by Ellie Geranmayeh
The Iran nuclear agreement marked its third anniversary in a gloomy state. Despite repeated attempts to keep him on board, US President Donald Trump withdrew the United States from the deal – signed on July 14, 2015 under the formal title the Joint Comprehensive Plan of Action (JCPOA) – and thereby pulled the rug from under Europe’s feet. European policymakers are now focused on salvaging the agreement. For a growing number of European corporate decision-makers, the deal is already dead. In reality, the JCPOA is on life support and the next few months could open either its next or final chapter. Despite the significant challenges they face, European governments have some limited time to avert the deal’s collapse.
In 2015, global powers unanimously hailed the agreement as a historic achievement that proved the effectiveness of multilateral diplomacy. Indeed, the JCPOA provides unprecedented oversight of Iran’s nuclear program. Furthermore, the agreement’s preface states that the parties anticipate it will “positively contribute to regional and international peace and security”. Many hoped that the resolution of the nuclear dispute would result in a new understanding between the West and Iran, opening a pathway for detente rather than confrontation. Relations between Europe and Iran have certainly made gains in this direction, but the Trump administration’s maximalist stance on Tehran has created an extremely hazardous environment for all remaining stakeholders in the nuclear deal.
Washington’s Pressure Package
Since the formal US exit from the agreement in May this year, the Trump administration has sought to sabotage European efforts to sustain the agreement. This has involved a policy of relentlessly threatening and otherwise pressuring any country or company inclined to maintain economic channels with Iran, by weaponizing US secondary sanctions. Reportedly, the US administration recently rejected an appeal by the EU foreign ministers to negotiate broad exemptions to such sanctions for European companies. The US clearly intends to specifically target European trade with Iran – although there remain questions about its ability to do so and the reach of US enforcement.
Together with its allies in the Middle East – particularly Israel, the United Arab Emirates, and Saudi Arabia – the Trump administration is increasing its efforts to squeeze Iran on multiple fronts. As a new report by the European Council on Foreign Relations outlines, this anti-Iran front views the collapse of the JCPOA as the trigger for a wider policy aimed at confronting Iran. The policy seeks to cause a deep economic crisis in the country, creating domestic divisions intended to bring about regime change. As part of this, the Trump administration has signaled its willingness to go further than any previous administration by choking off Iran’s oil exports.
European Resistance Mostly Political Rather Than Practical
European leaders’ have repeatedly stated their commitment to upholding the JCPOA. Policymakers are making genuine efforts to find an economic package that minimizes the impact of looming US secondary sanctions to sustain Iranian compliance with the deal. But these efforts have yet to generate an environment in which a reasonable number of European entities can make a firm commercial decision to continue doing business with Iran.
Although the European Union’s leaders remain unified in their support of the JCPOA, divisions are emerging between the 28 member states over how far they are willing to test the limits of US secondary sanctions. Moreover, several proposed ideas for safeguarding European companies against extraterritorial US sanctions would require months or even years to implement, as they require alternative financial mechanisms that are ring-fenced from US exposure. European governments are also falling short in the political momentum needed to salvage the nuclear deal. For instance, Germany and the United Kingdom are now far more preoccupied with challenges at home than they were in 2015, and EU institutions are focused on averting further transatlantic divide on trade and NATO.
Unsurprisingly, many European firms have little confidence that European policymakers will create the conditions necessary to protect them from US secondary sanctions, including by providing alternative mechanisms for doing business with Iran that are compliant with US sanctions. This has resulted in a wave of pre-emptive corporate over-compliance with impending US regulations and a decline in European business with Iran even before sanctions come into force.
Iran’s Patience Wearing Thin
This month, the foreign ministers of France, the UK, Germany, Russia, and China (the E3+2) met with Iran to discuss political and economic pathways through which they could safeguard the JCPOA. And Iran’s president, Hassan Rouhani, visited Austria and Switzerland to deliver two overarching messages. The first was that Iran’s patience was wearing thin and its full compliance with the JCPOA was only feasible if it continued to receive tangible benefits from the agreement. The second was that Tehran would abandon the agreement if it became unable to maintain oil exports and, accordingly, its share in global energy markets.
Rouhani’s visit followed a tense OPEC meeting, Trump’s call for Saudi Arabia to increase oil production, and weeks of speculation about the extent to which the US could pressure other countries to halt exports of Iranian oil. In Europe, Rouhani stated: “assuming that Iran could become the only oil producer unable to export its oil is a wrong assumption”.
The leader of Iran’s Islamic Revolutionary Guard Corps (IRGC) was quick to emphasize that elite forces were prepared to act on Rouhani’s words, noting: “we will make the enemy understand that either everyone can use the Strait of Hormuz or no one”. Iran has issued such warnings in the past, including during the 1980-88 Iran-Iraq war and in 2011 in advance of the EU and US embargo on Iranian oil. Iran may retaliate against any US attempts to curb its oil exports by disrupting regional crude shipments in the strait, through which 35% of all seaborne oil exports pass. Such measures seem unlikely for now – given the risk of military escalation with US and regional naval forces, and of damaging relations with China and Russia, which wish to keep energy markets stable.
Rouhani’s statement suggests that Iran is hardening its position. Qassem Suleimani, commander of the IRGC’s Quds Force, unexpectedly welcomed Rouhani’s threat.
Despite the significant political and economic challenges shaping Iranian domestic politics, the Trump administration’s maximalist posture may inadvertently lead to a consensus between the Rouhani government and the military elite on how to respond to national security threats. This may abruptly or gradually prompt the Iranian political establishment to shift away from diplomacy with Europe and towards confrontation with the US. Calculations on whether the JCPOA can be sustained will heavily influence this decision.
Iran is likely to continue implementing the JCPOA and engaging in diplomacy with Europe for at least a few more months, as it assesses the impact of US sanctions on its economic relations with Europe, China, and India (particularly in relation to oil exports), as well as the likely trajectory of US domestic politics in the aftermath of midterm elections.
Necessary European Action
Unless one side backs down, Tehran and Washington will escalate their dispute in a manner that poses real risks to European interests in non-proliferation, security in the Middle East, and global energy supply. It is imperative that in the coming weeks and months European governments redouble their efforts to sustain the nuclear agreement and ease regional tensions.
Firstly, they should continue to explicitly warn the US and their partners in the Middle East that they will not support a strategy aimed at destabilizing Iran internally or pursuing regime change in the country. Such an approach risks destabilizing a country of 80 million people close to Europe’s border. At the same time, European governments should address their many areas of disagreement with Iran – most urgently, those involving regional security. As ECFR’s new report recommends, this should be done in a strategically careful manner that avoids fueling further conflict in the Middle East.
Secondly, European governments must strive to fulfill their commitments under the JCPOA. They have made a good start by incorporating US secondary sanctions into the EU Blocking Regulation, due to be amended in August. But they need to quickly implement more practical solutions that will affect companies’ calculations on Iran (for a detailed list of recommendations, see the box below). Otherwise, there will be an exodus of European firms from the Iranian market.
European efforts to keep Iran in the JCPOA will face major challenges, including US attempts at sabotage. The Trump administration will look to use the JCPOA as a bargaining chip in its bilateral negotiations with Europe, China, and Russia on trade policy, tariffs, and sanctions. Therefore, European leaders must make important decisions about how far they are willing to go to secure a nuclear agreement borne out of more than a decade of diplomacy. They can only do so if they act collectively and firmly. Yet they must do so to prevent escalation between the West and Iran that will have disastrous consequences for global security.
- The EU/E3 should accelerate measures to establish a foundation for sustaining financial channels (including SWIFT) with Iran before November, when the US will introduce secondary sanctions designed to hit Iran’s oil and banking sector. In this, European central and state banks will have act as a bridging mechanism. While there are ways of moving funds to and from Iran, state banks will have to engage in operations that provide settlement and clearing facilities. At the same time, European governments should remind Iran that their banking relationship can only continue if the country follows the Financial Action Task Force’s road map.
- The EU and member states should devise a financial framework within which European companies (particularly small and medium-sized enterprises) can do business with Iran while complying with US sanctions. Technical experts have called for the creation of special purpose vehicles or “gateway banks” (supported by European state banks). These mechanisms will need to avoid direct links between Iranian entities and European private banks. Cooperation on this should extend into a larger structure that crosses a coalition of willing member states, thereby sharing risk between them.
- The EU and member states (particularly leading importers of Iranian oil such as France, Greece, Italy and Spain) should increase their coordination with China and Russia on measures to minimize the impact of US secondary sanctions on Iranian oil exports. European countries should firmly reject any proposed US framework for significant oil reduction from Iran in return for waivers to continue limited oil exports. This would amount to legitimizing the US secondary sanctions architecture. Russia and Iran are already in talks over significant Russian investment in the Iranian energy market, which could reportedly involve increased purchases of Iranian oil that could be reprocessed for global distribution via Russia. The E3 and China, together with other relevant private sector entities, should investigate whether it is feasible to offset potential reductions in Iranian oil exports through oil-swap arrangements with non-signatories to the JCPOA such as Turkey and Iraq.
- The European Commission should incorporate clear guidelines for European companies into amendments to the EU Blocking Regulation. The regulation includes a compensation mechanism (Article 6) that allows European entities to seek compensation if they become subject to extraterritorial US financial penalties. As this mechanism has rarely been enforced, its limits remain unclear. The European Commission should work with member states, regulators and the private sector to clarify and facilitate access to compensation, particularly for small and medium-sized enterprises that do business with Iran.
- The European Commission should mandate a competent body to facilitate legitimate European business with Iran. The body should provide comprehensive oversight of the US Treasury’s enforcement of extraterritorial sanctions. This should involve a reporting mechanism that assesses the legal and other tactics the US Treasury adopts against European companies, pursuant to secondary sanctions. The body should also assist European companies subject to US investigations.
- The European Commission should address discrimination and over-compliance relating to trade and investment with Iran in the European banking sector. As this problem is a direct consequence of US secondary sanctions, European leaders should primarily address it through regulatory measures that set a burden of proof requiring company boards to certify that their decisions are legally grounded under European law. The Blocking Regulation can provide a foundation for such measures. European regulatory bodies should provide greater oversight of European commercial banks’ decisions to block the flow of funds relating to Iran, reducing the likelihood that such decisions will be arbitrary.
- The E3/EU should not invest heavily in attempts to negotiate with the US administration on exemptions from secondary sanctions, given the Trump White House’s clear lack of interest in treating European allies amicably. The E3/EU should shift to a more firm and robust negotiating posture similar to their stance on US trade tariffs. They should warn the US about the costs for Western energy consumers of reducing purchases of Iranian oil at a time when Libyan, Venezuelan, and Nigerian exports have been disrupted, given that it remains uncertain whether Saudi Arabia and Russia will increase production to offset this disruption. European governments should limit the US Treasury’s space to demonstrate the power of sanctions in Europe. EU member states should urgently engage in private consultations to prepare countermeasures against US attempts to pressure SWIFT and its board members or to target European entities – using specially designated nationals lists – for doing business with Iran deemed legitimate under EU law.
Republished, with permission, from the European Council on Foreign Affairs.