Explained

Trump to Reinstate Sanctions on Iran, End Nuclear Deal. Here's What That Means

U.S. president Donald Trump pulled the U.S. out of the Iran nuclear deal vowing new and 'powerful' sanctions on Iran

In this Friday, Oct. 13, 2017 file photo, President Donald Trump makes a statement on Iran policy in the Diplomatic Reception Room of the White House in Washington
AP Photo/Evan Vucci, File

U.S. President Donald Trump announced Tuesday that the United States is pulling out of the Iran nuclear deal and reinstating all sanctions, as well as imposing new ones – a potentially fatal blow to the 2015 pact between Iran and six major powers.

Under the 2015 deal, Tehran agreed to curb its nuclear program in return for relief from economic sanctions. Trump's predecessor, Barack Obama, struck the pact to try to keep Iran from building a nuclear weapon, but Trump believes the deal has "disastrous flaws."

The United States will reimpose a wide array of Iran-related sanctions after the expiry of 90- and 180-day wind-down periods, including sanctions aimed at Iran's oil sector and transactions with its central bank, the U.S. Treasury said on Tuesday.

In a statement on its website and a related "frequently asked questions" document, the Treasury said sanctions relating to aircraft exports to Iran, the country's metals trade and any efforts by Tehran to acquire U.S. dollars will also be reimposed.

>> Trump Pulls U.S. Out of 'Disastrous' Iran Nuclear Deal, Imposes 'Powerful' Sanctions | Trump Pulls Out of the Iran Nuclear Deal, What Happens Next? | Israel Opens Public Shelters in North Over 'Unusual Movement of Iranian Forces' in Syria >>  

However, apparentlythe key U.S. sanctions targeting Iran's oil sales will not immediately resume. Oil markets and companies may have some time to adjust to the prospect of fresh U.S. sanctions, and diplomats could keep trying to avert them.

There are at least two avenues potentially offering more time for talks after Trump reimposes sanctions, difficult as that may seem given that Iran has strongly warned against such actions.

The agreement has a dispute resolution clause that provides at least 35 days to consider a claim that any party has violated its terms. That can be extended if all parties agree.

And if Trump restores the core U.S. sanctions, under U.S. law he must wait at least 180 days before imposing their most draconian consequence: Targeting the banks of nations that fail to cut significantly their purchases of Iranian oil.

Iran has ruled out renegotiating the accord and threatened to retaliate – though it has not said exactly how – if Washington pulls out.

"Iran has several options if the United States leaves the nuclear deal. Tehran's reaction to America's withdrawal of the deal will be unpleasant," Iranian Foreign Minister Mohammad Javad Zarif said last Thursday.

Oil markets on tenterhooks

Oil markets are watching the issue closely.

"This is a market that is on tenterhooks in terms of monitoring headlines out of the Middle East," said John Kilduff, a partner at Again Capital Management, a hedge fund in New York.

While the physical impact on oil supplies may be delayed or muted if the deal unravels, futures are expected to react sharply to a return of sanctions.

Oil prices already reflect a $1 to $3 premium on the assumption that the United States may pull out of the deal and that additional sanctions may be put in place that will harm Iran’s ability to sell oil into the market.

If the United States pulls out of the deal, as expected, and Iranian exports are cut, prices could climb as much as $5 a barrel.

If Trump does indeed declare he is reviving sanctions, it is unclear whether European allies would still want to talk or whether the deal's other parties, including Iran, would accept any compromise before the sanctions actually kick in.

"It is technically feasible by virtue of having this window ... but (I) struggle to see how it would work in reality," said a European diplomat of talking beyond May 12.

Diplomatic fallout

The end of the pact would raise tensions in the Middle East, where rivals Saudi Arabia and Iran are vying for supremacy.

It could also make it harder for Trump to get North Korea to curb its nuclear program, given that Pyongyang might conclude Washington cannot be trusted to keep its word.

Trump sees three defects in the deal: a failure to address Iran's ballistic missile program; the terms under which international inspectors can visit suspect Iranian nuclear sites; and "sunset" clauses under which limits on the Iranian nuclear program start to expire after 10 years.

Diplomats have cited progress on ballistic missiles and on inspections, but the sunset issue remained unresolved.

Newly installed Secretary of State Pompeo and Treasury Secretary Steven Mnuchin had previously hinted at the possibility of continuing talks, either about a fix or about a whole new deal.

"He can have it both ways by declining to extend the waivers in mid-May, and then using the six-month window to try to prod the Europeans to do more ... before sanctions actually kick back in," said a former U.S. official.

"Classic Trump – lots of sound and fury, with the door still cracked open," he said, citing fears this "would only prolong the death by a thousand cuts that is the [deal's] likely fate."