U.S. Looks Beyond Iran Nuclear Deal Deadline to What Comes Next

(Bloomberg) -- Donald Trump seems set on pulling out of the Iran nuclear deal next week, with U.S. officials suggesting that any initial diplomatic turbulence will be followed by negotiations for a new accord.

There's one big hang-up: Iran is ruling out new talks, calling the current agreement “non-negotiable.” And America's European allies continue to back it, saying the deal has been essential to reining in Iran's nuclear program.

As markets, U.S. allies and the government in Tehran question what might follow a U.S. withdrawal, the Trump administration remains focused on how it could toughen or replace the agreement to address issues such as Iran's behavior in the Middle East -- including its firm foothold in Syria and support for Hezbollah militants that threaten Israel -- and its continuing development of ballistic missiles.

President Trump hinted at his thinking on Monday. While refusing to reveal what he'll do by May 12, he repeated his belief the existing accord is “a horrible agreement for the United States.” But, he added, “That doesn't mean I wouldn't negotiate a new agreement.”

Iranian President Hassan Rouhani's government says the U.S. is “bullying” the Middle East nation. Iran has long claimed Washington isn't fully complying with its side of the deal -- a requirement that world powers ease economic sanctions -- and that uncertainty about the agreement's future has stymied needed investment.

Read more: Iran Accuses Trump of ‘Bullying' as Nuclear Deal Deadline Nears

“Let me make it absolutely clear once and for all: We will neither outsource our security, nor will we renegotiate or add on to a deal we have already implemented in good faith,” Foreign Minister Mohammad Javad Zarif said in a video message tweeted on his account.

Few people are willing to predict how this impasse will be bridged.

“We're not going to have perfect clarity under any circumstances on May 13,” said Suzanne Maloney, deputy director of the foreign policy program at the Brookings Institution.

While the May 12 deadline has been portrayed as a yes-or-no decision for Trump, it's not that simple. Under a law passed by Congress, Trump has to determine periodically whether to continue waiving sanctions linked to transactions with Iran's central bank. The 2015 accord required the U.S. to lift those sanctions. If they go back into effect, the U.S. will almost certainly be in violation of the agreement.

One possible scenario: Trump declares he's backing out of the deal and reimposes sanctions but leaves time before those sanctions take effect. Such a grace period would put new pressure on European allies to make fresh concessions toward fixing what the U.S. considers the deal's biggest gaps.

“I don't think he's going to snap back sanctions,” said Amir Handjani, a senior fellow with the Atlantic Council's South Asia Center. “I think he's going to give more time to see if the U.S. and Europeans can come up with a formula to present to Iran.”

While new Secretary of State Mike Pompeo hasn't promised a grace period, he said at his Senate confirmation hearing in April that “even after May 12 there is still much diplomatic work to be done.”

Read a QuickTake on the Iran deal Trump loves to hate

Trump's long-term goal is a better deal, not conflict, said Michael Singh, managing director of the Washington Institute for Near East Policy and a former senior director for Middle East affairs under President George W. Bush.

“Even if we were to try to reimpose sanctions and ramp up pressure, ultimately the object of doing so would be to get them to the negotiating table to agree to more far-reaching steps,” Singh said.

For weeks, U.S. negotiators have been meeting with allies France, the U.K. and Germany in an effort to reach a consensus on side agreements responding to U.S. concerns. They say they've made progress on some elements but haven't crossed the finish line on the “sunset clauses” in the current deal -- under which many of the key provisions expire in coming years and Iran is allowed to start enriching uranium to high levels again.

Despite Iran's insistence that it won't negotiate a new agreement, the administration is betting that economic strains in the country, and the prospect of further isolation if the deal crumbles, will eventually force its leaders to the negotiating table. That's viewed with intense skepticism by outsiders. They say Iran has no reason to agree to a tougher deal without concessions like those that led to the accord, formally known as the Joint Comprehensive Plan of Action, in the first place.

“They would be seen as very weak to go back into negotiations,” Handjani said. “If the U.S. isn't honoring its commitment already to the JCPOA, what's the assurance that they're going to honor a follow-up to the deal?”

Economic Overhaul

While inflation in Iran has slowed in recent months, the rial has slumped and oil climbed as markets await the U.S. decision. The head of the International Monetary Fund's Middle East and Central Asia operations said Monday that Tehran will need to to accelerate economic reforms, including plans to overhaul its banking system, if the U.S. quits the accord.

“When there's imperfect clarity businesses hesitate and Iran loses,” said Maloney of the Brookings Institution.

That gives the Trump administration what it sees as a crucial advantage: Iran is abiding by the nuclear accord while currently enjoying few of its potential benefits.

As for a future deal, U.S. officials were encouraged by a four-point proposal offered by French President Emmanuel Macron last week that echoed many of their demands. But Macron has argued that any new agreement be an add-on, not a replacement for the current accord.

Not Negotiable

In a call with Rouhani late last month, Macron and his Iranian counterpart agreed to work together to try to preserve the accord. But Iran's official government website quoted Rouhani as saying Iran won't accept any additional restrictions and the deal is “by no means negotiable.”

At the same time, the European strategy appears to be to try to manage Trump -- possibly with some sort of additional measures -- while also coaxing Iran to stay in the nuclear deal as long as possible, perhaps until after 2020 when the U.S. may have a new president.

“It took 13 years of a nuclear standoff with Iran to get a deal,” said Ali Vaez, Iran project director at the International Crisis Group. “It would be a pity to lose it as a result of something that could at the end of the day be considered a rough patch.”

--With assistance from Zainab Fattah and Ladane Nasseri

To contact the reporter on this story: Nick Wadhams in Washington at nwadhams@bloomberg.net.

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net, Larry Liebert

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