Europe’s SPV: With or Without Oil?

Federica Mogherini and Javad Zarif (U.S. State Department via Flickr).Federica Mogherini and Javad Zarif (U.S. State Department via Flickr).

by Kaveh L. Afrasiabi

According to reports from Iran and Europe, the European Union is on the verge of launching the financial clearing house known as the Special Purpose Vehicle (SPV), which was initially announced on the sideline of UN General Assembly summit last September. The SPV aims to allow European companies to continue to trade with Iran in accordance with EU law and could be open to other partners. It is conceived as an alternative to the Belgium-based SWIFT financial network, with which the U.S. interferes at will. The Trump administration has put some 50 Iranian banks on its black list and SWIFT has agreed to comply with the U.S. demand to steer clear of those banks.

After an initial delay due to the hesitation of some European countries such as Austria and Luxembourg to host the SPV, according to the European media France and Germany have agreed to join hands in sponsoring it, a move described as a “strength in number” tactic to minimize the risk of U.S. retribution against the European powerhouses. Under the arrangement this would be a public sector SPV based in one state, France, while its management leadership would be drawn from the other, Germany. Federica Mogherini, the EU’s foreign policy chief, has promised that the SPV will become operational before the year’s end. This has been confirmed by Iran’s foreign minister, Mohammad Javad Zarif, after his latest consultations with Mogherini and other EU officials, stating that the SPV will “be registered soon.”

Salvaging the Nuclear Deal

Considered the linchpin of European counter-sanctions efforts aimed to salvage the Iran nuclear deal (Joint Comprehensive Plan of Action or JCPOA) after the unilateral U.S. withdrawal from the arrangement in August, the SPV’s initiative is a significant turning point, articulated by European officials in the name of Europe’s “economic sovereignty.” If the EU prevails in preserving the JCPOA through the SPV and related initiatives, such as the “updated blocking statute” designed to protect European businesses in Iran from U.S. extraterritorial sanctions, this would be a net plus for a post Pax Americana global multipolarism. The stakes are, indeed, very high and, by the same token, should Europe fail in its current bid to maintain the nuclear deal, then chances are this will have disproportionate ramifications in terms of the reassertion of U.S. global power. In a word, the battle over the JCPOA is a microcosm of the broader global reality at the crosscurrent of divergent potentials. 

No wonder, then, that Trump administration officials have taken off the gloves in their efforts to undermine European initiatives on Iran. Secretary of State Mike Pompeo expressed profound disappointment at the SPV announcement, calling it “one of the most counterproductive measures imaginable for regional and global peace and security.” Gordon Sondland, US ambassador to the EU, has gone one step further by labeling the SPA a “paper tiger.” The irony is, however, that while belittling the SPV as ineffective and “doomed to failure,” the U.S. is using threat tactics to scare European banks and companies away from daring to bypass U.S. sanctions via the SPV. Thus, Brian Hook, the head of State Department’s Iran Action Group, has made it abundantly clear that those that defy the US will incur severe punishment. “European banks and European companies know that we will vigorously enforce sanctions,” Hook has stated. 

But the SPV is tailored primarily for small and medium-size companies, particularly those that have little or no connection to U.S. banks or U.S. markets. Without the participation of big companies, such as auto manufacturers like Mercedes Benz and Renault—who have pulled out of Iran due to US sanctions—the SPV is unlikely to generate more than marginal impacts in terms of sanctions-busting and thus maintaining “normalized trade” with Iran as called for by the JCPOA. Both the German weekly  Wirtschafts Woche and Financial Times have  referred to it as a “humanitarian SPV” designed to facilitate the import of medicine, food, and other basic necessities to Iran, already exempted from sanctions by the U.S. Treasury Department yet still facing hurdles due to U.S. banking restrictions.

What about Oil?

A recent report by Reuters has quoted unnamed EU officials expressing doubt that the SPV will cover Iran’s oil trade. Foreign Minister Zarif flatly denied that report and insisted that oil trade was “the focus” of Iran’s negotiations with Europe, which remained confidential due to U.S. opposition. “If no money is deposited in an account for our oil sales, it is clear that no money will be available for trade. On the other hand, oil forms the main part of Iran’s exports, therefore, it seems that certain propaganda and fabrications are being formed to disappoint people,” Zarif insisted earlier this month. This corresponds with the news from Iran’s deputy oil minister Amir Hossein Zamaninia that “Oil and gas agreements between Iran and Europe have a good momentum and are proceeding well.” After all, three European countries—Italy, Greece, and Turkey—received temporary waivers from the U.S. for their Iranian oil imports, and the EU statement on the SPV clearly mentions the oil trade: “Mindful of the urgency and the need for tangible results, the participants welcomed practical proposals to maintain and develop payment channels, notably the initiative to establish a Special Purpose Vehicle (SPV) to facilitate payments related to Iran’s exports, including oil.” The big question now is how and why did this commitment to cover and protect Iran’s oil trade through the SPV evaporate, to the point that the special mechanism is being openly touted as a mere reinforcing mechanism to safeguard the humanitarian exemptions that are already in place? 

Lest we forget, last May Iran’s Supreme Leader, Ayatollah Khamenei, reacted to the U.S. decision to quit the JCPOA by laying down certain conditions for Iran’s continued compliance with the agreement, one of which was Europe’s guarantee of oil receipts from Iran. “Europe should fully guarantee Iran’s oil sales. In case Americans can damage our oil sales…, Europeans should make up for that and buy Iranian oil,” Khamenei insisted, warning that Iran could resume its full-scale nuclear work if these demands were not met. Since then, Iran has repeated that warning, most recently through Ali Akbar Salehi, the head of Iran’s atomic energy organization. Complaining of Europe’s tardiness in delivering assurances to Iran, Salehi in his recent European tour warned that “if words are not turned into deeds, then … it is very ominous, the situation would be unpredictable.” 

By all accounts, this is a dire warning that European policy-makers ought not to ignore. Iran’s patience with Europe is running thin, to the detriment of moderate Iranian President Hassan Rouhani and his foreign policy team, headed by Zarif, who is threatened with impeachment in the Iranian Parliament by hard-liners critical of the government’s foreign policy. Iran is for all practical purposes in an economic war with the U.S., which has scared away billions of dollars of foreign investment from Iran and openly boasts of “plummeting” Iranian oil exports due to its “maximum pressure” approach, which aims to cripple or “bust up” Iran’s economy. After 8 months of waiting, other JCPOA signatories, including the European Union, will either live up to Iran’s expectations or the deal’s fate will be sealed in 2019, likely with an “Iran Nuclear Crisis II” harboring the potential for a military confrontation. 

Uncertainty on the Road Ahead

European policy-makers should know better than anyone the negative ramifications of such a scenario for their security, in terms of spill-over instability, a greater inflow of immigrants, and so on. Europe’s best bet is to muster the necessary political will to stand up to Washington and its threats of counter-measures, such as penalizing banks that participate in the SPV. This will not be easy, given how Europe today is roiled by Brexit uncertainties, protests in France, and rise of far-right populist parties across the continent. A weakened and divided Europe is clearly antithetical to the goal of asserting identity and autonomy vis-a-vis a United States that has turned protectionist and anti-globalist under the Trump presidency.

The EU has the right to file a complaint with the World Trade Organization (WTO), citing U.S. violations of its obligations under the WTO agreements, just as it did in 1996 with respect to Cuba. If it were to prevail, the EU would have the right to impose countervailing duties on U.S. goods to compensate for US damages.

The problem is that EU has already proven ineffective in its other pro-JCPOA measures. It has, for example, added Iran to the list of countries eligible for loans and investment by the European Investment Bank (EIB). Yet the EIB’s president, Werner Hoyer, has openly defied the EU’s guidance and cited the bank’s heavy involvement with U.S. financial centers to dismiss the possibility of his bank’s activity in Iran. The blocking regulation, meanwhile, does not appear to have made any tangible impact in terms of encouraging private European companies to return to the Iranian market.

Assuming that the SPV is finalized and up and running soon, then it must provide clarification on several important questions. It must use general sector classification guidelines to determine the scope of its activities. It will need to explain how European companies are to be legally protected in the event of U.S. reprisals and threats to their reputations. It will need to lay out a dispute resolution mechanism. What role will European governments play in financially supporting European commerce with Iran? How much autonomy will the SPV have? What kinds of transparency rules will it adopt, given the risk of U.S. backlash?

Sustaining Iran-Europe Dialogue

Meanwhile, there is a great deal of on-going dialogue and interactions between Iran and Europe, including talks of fostering future nuclear cooperation, which have yet to yield practical results. Of course, this is not to discount the importance of such dialogue—including the high-level Iran-Europe dialogue on Yemen–which serves as a confidence-building measure and can forge closer ties between the two sides. Europe and Iran enjoy geographical proximity, in contrast to the ‘tyranny of distance’ between Iran and the U.S. Iran fits the description of a European “near neighbor” that can be added to Europe’s current “neighborhood policy” —although that policy has been indirectly upgraded with the recent implementation of an EU “global strategy” that cites the defense of the JCPOA as an important part of its agenda.

In a word, Europe and Iran are destined to sustain their ties of “complex interdependence” and no amount of U.S. manipulation can possibly succeed in reversing the present momentum for a closer Iran-Europe connection. Essentially this means that time is against the U.S. sanctions on Iran, and even a limited humanitarian SPV can become the springboard for other SPVs covering a greater array of commodities, including energy. The SPV may start small, but most likely it will be a gateway for the steady flow of goods and currencies between Iran and Europe following its model. The illogic of the U.S. opposition to the SPV is that in addition to underestimating European resolve it also acts against the tide of history.

Kaveh Afrasiabi has taught at Tehran University and Boston University and is a former consultant to the UN Program on Dialogue Among Civilizations. He is the author of several books on Iran, Islam, and the Middle East, most recently Iran Nuclear Accord and the Remaking of the Middle East (2018) and the co-author of the forthcoming Trump and Iran: Containment to Confrontation.

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5 Comments

  1. Wishful thinking from KA as usual to help Ayatollahs remain in Iran. Why doesn’t he mention the bigger sanctions the Ayatollahs have placed on Iranians for 40 years.

    Just because you do not like US policies, don’t like Ayatollahs. Unless you want Ayatollahs to remain in Iran. That is the message to all those US haters in Europe.

    Iran’s economy has collapsed. They are soon to be the Venezuela of Middle East. It has to get ugly before we can get rid of these madmen non-violently. Hopefully they will implode.

  2. Trump may survive the soft coup currently underway in USA via Mueller probe. Trump may be re-elected. Europe would be wise to consider American public opinion that supports dissolving NATO and leaving Europe to defend itself. Iran needs to be done with the Ayatollahs and if Europe ends up on the wrong side of this fight, there will be permanent damage – if not a complete rupture – to the relationship between America and Europe.

  3. What is keeping Iran from walking out of the nuclear deal now that the West has reneged on its promises? Any outsider can see this is borderline ridiculous. A deal broken by one side is not worth honoring by the other side and no one can blame Iran if it set fire to it as some of its lawmakers did.

  4. Very good article. Let’s hope that Ms Mogherini will be successful in finding a very solid and protected route for banking transactions with Iran which bypasses the US unreasonable primary and secondary sanctions.

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