Trump’s MOU With Iran Does Not Relinquish U.S. Leverage
The interim relief Iran may receive will not be enough to solve the country's deep economic crisis.
By Esfandyar Batmanghelidj
Editor’s Note: Several hours after this analysis was published, further versions of the MOU were made public. U.S. sources provided a “final” version of the MOU to Axios and Iranian sources provided a final version to Amwaj. There are no substantive differences between the two versions and the analysis of the clauses presented below, which was based on an early draft text published by Bloomberg, continues to apply.
On Monday, the United States and Iran electronically signed a historic framework deal, ending the war in the Persian Gulf, and setting the terms for further negotiations towards a comprehensive peace agreement. The so-called “memorandum of understanding” or “MOU,” which will be formally signed on Friday in Switzerland, raises the prospect of a transformation in relations between the U.S. and Iran.
Despite the significant obligations the MOU places on Iran, including the commitment to “refrain from the threat or use of force” against the U.S., the reopening of the Strait of Hormuz, and the freezing of its nuclear program—steps that, in effect, eliminate the coercive pressure that Iran’s leaders have managed to impose on the Trump administration since February—the MOU is being roundly criticized, most vocally by Democrats eager to deny Trump a face saving way out of his blunderous war.
Senator Chris Murphy has characterized the MOU as a “surrender” to Iran, claiming that the early sanctions relief gives away U.S. leverage. Brett McGurk, who led Middle East policy during the Biden administration, has claimed that the initial sanction relief offered Iran “reduces incentives” for Iran’s leaders to pursue a full agreement.
There are many valid reasons to criticize the MOU. It is a loosely drafted document which raises significant questions over the sequencing of confidence building measures by the U.S. and Iran and provides little guidance for how the general commitments will be converted into technical terms in a comprehensive agreement. At best, it establishes the core principles for further negotiations. But the argument that the MOU relinquishes U.S. leverage is mistaken. Such claims fail to take into account both the tremendous economic challenges Iran’s leaders now face and also fundamentally misunderstand how sanctions leverage actually works.
Economic Commitments
Several media outlets, including Bloomberg, have published what is described as a “draft” text of the MOU. The idea that the U.S. and Iran would agree to a simple framework agreement before beginning technical negotiations is not new. This was the approach being pursued in May of last year by Omani, Qatari, and Saudi mediators eager to establish mutual understandings and trust ahead of technical negotiations. My understanding is that the text published by Bloomberg is close to the final version. Several clauses of the MOU pertain to economic concessions that the U.S. has promised Iran.
Clause 4 obligates the U.S. to lift “the naval blockade and prevent any interference or obstruction against the Islamic Republic of Iran.” In tandem, as stipulated in Clause 5, Iran “will immediately take steps to ensure that the movement of merchant ships from the Persian Gulf to the Sea of Oman and vice versa is resumed.” Both sides are expected to facilitate the “pre-war volume” of maritime traffic through the strait within 30 days.
As part of negotiations, Iran has demanded compensation for the damage incurred during the war. While it does not frame the commitment in terms of compensation, Clause 6 obligates the U.S. to develop a “comprehensive plan agreed upon by both parties for the rehabilitation and economic development of the Islamic Republic of Iran.” The plan is intended to provide Iran with financing of “at least $300 billion” for this purpose but does not specify how the funds will be raised.
During the negotiations last year, just prior to the 12-Day War in June, it became clear that the Trump administration had proposed the potential lifting of primary sanctions to incentivize larger Iranian concessions. This prospect is reflected in Clause 7 of the MOU, in which the U.S. “commits to ending, on a schedule to be agreed upon as part of the final agreement, all types of sanctions currently facing the Islamic Republic of Iran, including resolutions of the United Nations Security Council and the Board of Governors of the International Atomic Energy Agency, and all unilateral U.S. sanctions, both primary and secondary.”
Clause 9 dictates that while Iran will “maintain the status quo” on its nuclear program, meaning that it will not reconstitute its facilities or resume enrichment, the United States neither “impose new sanctions on Iran” nor “strengthen its forces in the region.”
Finally, the MOU offers Iran the prospect of immediate economic relief through two mechanisms. In Clause 10, the U.S. undertakes that it will “issue waivers for exports of Iranian crude oil, petrochemical products and their derivatives, and all related services, including banking, insurance, transportation, and the like” while negotiations over a comprehensive agreement continue. In Clause 11, the U.S. commits to make “fully available” Iran’s frozen assets, in accordance with “progress of negotiations towards a final agreement.”
Iran’s Deeper Crisis
A facile reading of these economic clauses has spurred much of the criticism of the MOU. There are claims circulating that Iran is poised to receive $300 billion, when in fact the MOU simply obligates the U.S. to devise a reconstruction plan, which could provide Iran access to financing over a period of years, if not decades. Similarly, there is intense focus on the prospect of immediate sanctions relief in the form of oil waivers. But far less consideration is given to why Iran might be incentivized to reach a comprehensive agreement because of the prospect of a complete lifting of all sanctions, including the U.S. primary embargo.
Critics of the MOU fail to understand that the war has dramatically altered Iran’s economic circumstances and that the limited relief promised by the MOU does not solve the profound challenges faced by Iranian policymakers. Estimates suggest Iran may have experienced up to $300 billion in physical damage during the war — a figure commensurate with the financing target of the reconstruction plan. The U.S. and Israel recklessly struck at civilian targets, including residential, commercial, and industrial buildings. One study found that two-thirds of the nearly 3,000 buildings damaged by airstrikes in Tehran were civilian.
Across the country, air strikes on steel plants, petrochemical facilities, and critical infrastructure such as desalination plants, oil depots, and road and rail bridges undermined the normal operation of the Iranian economy. As a result of this damage, and in light of the extensive disruptions to normal trade owing to the war and the closure of maritime traffic in the Strait of Hormuz, Iran’s economy is expected to contract by around 10% this year, according to an early estimate from UNDP which compared with a “no-war” baseline. The drop in economic activity will dramatically increase pressure on Iranian firms and households.
Since Trump withdrew from the Iran nuclear deal in 2018, reimposing broad unilateral sanctions on Iran, the Iranian economy has experienced a long period of stagflation. The impact of sanctions on export revenue and access to international reserves thrust Iran into a balance of payments crisis. Supply chain disruptions, pass through effects from currency devaluation, and monetization of the fiscal deficit combined to keep annual inflation levels elevated at nearly 40%. The saving grace for the economy has been that industrial output did not decline. Oil production and exports began to recover beginning in 2021 and non-oil manufacturing proved resilience. The resulting economic condition, typified by low growth and high inflation, was one of “stagflation.” Iran found itself in a slow-moving economic crisis, not in an accelerating economic collapse.
Much of the economic hardship caused by U.S. sanctions was borne by ordinary Iranians, who have seen their living standards fall, leading to a rise in economic grievances and an increase in the frequency of protests. But Iran’s leaders felt increasingly confident about their ability to muddle through the economic crisis by deflecting the costs of the crisis away from economic elites and by relying on repression to quell dissent — at least until the war. Today, as inflation rises further and the economy tips into a recession, Iran’s leaders are facing a completely new set of macroeconomic challenges. Getting the economy back on track will require significant economic stimulus and reconstruction spending, measures that are impossible without broad sanctions relief. Not only is sanctions relief necessary to tame inflation, it is also necessary to enable Iran to import the industrial equipment and machinery needed to rebuild infrastructure and bring major industrial facilities back on line.
This predicament is why Iranian officials have insisted on “compensation” for damage incurred during the war. The oil revenues that could be earned during the initial negotiation period, perhaps amounting to around $8 billion, are essentially meaningless when fully accounting for the cost of the war, a fact that critics of the MOU have failed to acknowledge. Iran’s leaders must gain more from diplomacy with the Trump administration if they are going to hoist themselves out of the deepening crisis.
Understanding Sanctions Leverage
Alongside their failure to understand why Iran would be incentivized to pursue a comprehensive deal, critics of the MOU have also failed to understand how sanctions leverage works, and why Iranian officials were unswayed at previous moments in which broad economic relief was on the table.
An absence of credibility has been the principal problem facing U.S.-Iran diplomacy since Trump reneged on the Joint Comprehensive Plan of Action (JCPOA). During the Biden administration’s long negotiations to restore the nuclear deal, U.S. negotiators were faced with intense Iranian skepticism about American commitments to roll back sanctions. Not only were Iranian officials concerned about the prospect of another U.S. president tearing up the nuclear deal for a second time, but they were also dismayed by the Biden administration’s insistence on maintaining maximum pressure sanctions on Iran throughout the course of the negotiations, a move that slowed the resumption of negotiations and also led to the talks taking place in an indirect format.
What this experience demonstrates is that sanctions leverage is not simply a product of coercive power and economic pain. Rather, to be useful in the context of diplomatic negotiations, sanctions leverage depends on another factor, the credibility of the commitments for sanctions relief and termination.
When talks did get underway, Iranian officials insisted on “guarantees” that the U.S. would fulfill its sanctions relief commitments, a demand that European officials facilitating the negotiations tried to address through some technical innovations in how sanctions relief would be sequenced, mainly by promising Iran greater up-front relief before requiring conclusive steps on the dismantling of key nuclear facilities.
Ultimately, while a complete agreement was agreed by the technical teams in August of 2022, Iran’s Supreme Leader refused to approve it. This was almost certainly a strategic mistake which contributed to the escalatory cycle that ultimately led to the February 2026 war. But the move was not completely illogical. In the wake of the Russian invasion of Ukraine and revelations about Russian-Iranian military cooperation, the political atmosphere had grown far more negative. Had the renewed nuclear deal been adopted and implemented in this environment, it was highly unlikely that Iran would receive the full economic benefits of the agreement, even if the terms of the deal promised broad sanctions relief. In this condition, many Iranian leaders preferred to remain under sanctions, and to delay the resumption of nuclear negotiations until a more conducive moment.
What this experience demonstrates is that sanctions leverage is not simply a product of coercive power and economic pain. Rather, to be useful in the context of diplomatic negotiations, sanctions leverage depends on another factor, the credibility of the commitments for sanctions relief and termination. The MOU addresses this issue directly in Clause 12 when it states that Iran and the U.S. “agree that an implementation mechanism will be established to oversee the successful implementation of and future commitment to the Final Agreement.”
Building Confidence
In this way, the MOU may actually represent a substantial improvement over Obama’s JCPOA and the aborted deal negotiated under Biden. Even before the initiation of technical negotiations, the MOU establishes a political commitment on the part of the Trump administration to repeal all sanctions targeting Iran and recognizes the need for such commitments to be subject to an oversight mechanism.
No U.S. administration has ever before made such a commitment, and the language underscores not only the profound ways in which the war has changed the strategic balance between the U.S. and Iran, but also the reality that President Trump, unlike any president before him, has a personal interest in transformative diplomacy with countries long considered U.S. adversaries. He may also be uniquely able to ignore criticism from across the political spectrum and from powerful lobbies as he pursues such deals, a fact demonstrated by the administration’s apparent lack of concern that the MOU may violate legislation such as INARA, which grants Congress a right of review over nuclear “agreements” with Iran.
Of course, Iranian leaders do not trust Trump. He tore up the nuclear deal, launched maximum pressure sanctions, and twice whipsawed between negotiations with Iran and launching wars against Iran. But the MOU is written in light of this distrust. The document establishes ambitious shared principles for a potential transformation of the U.S.-Iran relations, providing a set of mutual goals also endorsed by every major regional power except Israel. In pursuit of those goals, it obligates modest actions from both sides that can help build confidence and pave the way for the thorny technical negotiations necessary to craft a comprehensive deal. During the course of those negotiations, the U.S. will retain leverage over Iran, as the country’s economy continues to struggle. Whether Trump can effectively use that leverage depends entirely on whether he and his negotiators will acknowledge that Iran too enjoys latent leverage. The two sides are evenly poised in the negotiations. If, as the language of the MOU suggests, Trump is now willing to accept a win-win deal with Iran, diplomacy may yet have a chance.
Esfandyar Batmanghelidj is the Founder and CEO of the Bourse & Bazaar Foundation.
Section: (vision-iran-initiative) Photo: White House