to implement the agreement, ultimately endangering its future.
The United States and its five international partners painstakingly negotiated to end the preeminent security concern from Iran: nuclear weapons. States who want to wield sanctions to change a broader range of Iran’s behaviors put the agreement at risk.