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Testimony

The Implications of U.S. Aircraft Sales to Iran

Testimony for House Financial Services Committee
7th July 2016

Executive Summary 

As we approach the one-year anniversary of the announcement of the Joint Comprehensive Plan of Action (JCPOA), many of the concerns of those who opposed the deal have indeed come to pass: an increase in Iran’s malign activities, an Obama administration reluctant to use non-nuclear sanctions to punish and deter these activities, and an Iranian regime for whom the JCPOA was not the end of negotiations but merely the beginning.

The JCPOA was objectively a very good deal for Tehran: It preserved essential elements of the country’s nuclear infrastructure and placed only temporary, limited restrictions on its nuclear ambitions, which start expiring in 2023. In exchange, Iran got the complete dismantlement of many of the most impactful U.S. and international economic sanctions, which already has helped trigger an economic recovery.

In January, the accord proceeded as scheduled. Iran mothballed some of its nuclear infrastructure and got the coveted stamp of approval from the International Atomic Energy Agency. Following that, Washington and the Europeans terminated or suspended a slew of punishing economic sanctions and even agreed to hand over access to $100 billion in blocked Iranian assets.

Even this was not enough for the Islamic Republic. “On paper the United States allows foreign banks to deal with Iran, but in practice they create Iranophobia so no one does business with Iran,” thundered Supreme Leader Ali Khamenei.  Iran demanded greater sanctions relief or it would walk away from the nuclear deal.

The administration acquiesced to these demands. Secretary of State John Kerry rushed overseas on an international invest-in-Tehran “road show.”  Banks simply need to “do their normal due diligence and know who they’re dealing with,” Kerry told reporters.  But the banks know that there is no “normal due diligence” in a country as corrupt as the Islamic Republic.

In an attempt to assuage their concerns further, Kerry’s staff briefed State Department reporters on a plan to issue a license to permit foreign banks to use dollars when processing transactions with their Iranian counterparts  – a concession never explicitly negotiated as part of the nuclear deal. This prompted a backlash in Congress that had Treasury Department officials scrambling to issue guidance that Washington is not permitting Iranian access to the U.S. financial system, even as they left open the possibility of offshore dollar clearing. 

More recently, Boeing and Iran Air announced a deal worth an estimated $25 billion to sell and lease aircraft. This represents a multi-billion dollar bet by President Barack Obama that the economic benefits from the JCPOA will moderate Iran’s behavior before the nuclear restrictions start expiring.

Yet Boeing is signing a deal with an Iranian aviation company and an industry complicit in the regime’s weapons proliferation and destabilizing adventurism. Boeing and those banking this deal face a due diligence nightmare. They cannot prevent their planes from being used by Iran’s Islamic Revolutionary Guard Corps (IRGC), for example, for deadly airlifts to Syria’s Bashar al-Assad and Lebanese Hezbollah.

This deal is unnecessary: Iranian citizens and foreign travelers to Iran have alternatives.

Over the past five years, Gulf and Turkish airlines were primarily responsible for the growth in the Iranian aviation market, with an increase in their routes by nearly 60 percent over the past three years.  European airlines also announced a resumption of flights to Tehran following the lifting of sanctions.

Iranian citizens need not rely on Iran Air or Mahan Air – companies racked with corruption and implicated in a range of illegal activities – but can look to more reliable foreign companies to meet their travel needs. Indeed, corruption plagues Iran’s aviation industry; safety challenges reportedly have been the result of corruption and mismanagement, not U.S. sanctions. The Boeing deal may end up benefitting the still U.S.-sanctioned and IRGC-controlled Mahan Air, which has become the largest international carrier to and from Iran, as well as other sanctioned airlines supporting the IRGC and the Assad regime.

In addition to implicating U.S. companies in Iran’s malign activities, the Boeing deal also undermines the Obama administration’s much-touted economic “snapback” mechanism for enforcing the JCPOA. Iran targeted the Europeans to block any transatlantic re-imposition of sanctions by signing a similar deal with Boeing’s competitor Airbus and with ATR, a joint venture between Airbus and Italy’s Finmeccanica. French and Italian financial institutions and export credit agencies will finance these purchases, with a combined value of close to 30 billion dollars. 

From Iran’s perspective, this is a smart strategy: Snapping back sanctions would cause American and European aviation companies and banks to lose billions of dollars in unpaid contracts. The aircraft companies and banks would surely lobby the White House and European capitals against restoring sanctions against Tehran, or at least seek reassurances that the aviation and financial sectors would be spared. In other words, with these deals, Iran can further exploit the tension between national security and Western commercial interests.

The Boeing deal comes at a time when the Obama administration has failed to push back against Iran’s malign activities, including support for terrorism, human rights abuses, and other destabilizing activities in Syria, Iraq, Yemen, Lebanon, and other countries across the Middle East. It underscores the deterrence power of Iran’s “nuclear snapback,” wherein Tehran will threaten nuclear escalation if the world powers try to force it back into compliance with the agreement or impose sanctions against its non-nuclear malign activities.

The Boeing deal only serves to increase the Iranian regime’s leverage over the nuclear deal while diminishing the American appetite for rigorous enforcement. Before the aviation deal is permitted to move ahead, Congress should maintain pressure on the Iranian regime to change its behavior by linking the sale to demonstrable changes in the behavior that prompted sanctions in the first place.

Specifically, I recommend that Congress consider taking the following steps:

  1. Require presidential certification that commercial planes are only being used for civil aviation end-use.
  2. Prohibit any U.S. financial institution, including the Export-Import Bank, from financing any trade with Tehran while Iran remains a state sponsor of terrorism.
  3. Protect the integrity of the U.S. dollar from Iranian illicit finance by codifying existing restrictions, reporting on financial institutions involved in dollarization, and linking the termination of these measures to the end of Iranian support for terrorism and missile development as well as compensation for victims of Iranian terrorism.
  4. Reauthorize the Iran Sanctions Act, an important foundation of the sanctions architecture and legislation based on both Iran’s nuclear program and its support for international terrorism.

If the deal is permitted to proceed without these requirements, the Obama administration will in effect make one of America’s most respected companies and the banks that finance this deal accomplices to the world’s leading state sponsor of terrorism.