Europe’s Trade With Iran Is Worth Saving

Can trade between Europe and Iran be saved? French President Emmanuel Macron’s $17 billion Hail Mary pass came up short. Instex, the so-called “special purpose vehicle” to evade American sanctions, is stuck in the doldrums. Most European companies are steering clear of business with Iran. European imports of Iranian oil have dropped to zero.

As the Trump administration’s “maximum pressure” sanctions campaign rolls on, it might seem like Europe not only lacks the means to defend its trade with the Islamic Republic, but also that there’s little left to defend. 

But a closer look at the trade data tells a different story. European technology is deeply embedded in Iran’s economy, particularly in the country’s large industrial sector, which employs around one in every three Iranian workers. (By comparison, the oil sector employs around one in every 200.) The export of European parts, machinery, and transport equipment—captured under Chapter 7 of the Standard International Trade Classification system—is arguably a more important indicator of Europe-Iran trade relations than Europe’s purchases of Iranian oil.

The value of European SITC 7 exports to Iran has halved since the Trump administration reimposed secondary sanctions in November 2018. Looking to European Union totals, the average monthly export value was $970 million in the 12 months prior to the reimposition of sanctions, falling to an average of $433 million in the subsequent 10 months for which data is available. Iran’s industrial sector is largely dominated by state-owned enterprises, most of which are included in the U.S. Treasury Department’s sanctions list and therefore off limits for European firms that want to maintain commercial links with the U.S.

But even with these significant barriers, Europe continues to export billions of dollars of parts, machinery, and transport equipment to Iran. Exports to private companies are not proscribed under U.S. sanctions where sector-wide sanctions, such as those on Iran’s energy sector, are not in place. This means that so long as European firms are able to find a bank willing to accept payment for exports—an increasingly difficult task—trade can take place.

This trade is worth defending and European officials should not be disheartened by their recent struggles to sustain bilateral trade in the face of American sanctions. The persistence of this trade also makes clear that Iran, cannot simply give up on Europe, despite the political rhetoric of Supreme Leader Ali Khamenei.

There is a common misconception that the multilateral sanctions campaign which ran from March 2008 to January 2016, and which included EU sanctions, forced Iran to turn away Europe in favor China. While Iran’s trade with China grew considerably in this period—Chinese exports of parts, machinery, and transport equipment grew from $2.9 billion in 2007 to $7.8 billion in 2015—similar growth can be seen in most industrializing countries of the world. After all, the sanctions period corresponded with the emergence of China as a major exporter of high-value manufactured goods.

However, European exports to Iran rebounded immediately after sanctions were lifted. The relative proportion of Chinese-to-European exports in the SITC 7 category fell from 2.58 in 2015 to 1.13 last year. Despite China’s newfound dominance, Europe was able to win back much of its share of Iran’s imports of parts, machinery, and transport equipment.

Why? Because of a kind of path dependency. When Iranian industry went through its last major phase of modernization, in the early 2000s, European firms took the lead in establishing factories and transferring technology. French engineers got Iran’s automotive sector in gear, German engineers got locomotive manufacturing on track, and Italian engineers got the food industry cooking.

To keep those assembly lines running, Iran needs European inputs. Even if Chinese firms have become major suppliers, they have not yet been able to wean Iranian industry away from dependency on Europe. In large part, this is because the previous round of sanctions was at its peak intensity for only 20 months—from January 2012 to November 2013, when the nuclear negotiations resulted in some initial sanctions relief, including the suspension of sanctions on the automotive sector.

As a result, Iran’s industrial sector has never felt it had to fully eliminate its reliance on European parts and technology. It takes years to set up factories and supply chains; it will take years for sanctions to undo the path dependencies established through historical trade ties.

Even if the overall value of European trade with Iran has fallen in both absolute and relative terms, Europe retains a crucial and assured role in the future of the Iranian economy. Iranian politicians—however disappointed with European efforts to withstand U.S. sanctions—cannot simply cast aside relations with the West. This gives Europe unique leverage.

As Iran announces further reductions of its commitments under the nuclear deal, some in Europe will call for the reimposition of EU sanctions, which would devastate industrial trade with Iran. Iranian authorities no longer believe that the U.S. can impose meaningful economic pressure on Iran—but Europe can.

This makes Europe a more consequential party to any negotiations than is widely appreciated. Whereas the U.S. reimposed sanctions and then sought talks, Europe ought to take a different approach. Rather than making the future of the nuclear deal beholden to a $17 billion credit line or the innovations of Instex, Europe should put its regular trade with Iran at the center of its diplomacy. The practical need for parts, machinery, and transport equipment can inspire pragmatism at a time of rising tensions.

Photo: MAPNA

New EU Top Diplomat Will Seek Continuity on Iran—if Circumstances Allow

While the recent nominations for European Union’s top posts sparked some controversy, there is broad consensus in Brussels that Josep Borrell, the foreign minister of Spain, is a worthy nominee to replace Federica Mogherini as the EU’s High Representative for foreign policy.

The European Parliament will vote on the new European Commission in October. Prior to that, Borrell—who will also wear the hat of the Commission’s vice-president—will have to face hearings in the Parliament’s foreign affairs committee.  These hearings are not a mere formality and nominees have stumbled in the past. But given Borrell’s profile, there is little doubt he will pass muster.

In Borrell’s favor speaks his ample experience in Spanish and European politics. He is a veteran member of the Spanish Socialist party. He honed his skills in Brussels as the president of the European Parliament from 2004 to 2007. Since June 2018 he is the foreign minister of Spain. To both his supporters and detractors, Borrell is known as an intellectual powerhouse. Although some diplomats fret that he may be “too outspoken” for the High Representative role, his directness could help Europe’s foreign policy find a voice that goes beyond bland statements reflecting the minimum consensus between EU member states.

Borrell’s statements made after securing the nomination show that he sees saving the Joint Comprehensive Plan of Action (JCPOA) as an immediate priority for the EU. In comments to the Spanish media, he expressed hope that  “sanity will prevail” and that “worst will be avoided” in the brewing crisis following the violation of the nuclear deal by the United States. He stressed that Iran fulfilled its part of the agreement, and that the recent surpassing of the limits of the low enriched uranium are due to “technical reasons”, not Iran’s “will to violate the pact.”

He also criticized the decision of the United Kingdom to detain a tanker carrying Iranian oil—allegedly at the request of the United States—off the coast of Gibraltar. While Borrell’s comments must be understood in the context of the long-running dispute between Madrid and London over the status of Gibraltar, the fact that Spain protested a seizure of a tanker with Iranian oil says as much about its rejection of the extra-territorial American sanctions as it does about its feelings of its sovereignty being infringed by the British.

These are not random views expressed in reaction to particular political events. Rather, they are reflective of Borrell’s broader outlook.  The fact that Spain is traditionally one of the EU countries with a pragmatic and moderate view of Iran—a group that also includes Sweden, Finland, Belgium, Austria, Netherlands and, under the previous government, Italy—certainly plays a role. As surely does Borrell’s socialist background. His predecessors in the role of the EU foreign policy chief—another Spaniard Javier Solana, Catherine Ashton, and Federica Mogherini—each hail from this political family and each endeavored to pursue nuclear diplomacy and broader engagement with Iran.

Borrell himself displayed a nuanced understanding of Iran on the occasion of the 40th anniversary of the Islamic revolution in February of this year.  In a series of tweets savaged by the right-wing media as “appeasement of the ayatollahs” he noted how Iran’s literacy rates increased since the revolution from 35 percent to 84 percent. He also recognized Iran as a key power in the Middle East, while contrasting the United States’ attitude to Vietnam and Iran, two countries that “inflicted heavy defeats on the super-power in 1970s.” In Borrell’s assessment, while relations with Vietnam are “now excellent”, Iran is still “an obsession of the American government, with no diplomatic relations and Trump’s decision to withdraw from the nuclear agreement and re-impose sanctions.” In conclusion, Borrell stated that Iran “could survive the sanctions if Trump is not re-elected, but, in the opposite case, could re-active its nuclear program and multiply its interventions in the region.”

Such views led some Israeli and Emirati media outlets to accuse Borrell, preposterously, of being “a supporter of the Iranian regime,” conflating his advocacy for a dialogue with Tehran with the defense of its regime—a favorite tactic of those opposed to diplomatic engagement with the Islamic Republic.

Borrell’s views on Iran suggest continuity with Mogherini’s pro-engagement policy. However, the Spaniard will face two serious challenges on this path. First, he must preserve unity among member states facing the Trump administration’s relentless “maximum pressure” campaign. Already, some European states are showing signs that they may be inching closer to Washington, among them Brexiting Britain and the populist-led Italy. Some eastern European countries, like Hungary and Poland, which maintain excellent relations with both the Trump administration and Israeli prime minister Benyamin Netanyahu, may follow suit.

Borrell was outspoken in his steadfast opposition of the United States’ sanctions on Iran. If his previous statements are any guide, he could well be inclined to push back more aggressively against American unilateralism than has been the case until now, but his ability to rally the member states will be tested. Borrell himself pointed to the unanimity rule as a major impediment for the EU to play a more effective international role. One solution could be for a wider group of member states to join,the “E3” countries of Britain, France and Germany and become shareholders in INSTEX, the mechanism devised to support  bilateral trade with Iran.

The second challenge Borrell faces has to do with the fact that by the time he assumes his position in November, (provided the European Parliament approves the new Commission), he could well face a scenario very different from today. If Iran does not obtain sanctions relief from Washington, nor economic assistance from the remaining parties to the JCPOA, it may well follow through on its warnings and pursue escalation, whether by reducing its compliance with the JCPOA or by retaliating against American allies in the Persian Gulf.

Even if European governments blame the United States for igniting the crisis, they can hardly be expected to condone continued Iranian non-compliance with its commitments under the nuclear deal. The next couple of months will thus be crucial in determining whether the tensions between America and Iran will de-escalate, or degenerate into military confrontation. For now, piloting the EU through this crisis remains Federica Mogherini’s responsibility. Thus, Borrell’s ability to steer the EU policy on Iran will depend not just on his own views, but also on the nature of the crisis he will inherit.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the positions of the European Parliament.

Photo: Wikicommons

How Europe’s Forthcoming SPV Can Help Iran Fight Inflation

Europe has yet to launch its special purpose vehicle (SPV) to support trade with Iran and while Iranian stakeholders grow increasingly impatient, some have begun to question the likely impact of the new mechanism. The chief complaint is that the initial SPV, if limited to humanitarian trade, will not have a meaningful economic impact for Iran, which had sought to maintain oil exports to Europe in the face of US sanctions.

As recently argued in a joint report from Bourse & Bazaar and the European Leadership Network, the creation of a humanitarian SPV (H-SPV) has important advantages from the standpoint of protecting the new trade mechanism from interference by the United States. A focus on non-sanctionable trade will enable Europe and Iran to develop a more robust mechanism that delivers practical value for businesses. When a truly useful mechanism has been devised, subsequent SPVs can be established to facilitate what the United States considers sanctionable trade. 

Nonetheless, in order to be welcomed by a broad spectrum of Iran’s political and business establishment, the initial SPV, especially if limited to non-sanctionable trade, must demonstrate a positive impact on Iran’s economy in the near term. An examination of the nature of Europe-Iran trade and the impact of this trade on Iran’s currency markets, suggests that the SPV could have a significant and stabilizing impact on Iran’s economy by helping to fight runaway inflation, the foremost economic challenge facing Iran’s leadership.

Trade Deficits and Inflation

Since early 2018, Iran has been struggling to contain rising inflation exacerbated by rapid currency devaluation. Rising costs of imports have impacted the costs of goods in the consumer basket. The year-on-year increase in the consumer price index in Aban (October 23 - November 22), the most recent period for which data is available, was 39.9 percent. This increase was driven by year-on-year rises in categories including food and beverages (59.9 percent), tobacco (150.8 percent), clothing and footwear (48.5 percent), and furnishings and household goods (83.1 percent). The increase in the health category, which includes medicine, was a significant 19.6 percent.

These categories represent the daily needs of Iran’s households. They are also, broadly speaking, goods which do not fall under the restrictions of US secondary sanctions. Not only are the goods themselves not sanctioned, but the larger role of the private sector within the food, pharmaceutical, and FMCG sectors in Iran means that the Iranian corporate entities active in these sectors are typically not subject to secondary sanctions. On this basis, a humanitarian SPV which would focus on non-sanctionable trade, would be well-suited to support Europe-Iran trade related to these elements of the consumer basket.

While Iran does manufacture many of these goods domestically, overall consumption still relies on a significant volume of imports of food and medicine, with the European Union (EU) the most important trading partner. Even the domestically produced products rely on imports of raw materials which mainly originate in the EU. In 2017, the most recent full year of trade without sanctions, Iran faced a trade deficit with Europe of just under EUR 1 billion in the food and beverage, medicine, clothing and footwear, and furniture categories, based on imports of EUR 1.3 billion and exports of approximately EUR 300 million. Importantly, this figure does not include Iranian imports from Switzerland, a major source of pharmaceutical products with about as much export volume as Germany. But given that the SPV is an EU undertaking, and given that the Swiss are working on a separate banking channel to support their humanitarian trade with Iran, it can be kept separate for the purposes of this analysis.

Beyond humanitarian goods, Iran has typically run a trade deficit of about EUR 1 billion with Europe, even in those years that Iran has been able to export significant volumes of oil to European buyers. The trade imbalance with the EU has a direct impact on inflationary pressures in three areas. First, the euro is a strong currency and the rapid devaluation of the rial has made imports considerably more expensive over the last year. Second, purchasing European goods generally involves higher transaction costs for Iranian importers related to the restrictions on banking channels between Europe and Iran. Finally, Europe is the only source for a number of imports, particularly medicines, meaning that a fall in exports will have a direct and often unmitigable impact on available supply in Iran, pushing prices higher and creating black markets for some specialized medicine. All three phenomena can be seen in the Iranian market today.

There are other indirect drivers as well. As is common for countries at the same level of development, Iran’s process of industrialization is import-intensive. New technologies are acquired to produce a wider range of foods, medicines, and consumer goods domestically, often in accordance with licenses for European formulations or technology. Iran imported EUR 5.5 billion in industrial machinery and equipment in 2017 in order to support domestic industrial capacity. When this equipment or the relevant services, spare parts and training are unavailable, it has a knock-on effect on manufacturing output, available supply, and the market price for consumers.

On one hand, the fall of Iranian imports of European machinery from their 20-year high of over EUR 8 billion in 2004, suggests that Iran is increasingly sourcing such machinery from other markets, especially China. But, Europe retains a technological advantage over China for the manufacturing of food and medicine and the most popular brands in Iran in these categories are often European brands or formulations. This means that substitutions cannot be easily made for the equipment necessary in the domestic production of these goods. Moreover, Iran also relies on European technology for the storage and distribution of food and medicine across the supply chain.

The SPV Intervention

Given these challenges, the appeal of Europe’s SPV, if properly operationalized, is clear. The SPV can help alleviate inflationary pressures by empowering European and Iranian policymakers to better manage foreign exchange risks, reduce transaction costs, and address the trade deficit, particularly around key items within the consumer basket.

First, in the area of foreign exchange, the SPV could reduce pressure on the Central Bank of Iran to source and allocate euros for importers of so-called “essential goods.” Presently, delays in the allocation of foreign exchange are leading to payment issues on the part of Iranian importers of both food commodities and pharmaceuticals. In one manifestation of these delays, cargo ships are remaining anchored off of Iran’s coast for as many as sixty days, incurring demurrage costs.

If the SPV oversees a ledger of trade between Europe and Iran, a role which some have compared with that of a “clearing house,” it would be able to coordinate a version of book transfers, which would enable Iranian importers to pay European exporters indirectly with the SPV coordinating a euro-denominated payment by a European importer on behalf of the Iranian importer. In turn, the Iranian importer would make a rial-denominated payment on behalf of the European importer to its counterparty in Iran (an exporter). Through such a mechanism, there would be no need for the Central Bank of Iran to source and allocate Euros for the purchase by the Iranian importer, as monies already in Europe would be used to make the payment. In this way, reducing demand for euro allocations among Iranian importers should help the CBI more effectively operate the NIMA system, its central marketplace for foreign exchange, thereby reducing the significant inflationary pressures arising from foreign exchange markets.

In a related fashion, the facilitation of book transfers by the SPV would also help eliminate the additional transaction costs currently incurred when arranging cross-border financial transactions between Europe and Iran. Due to the higher compliance risks associated with accepting Iranian-origin funds, the few European banks that do continue to transact with Iran impose fees on clients of up to three percent of the total transaction amount. Some routine and low-risk trade currently facilitated by the few correspondent banking channels that remain between Europe and Iran could be shifted to the SPV, reducing the compliance costs associated with cross-border transactions that can depress export volumes.

Finally, the SPV will only truly succeed if it is operationalized alongside an effort to shrink Iran’s approximate EUR 1 billion trade deficit with Europe in non-sanctionable goods by increasing Iran’s non-oil exports. To be clear, it is highly unlikely that the full volume of Europe-Iran trade will run through the SPV. Where possible, companies will certainly favor using normal channels, facilitating payments through the small number of European banks that will remain willing to process payments for humanitarian trade. Nonetheless, the fundamental problem faced by Iranian importers is access to the euros necessary to sustain purchases from Europe. In this case, in the absence of oil sales, foreign finance, or foreign direct investment, Iran’s exports to Europe will remain the only reliable source of euros for the Central Bank of Iran which is responsible for making foreign exchange available to Iranian importers. 

A New Vision for Europe-Iran Trade

As such, it should be a primary goal of the SPV to increase the volume of European imports from Iran, helping to minimize the trade balance and increase the supply—and thereby reduce the cost—of Euros for Iranian importers. This may seem a difficult task. Iran’s manufacturing output is generally inferior in quality and higher in cost than that available from EU member states and from other countries with active trading relationships with the bloc.

But there are a few product categories where Iranian producers could regain or establish market share in Europe. In 2000, Iran exported EUR 316 million worth of “floor coverings” to Europe, a figure which primarily reflects the sale of traditional Persian wool rugs. By 2017, the sales amounted to just EUR 28 million. The collapse in Persian rug exports may reflect changing tastes among European consumers, as similar decreases can be seen for the same product category as exported by India, Pakistan, and China. An industry-led campaign to boost the popularity of Persian rugs among younger consumers could help reverse the trend.

Iran’s loss of market share in the export of key foodstuffs is harder to explain. European consumption of pistachios has exploded in the past 20 years, but the increase demand has been met by supply from the United States, the only other major producer of pistachios in the world. Iran lost its mantle as top exporter of pistachios to the EU in 2004. Had it captured just half of the growth in European imports since that date, pistachio exports would be around EUR 150 million higher.

Similarly, Iran’s exports of caviar to Europe have fallen from EUR 26 million in 2000 to just EUR 700,000 in 2017. In the same period, exports from the United States have risen from EUR 11 million to EUR 26 million. Exports from China have risen from less than EUR 500,000 to EUR 7 million. It is also notable that Iran’s export of shrimp to Europe has collapsed from EUR 40 million to EUR 2.7 million since 2000, despite the fact that Iran’s seafood industry remains healthy.

Altogether, by dramatically ceding market share, Iran has likely failed to realize around EUR 250 million of export potential in these categories. However, Iran’s growing exports of saffron, which have risen from EUR 24 million in 2000 to EUR 67 million in 2017, help illustrate that Iranian suppliers can achieve significant growth in the European market. This analysis does not account for the many categories of foodstuffs such as nuts and fruits where Iran’s exports to Europe remain very low, but where Iran ranks among the top global producers.  Generally, Iran could become a reliable supplier of food ingredients and herbal medicine to Europe, but it will require an effort from both sides to facilitate the growth. Iran also exported just over EUR 30 million in pharmaceutical products to the EU in 2017—another potential area for growth. Organizing relevant delegations in both directions to expand commercial ties in these sectors would be an important step.

The non-oil trade deficit has been the subject of some attention among Iranian authorities. The National Development Fund of Iran, the country’s sovereign wealth fund, has a program to provide capital to Iranian commercial banks in order to fund loans for private sector export-oriented enterprises. Many of these projects are focused on agricultural production, where loans are used to implement new (often European) technology in order to increase the quality or quality of production while also creating jobs.

Nonetheless, the primary instinct for Iranian officials has been to try and reduce import demand. Recently, the government announced a measure to ban the advertisement of foreign products for which there exists a domestically manufactured equivalent. But given that demand for many imports will prove inelastic, a focus on boosting exports would be a far more prudent strategy for dealing with the trade deficit.

When looking to non-sanctionable goods and the current trade deficit of EUR 1 billion within this category, the possibility of boosting Iranian exports by EUR 250 million is significant from the standpoint of reducing pressure on foreign exchange markets. Add to this other intended improvements to the cost efficiency of trade, and it becomes clear how the forthcoming H-SPV could help Iran address some of the external drivers of inflation. Most importantly, this analysis shows that the launch of the SPV is not the end of an implementation process. It is just the first step in a much-needed reimagining of Europe-Iran trade relations and a process in which the EU can showcase its commitment to a working partnership with Iran.

Photo Credit: IRNA

Europe’s SPV Will Be a ‘Rare Victory’ Only if Iran Makes it So

This article was originally published in Persian in Etemad Newspaper.

In a recent speech, President Rouhani declared that Iran had achieved a “rare victory” insofar as Europe is seeking ways to sustain its trade with Iran in the face of US sanctions. While this may be true in a political sense, practically speaking, the President is declaring victory too soon. Iran should be doing much more to ensure Europe’s efforts result in solutions that can maximize the flow of trade while banking ties remain restricted.

As US sanctions are reimposed, European efforts to sustain trade center on the creation of a new “special purpose vehicle” (SPV) which will serve to reduce the reliance of Europe-Iran commerce on the international financial system. The SPV, which will be owned by a group of European states with strong commercial ties to Iran and will help coordinate the “netting” of Europe-Iran trade, minimizing the need for cross-border financial transactions. There seems to be serious political will. In an interview with the Financial Times, French economy minister Bruno Le Maire expressed his hope that the SPV would evolve into a “real intergovernmental institution that will serve as the financial instrument of Europe’s independence.” The new mechanism “should allow us to trade in any product, with any country, so long as it is in line with international law and Europe’s commitments.”

The necessary technical work is proving complex, but continues to move forward. While the SPV is expected to be legally registered in the next few weeks, it will take more time for the new entity to become fully operational. The Iranian government seems content to exercise “strategic patience” as it waits for the SPV to come online. But while this patience is commendable, Iran should be taking a much more active role in shaping the SPV to suit its needs.

There is a precedent for Iran to take a more active role in implementing new financial mechanisms. When the Joint Plan of Action (JPOA), the precursor to the JCPOA, was agreed on November 24, 2013, Iran received its first round of sanctions relief. This relief included the creation of a channel to facilitate humanitarian-related transactions including trade in food and  medicine at a time when strict banking sanctions remained in place.

The OFAC guidelines issued upon implementation of the JPOA outline that the “[foreign financial institutions] whose involvement is sought by Iran in hosting this new mechanism will be contacted directly by the USG and provided specific guidance.” What this means is that Iranian technical assistance was crucial in helping the United States identify the foreign banks that could facilitate humanitarian trade if given the proper assurances.

Today, same kind of Iranian input is necessary to ensure the European SPV is effective, particularly for the sake of sustaining humanitarian trade. There are two areas where Iran must play a more active role in advising its European partners on the structure and operation of the SPV.

First, Iran should ensure Europe to establishes multiple SPVs so that sanction-exempt humanitarian trade can be facilitated through a separate channel from sanctionable trade such as oil exports. Presently, only a single SPV is being considered by European governments. While facilitating all trade through a single entity is consistent with EU law, which does not see trade in food as different from trade in oil, for example, creating a single SPV will make the new mechanism more vulnerable to US sanctions. Given that in the short term, the SPV will be focused on humanitarian trade, it would be sensible to create a dedicated channel for these transactions. US officials have publicly promised they do not seek to inhibit humanitarian trade. Any mechanism focused exclusively on humanitarian trade is unlikely to be targeted by additional sanctions.  

Second, the SPV will need to conduct due diligence on each of transactions it facilitates. This will be a costly and time-intensive process. In order to maximize the volume of trade that the SPV can facilitate, Iran should create tools that will make it easier for the managers of the SPV to conduct the necessary due diligence. For example, the SPV could be given access, via a portal administered by the Central Bank of Iran, to registration and ownership information of Iranian companies currently only available to Iranian banks. Iran could also nominate a list of well-established companies authorized to use the SPV, reducing the risk that the SPV will be overwhelmed with unprofessional requests or abused by untransparent actors.

If the SPV can be implemented successfully, it would indeed be a rare victory in which Iran’s trading relationships will become less vulnerable to US economic warfare. But this opportunity is as urgent as it is historic and, over the next few months, Iran must take a more active role in shaping the planned European mechanisms to ensure their optimal operation. 

Photo Credit: IRNA

Iran: The Case for Protecting Humanitarian Trade

This article has been republished with permission from the European Council on Foreign Relations. 

A crisis is looming in Iran’s healthcare sector: patients are reporting shortages in life-saving medicine. The situation is expected to worsen once US sanctions on Iran are reimposed in November. European and US companies that can provide the advanced medicine and equipment needed to treat chronic diseases inside Iran are grappling with how to sustain their operations. The goods that are making it into Iran are being sold at soaring prices due to a sharp currency downturn following Donald Trump’s sanctions decision.

Millions of ordinary Iranians are bracing themselves for the impact of these sanctions. The UN special rapporteur for human rights warned that the sanctions will undermine human rights in the country, drive people into poverty, and make imported goods unaffordable. The impact of incoming sanctions on the humanitarian sector contradicts the US administration’s repeated statements in support of the Iranian people.

Iranians experienced similar hardship between 2012-2013 when the United States and Europe introduced the severest of sanctions to pressure Iran to restrict its nuclear program. At the time, the US Treasury provided broad authorization and exceptions for the sale of medicine and medical devices. Yet only a limited number of Western companies managed to operate under these conditions. Many were forced to halt or downsize trade due to disruptions in banking and high operational costs.

A repeat of this situation must be prevented. Unilateral US sanctions must not be allowed to needlessly cause suffering to millions of Iranian citizens. This is especially the case given that Iran continues to implement restrictions on its nuclear program under the 2015 deal. Europe, China, and Russia have also vowed to uphold the agreement.

The overarching hurdle facing many companies that export medical goods and services to Iran is related to securing banking services and finance to enable such transactions to happen. This includes a recent foreign currency shortage with which to reimburse European companies. The lack of clarity over how the US will enforce its sanctions has exacerbated these problems. For example, while the latest US OFAC guidelines reaffirm that there is broad authorization for humanitarian transactions, there is ambiguity over how extensively the US will use secondary sanctions to target private Iranian banks.

Since the nuclear deal, such banks were clearly exempt from secondary sanctions. That meant that non-US companies could establish ties with such banks to facilitate payments for the sale of humanitarian goods to Iran. Their position is now unclear. The US has outlined plans to sanction the Central Bank of Iran (CBI); but it is inevitable that any local private Iranian bank will have to transact with the CBI. Under the current US sanctions framework it is unclear if this would trigger a designation for that local bank, meaning that European banks would most likely refuse to transact with that entity.

Such uncertainty can effectively block payment channels into Iran and prevent life-saving assistance from reaching doctors and Iranian patients. Indeed, several leading pharmaceutical companies currently engaged in Iran have shared with us their concerns that banks, insurance companies, and distribution channels that have facilitated humanitarian trade with Iran are getting cold feet, fearing they could fall foul of US sanctions. Competing interpretations of the OFAC guidelines also are causing over-compliance by European companies whose board members are reluctant to accept reputational damage in the US even for humanitarian exchanges with Iran.

For Iranians, access to basic healthcare is a constitutionally protected fundamental human right. In recent years, health conditions in Iran have been gradually improving for underprivileged patients. In part this has been due to the easing of international sanctions that have made healthcare products more affordable and easily accessible. President Hassan Rouhani’s government also introduced new reforms that offer healthcare to almost 11 million previously unprotected people.

Treatment for chronic diseases is a major challenge for Iran where successful treatment requires advanced devices, training, and pharmaceuticals that are often provided through Western companies. Protecting access of such companies to Iran is therefore imperative.

As global powers look to salvage the nuclear deal despite the US withdrawal, they should seek to preserve humanitarian trade with Iran. Despite opposing views between Europe and the US on the nuclear agreement, saving the lives of Iranians should not be a topic of debate. Brian Hook, the newly appointed US special representative for Iran, recently stated that the US and Europe should be working together to “find lasting solutions that truly support Iran’s people”. Europe should press the US to fulfill this offer by working to immediately facilitate and remove obstacles to humanitarian trade with Iran.

European governments should urge the US Treasury to quickly clarify the ambiguities created by its latest guidelines and ensure that a reasonable number of Iranian private financial institutions remain exempt from US secondary sanctions. The European Union should double down on efforts to ensure payment channels with Iran are preserved, including Iran’s access to the SWIFT financial messaging service. As a matter of priority it should aim for banks in Europe to remain open for humanitarian trade with Iran. To help foreign companies sustain the profit margins of operations inside Iran, the Iranian government could also offer cost-saving incentives for companies that import medicine and medical goods into the country.

The European Commission recently announced it will provide an €18m economic package for the social benefit of ordinary Iranians. If required, it should introduce similar new provisions after November to bridge any gaps in funding and payment facilities for medicine exported by European companies. This lending mechanism (in euros as opposed to US dollars), should be large enough to at least cover the import of life-saving medicine into Iran and should be flexible enough to respond to new needs. The EU and Iran could also consider establishing a medical fund for donating pharmaceuticals and equipment to Iran. In such instances, no banking transactions will be required and therefore the risks to European companies will be reduced.

The EU could also encourage expanded scientific cooperation with Iran in medical research and training. Relative to many countries in the Middle East, Iran has advanced public and private medical research institutions that are likely to welcome such bilateral cooperation. In fact, Iranian and US scientists have long engaged in successful health diplomacy projects. European governments can support and facilitate such humanitarian-focused projects. Such measures from Europe can demonstrate that their commitment to the humanitarian needs of Iranian people goes beyond rhetoric.

Many Western governments view sanctions as an effective economic tool to alter the actions of adversary states. Yet sanctions have repeatedly hit ordinary people the hardest and resulted in a negative impact on health in the targeted country. The human cost of sanctions in countries such as Iraq, Iran, Syria, and Venezuela has been severe. Going forward, the international community must implement safeguards to fully protect humanitarian sectors of trade. As Europe pledges to demonstrate its commitment to the Iran nuclear deal, it could take a lead in this dialogue and provide concrete solutions.

Photo Credit: IRNA

Brexit Britain Must Match EU Efforts to Save Iran Nuclear Deal

The European Union and its member states have been scrambling to to preserve the economic benefits of the Joint Comprehensive Plan of Action (JCPOA) for Iran following President Trump’s withdrawal from the agreement on May 8. In the last month, the European Commission has moved to add Iran to the investment mandate of the European Investment Bank (EIB), the EU’s long-term lending institution (even in the face of significant resistance from EIB’s management). Similarly, the European Commission’s Directorate-General for International Cooperation and Development (DEVCO) has set-aside a pool of funding to support projects in Iran. The European External Action Service is also coordinating discussions around central bank payment channels and the European Commission’s revival of the blocking regulation, which prohibits European compliance with extraterritorial sanctions.

As a core party to the JCPOA, the UK government has a strong interest in seeing these European efforts succeed. However, in March of 2019, at the end of the Brexit process, the UK will likely leave the EU, meaning that it will end its participation as stakeholder in European institutions, including EIB, as well as European legal frameworks, such as the blocking regulation.

While the Bank of England is exploring the creation of payment channels with the Central Bank of Iran, the UK government has shown little real initiative to match European efforts to sustain economic engagement with Iran. In recent weeks, Iranian authorities have indicated that they believe bilateral efforts will prove the most successful in delivering solutions to protect trade and investment in the face of US secondary sanctions. Countries like France, Germany, Austria, Italy and Sweden have been exploring whether it may be possible to use state investment vehicles and financial institutions to facilitate investments to Iran. The UK has not, pointing to the EIB's expanded mandate. But given that EIB is unlikely to finance projects in Iran, and given that the UK is set to exit the EU anyway, the UK government can no longer lean on European efforts in devising an economic package for Iran. 

To demonstrate its commitment to the JCPOA, the UK should parallelize its Iran policy with that of EU member states and seek its own mechanisms through which to support access to financing in Iran’s economy—both because of the clear national security implications of maintaining the the nuclear deal, but also to take advantage of economic opportunities in a major emerging market, particularly one in which UK companies can continue to make inroads from a low base of activity.

The reimposition of US sanctions means that the UK government cannot reasonably rely on British private sector financiers to engage in project finance in Iran. Just as European governments are exploring state-owned entities through which to provide financing, so will the UK financing entity need to be state owned. Helpfully, such an institution exists.

CDC Group is the overseas investment arm of the UK government. The group is a state-owned development bank overseen by the Department for International Development. It currently overseas an investment portfolio of around GBP 5 billion and primarily funds projects in Africa and South Asia, with a strong focus in countries where were formerly part of the British Empire and now part of the Commonwealth.

CDC has a wide portfolio of investments in infrastructure, health, manufacturing, food and agriculture, and construction. The investment philosophy is focused on “sectors where growth leads to jobs” and the institutions “decision-making process ranks sectors based on their likelihood of creating jobs.” Investments take the form of both equity and debt financing.

On the basis of its focus on emerging markets and its investment philosophy focused on job creation, there is justification for the UK government to extend the investment mandate of CDC Group to include projects in Iran. Such a move would parallel the EU’s attempted move in regards to EIB and the still planned funding via DEVCO, as well as the various efforts at the member-state level.

If CDC’s investment mandate is extended to Iran, the challenge will be to ensure that the relevant capital can be deployed in Iran. For this purpose, the UK government should seek to use the UK-regulated branches of Iranian financial institutions. These institutions will be able to maintain correspondent banking relationships with their Iranian parent banks in the face of US sanctions. If the UK government can institute additional due diligence protocols around the transfer of funds via this channel, it should be possible to deploy capital in Iran without the need to rely on the UK’s tier one banks.

Importantly, in order to encourage the UK to make such a move, the Iranian government must be prepared to offer a privileged pipeline of investment opportunities to CDC Group, particularly with regard to public-private partnership projects in Iran that would include the participation of UK multinationals or SMEs. For example, CDC Group financing could help support the strong inroads made by UK solar energy developers in the Iranian market. Furthermore, the Iranian government should explore export credit or sovereign guarantee arrangements that would project CDC Group’s investments in order to lower the assessed risk behind a given project in Iran.

The Iranian government should actively seek a UK commitment to facilitate development financing in Iran. Politically, such a move would be consistent with the ambitions of “Brexit Britain” as the UK will need to replace its reliance on EU institutions in regards to engaging global growth through proactive investments. As with bilateral relations with other European countries, an expansion in economic engagement could reduce pressure on political relations. The UK will no doubt expect to see progress on its consular cases as part of trust-building and the deepening of ties with Iran.

Beyond challenges of structuring, the continued political uncertainty in the UK, including the recent change in foreign minister, will make such plans complicated to execute. But Iran can leverage its relationships with key stakeholders within the Foreign and Commonwealth Office as well as in the House of Parliament and House of Lords in order to seek a structured dialogue on this matter. Whether through CDC Group or another special purpose vehicle, Brexit Britain should be pushed to at least match EU proposals to support trade and investment in Iran, and thereby to safeguard the nuclear deal.

Photo Credit: IRNA 

As Trump Goes Nuclear On Iranian Oil, Europe Must Match His Brinkmanship

This article was originally published in LobeLog.

In the view of veteran observers of the oil industry, Trump has “gone nuclear.” Speaking during a background briefing on Tuesday, a senior state department official announced that the the Trump administration wants to completely eliminate imports of Iranian oil by its current customers. The official told journalists that, during a tour of countries that has already begun with a visit to Japan, U.S. officials will be “requesting that their oil imports go to zero, without question.”

Until recently, there had been an expectation that the Trump administration would issue significant reduction exceptions as was the case under the Obama administration, allowing countries to sustain some level of imports from Iran if significant reductions take place. Indeed, the guidance issued by the U.S. Treasury on May 8 following Trump’s withdrawal from the Joint Comprehensive Plan of Action, made specific reference to significant reduction exceptions as part of the reapplication of oil sanctions. These exceptions were to be devised following “the Secretary of State, in consultation with the Secretary of the Treasury, the Secretary of Energy, and the Director of National Intelligence” as consistent with “past practice.” A survey of oil analysts conducted by S&P Platts after May 8 suggested that “US oil sanctions on Iran will likely have an immediate impact of less than 200,000 bpd and will block less than 500,000 bpd after six months.” The announced policy is akin to a reduction of over 2 million barrels per day.

Something seems to have shifted during the OPEC meeting. As reports emerged that Japan had been asked to cease its imports of Iranian crude, Bijan Zanganeh, Iran’s oil minister, engaged in expectation management. During an interview with Bloomberg Television, he stated, “I don’t believe [the Japanese] can receive a waiver from the United States,” adding that Iran would need to “find some other way” to mitigate the effect of the oil sanctions. With Saudi Arabia cavalierly announcing that it will boost its production to record levels in July, it is easy to see how a Saudi commitment to raise production would have been coordinated with an American effort to eliminate Iran’s export market entirely.

To this end, Iran is facing the most serious challenge to its economy and political integrity to date. The Trump administration has taken its avowed commitment to exert “unprecedented financial pressure” far beyond the realm of coercion and into the realm of destruction. For Iran’s government, which receives about half of its revenues from oil sales, the prospects are grim. Of course, such an outcome is consistent with the regime-change goals of the Trump administration and its regional allies. They are seeking to engineer a collapse from within. But what is seemingly unaccounted for in such a scenario is the immense risk of regional chaos and conflict if they push Iran’s government to the brink. The risk is not merely that instability will lead to violence and mass displacement that could spill beyond Iran’s borders, but more likely that when faced with a near-existential threat, Iran’s ruling elite will seek to regain leverage in the most destructive ways possible.

In one plausible scenario, the Iranian reaction to the total embargo of its oil sales will be to try and impose a physical blockade on Saudi exports by closing the Strait of Hormuz and engaging in a new “tanker war.” The threat to close the strait has been a constant feature of hardline rhetoric from Iran over the years, and the move is easier said than done. But any suggestion that Iran could escalate in such a manner would no doubt spook oil markets—about 18 million barrels per day, equivalent to 20 percent of global supply, pass through the strait each day.

European Response

The prospect of a global oil crisis spurred by Trump’s brash move to deny waivers should frighten European leaders. Aside from the risks of confrontation in the region that would stem from any blockade attempt, the knock-on effects of an even short-term supply crisis could send the already fragile Eurozone economies into a recession. European officials have been quick to note the risks, characterizing the move as “really unhelpful and part of an escalation plan” and declaring that Europe “strongly disagree[s] with this plan.”

The timing could not be more fraught for Europe, which had been expected to present its long-awaited package of economic measures to Iran in the next week. These measures, intended to help incentivize Iran’s continued compliance with the JCPOA in the face of U.S. sanctions snapback, will have little meaning if the preservation of oil imports cannot be assured. Realistically, it will be difficult for Europe to find a way to maintain a viable importation mechanism in the absence of exemptions. If circumvention is not an option, Europe must find new leverage and compel the United States to change its policies. There are three actions that can be taken.

First, European governments must buy themselves and Iran time to reduce the chaos factor. Accelerating and increasing imports of Iranian oil over the next few months, basically allowing Iran to frontload its expected 2019 exports before the sanctions deadline kicks in, would help ensure that Iran retains an ability to sustain the rising pressure. Indian imports of Iranian oil surged in May in anticipation of the U.S. sanctions. European governments should, as a matter of national security, use any excess storage capacity to purchase as much Iranian oil as possible. In order to encourage Europe’s more independent oil traders and refiners to take on these purchases, Iran would need to offer attractive commercial terms in something akin to a flash sale.

Europe should also consider its own coercive measures. American oil exports to Europe have recently reached levels of around 500,000 barrels per day, levels approaching those of Iran. It would be relatively straightforward for Europe to declare that it will seek to eliminate imports of American oil to Europe as a countermeasure for Trump’s move to ban Iranian imports. The impact on the oil-producing American heartland and Trump’s political base could be profound. Importantly, Europe would not necessarily seek to use sanctions in order to enforce such a move. Sanctioning European companies that trade American oil would inhibit the ability of these multinational companies to pick up supply from other producers worldwide. A much more elegant way to impose a cost on the Americans would be to take a page out of the tariffs playbook. Imposing a hefty oil-import tariff would make it commercially unattractive for refiners to important American crude, and so the decision to cease importing American oil would technically be a voluntary decision rather than a decision requiring legal enforcement.

Sanctioning Trump

Finally, European entities could target Trump’s personal assets as damages for the costs incurred due to his prohibition on Iranian oil imports. Congressman Keith Ellison (D-MN) and Vox editor Matthew Yglesias have both recently argued that sanctioning Trump personally may be the best way to change his behavior. As Ellison puts it, “Sanctions targeting Trump’s own companies will sting in a way that he cannot ignore.”

But there may be a more elegant solution already at Europe’s disposal. The EU has initiated the revival of the so-called Blocking Regulation, a 1996 EU law designed to prohibit compliance with US sanctions by EU companies. The regulation includes a “clawback provision” that provides a mechanism for EU entities to sue for damages for costs arising from sanctions. The recovery of damages “may be obtained from the natural or legal person or any other entity causing the damages or from any person acting on its behalf or intermediary.” This broad definition could clearly be extended to Trump.

Moreover, the “recovery could take the form of seizure and sale of assets held by those persons, entities, persons acting on their behalf or intermediaries within the Community, including shares held in a legal person incorporated within the Community.” In short, Trump’s property and assets in Europe could be seized and sold. Given that the assessed costs related to a complete cessation of Iranian oil imports could easily amount to billions of dollars, Trump could ostensibly be threatened with the total seizure of his Europe-based wealth. Of course, the legal action probably would not need to go that far. Dragging the Trump Organization into European court would probably wake up Trump. He has a history of settling in the face of legal challenges, so a threat to his personal empire may force him to rethink his abuse of the American empire.

If Europe can muster the political courage to pursue these measures in the face of catastrophic security and economic risks introduced by the total oil embargo, it can gain the necessary leverage to push the United States to a more reasonable position. Europe must not rely on China or India or Turkey to skirt the U.S. sanctions. Given the immensity of the threat to global security arrangement represented by the abrogation of the JCPOA, and the global economic arrangement underpinned by the current composition of the oil markets, Europe must match Trump’s “nuclear option” with its own. Perhaps this kind of mutually assured financial destruction can bring the world back from the brink.

Photo Credit: IRNA

After Trump’s Iran Decision: Time for Europe to Step Up

This article was originally published on the website of the European Council on Foreign Relations.

Despite months of E3-US negotiations to avert an unnecessary crisis over the Iran nuclear deal, President Trump has declared a hard exit from the nuclear agreement. The decision demonstrates that the US has decided that confrontation with Iran is both necessary and inevitable, regardless of what European allies think. The US administration looks set to increase tensions with Tehran and promote an implosion of Iran’s economy in ways that significantly increase risks of greater military escalation in the Middle East. Moreover, in the coming weeks, United States looks set to lead an economic and political assault on European interests.  

The E3 should now acknowledge that its negotiating tactic of accommodation and comprise with Trump has failed. If Europe is to have any influence forthcoming US policy on Iran, European governments should quickly shift tack, unifying behind a more assertive diplomatic strategy aimed at deterring the worst-case scenario of renewed Iranian nuclear program and more instability and violence in a region close to its borders. 

European governments are clearly tempted to think that the delays in implementation of sanctions mean they still have time to persuade the US president to reverse course. But the US president has acted on his promise to fully withdraw from the deal. He is now supported in that view by key advisors who have long advocated a forceful stand against Iran, not just on the nuclear deal but also in terms of encouraging regime change in Iran. It should now be abundantly clear that the current US administration cannot be a partner in salvaging the deal.

In this context the EU and its member states should now prioritize the following action points:

1. European leaders should use the forthcoming May 17 European Council meeting in Sofia to publicly and unanimously condemn the U.S. decision  to withdraw from a multilateral global security arrangement and place the responsibility for any instability that results on the Trump administration.
2. European leaders should reject further negotiation between the E3 and the US administration on a “broader framework” on Iran policy, including the prospect of further EU sanctions targeting Iran, until and unless the Trump administration makes significant adjustments to minimise the enforcement of US secondary sanctions targeting European companies doing business with Iran.
3. European governments should prioritise measures aimed at maintaining Iranian adherence the deal. The E3/EU should meet with Iranian counterparts at foreign ministerial level to agree on contingency plans. European governments should make a case to the Iranian government and public as to why the deal can be sustained and continue to serve Iran’s interest. This should emphasise the immediate economic benefits of continued oil exports (which Europe must vow to maintain as an priority). In this effort to entice Iran, Europe should cooperate with Russia and China, the other parties to the nuclear deal.
4. Europe’s approach should include the formulation of clear legal conditions for strategic sectors of trade with Iran aimed at protecting key European commercial deals seen as barometers of nuclear deal’s success and its ongoing survival (namely in the energy domain, aviation and automotive industries). The E3/EU should prioritise securing exemptions and waivers from enforcement of US secondary sanctions for European energy companies and related financial services to allow continued oil imports from and payments to Iran. Towards this end, EU member states should begin consultations regarding counter-measures against the United States. This should include political and legal threats that the EU will consider reviving the EU Blocking Regulation and even impose new penalties against assets of US companies based in Europe to allow for “claw-back” of unfair and illegal fines imposed on European companies doing business with Iran. European leaders should press this issue very hard with the Trump administration, making clear that this is a critical issue for the transatlantic relationship, as well as ongoing cooperation on regional issues in the Middle East.
5. European governments should also look to find bridging solutions to maintain banking connections with Iran even if at far reduced levels, including by temporarily connecting respective central banks in EU member states to the Central Bank of Iran and creating emergency export credit lines. The EU EAS should accelerate coordination among leading member states, their export credit agencies and state-owned banks to devise novel banking mechanisms allowing a degree of risk-sharing between governments and the financial sector on business with Iran. This effort should aim to facilitate a pan-European approach towards creating special purpose vehicles to finance sector-specific trade and investment with Iran. The EU EEAS should also advance existing proposals for the European Investment Bank to become a lending bank for long-term and medium-sized investments inside Iran.
6. It will now be more critical than ever for Europeans to maintain a dialogue with Iran on regional and ballistic missile issues, given that the US exit from the nuclear deal is already feeding wider regional escalation. This is particularly true given that the Trump administration is likely to work with its key regional allies to accompany the nuclear agreement withdrawal with a wider push against Iran. Germany, France, the UK and Italy should accelerate and formalise recently launched regional talks with Iran, including efforts to advance de-escalation possibilities between Iran and Israel in Syria where the situation is becoming increasingly febrile.

In the end, Europe may not be capable of salvaging the nuclear deal. But if the Europeans want to promote non-proliferation in the region and reduce regional instability, they need to demonstrate to the Americans, the Iranians and others that they are willing to try. Allowing the collapse of the nuclear deal without a proper fight will have immediate and disastrous consequences in the Middle East, while also significantly reducing European relevance on global security. Europe faces a critical and historic choice and must demonstrate its political will to advance its security interests through robust diplomacy.

Photo Credit: HR VP

Europe Should Strike a Tough Pose With Trump on the Iran Nuclear Deal

This article is re-published with permission from the European Council on Foreign Relations. Since the initial publication of this article, John Bolton has been named Trump's new national security advisor. 

France, the United Kingdom, and Germany (the ‘E3’) appear set to intensify ongoing talks with the US in an effort to convince Donald Trump to stick to the Iran nuclear deal. Trump has threatened to withdraw from the agreement in May unless certain preconditions were met. Europeans hope the ongoing discussions will be able to find a middle way to both safeguard the nuclear deal and address outstanding areas of concern with Iran, such as on missiles and regional issues. However, Trump’s recent nomination of Mike Pompeo as US secretary of state increases the risk that this approach will backfire on Europe.

European policymakers largely viewed Rex Tillerson as a voice of moderation within the White House and as someone who, together with secretary of defense James Mattis, influenced Trump towards a more pragmatic position on Iran. If Europe is serious about saving the nuclear deal, then the appointment of Pompeo, an Iran-hawk in Washington, should serve as an urgent prompt to rethink its current strategy.

Some in European policy circles hoped that Trump’s statement on the nuclear deal on 12 January this year was part of his maximalist negotiating tactics, and that if Europe showed some flexibility, the president would be climb down from these demands. But one of the reasons Trump cited when firing Tillerson was their disagreement over the Iran nuclear deal. This should indicate that the moderate voices in the White House have been unable to bridge gaps between Trump and Europe over the nuclear deal.

Trump, meanwhile, remarked on the “very similar thought process” he and Pompeo share on a number of issues. Pompeo has been especially outspoken on Iran: he opposed the nuclear deal, supported regime change, and downplayed the costs of war with Iran. With Pompeo now in charge of US diplomacy, Europeans are likely to face a tougher and non-accommodating negotiating posture from the Trump administration over the nuclear deal. This comes against a backdrop of rising regional tensions between Iran and Israel, in addition to repeated pledges from Trump to confront Iran, most recently in his Nowruz message marking the Iranian new year.

Trump’s deal-making during his term in office should create doubt as to whether he would actually implement a side framework agreement of the type that his administration is currently seeking to strike with Europe over Iran policy. On foreign policy matters, Trump has remained dangerously unpredictable, and threatened everything from trade war to nuclear war. The pattern of negotiations between his administration and the US Congress over immigration and healthcare suggests that, even if Trump’s counterparts make concessions to fulfil his demands, there is no guarantee that he will, in the end, accept it.

Europeans should therefore be clear-eyed about the chances of success of current talks with the United States. Based on recent precedent, Trump is likely to perceive Europe’s flexibility and accommodation over Iran policy as a weakness that he can exploit to raise the benchmarks of demands. Moreover, by threatening imminent withdrawal from the nuclear deal, Trump is increasingly pressuring the E3 to jump on board with his efforts to undermine the agreement. Republican lawmakers such as Senator Bob Corker have also adopted this stance and warned that, unless the E3 sign up to the side framework agreement that meets US demands, Trump is unlikely to extend sanctions waivers due in May.

Yet, in their attempt to save the nuclear agreement through reaching a broader understanding with the Trump administration on Iran policy, the E3 must ensure that Europe does not become complicit in hollowing out the nuclear agreement. So far, the International Atomic Energy Agency has repeatedly verified that Iran is fulfilling its nuclear-related obligations. However, Iran has firmly indicated it will take reciprocal action to match any US backtracking from the deal. A potential side agreement between the E3 and the US with respect to the nuclear deal therefore risks a tit-for-tat exchange between Tehran and Washington that could alter and muddy their respective commitments under the agreement and cumulatively cause it to unravel.

So, what should Europe do?

In light of Pompeo’s appointment, the E3 should harden their negotiating tactics on the nuclear deal in ways that match the mindset of the Trump administration. First, Europeans should take a unified and more assertive position in forthcoming talks with the US to underscore that they will not be party to, nor accept as permissible, violations of a multilateral and United Nations Security Council-enshrined agreement. The E3 should continue to outline that it will not, and indeed cannot, alter expiration dates of the terms in the nuclear deal (so-called “sunset provisions”) as Trump has demanded. If Trump wants to kill the deal, he must take full responsibility, and Europe should avoid guilt by association.

Second, Europe should continue to show openness to working with the US administration on a follow-up to the nuclear agreement with Iran once the current deal has reached a more mature stage of implementation. The E3 should also have a candid exchange with Iran on regional security and demonstrate to the Trump administration that a range of tools exists to address concerns related to Iran. But in return for this flexibility, Europeans should outline an expectation that Washington will adhere to its existing obligations under the multilateral agreement and minimize the unpredictability surrounding Trump’s waivers of sanctions.

The sequencing of European measures and flexibility will be important to strengthening the E3’s position. For example, the European Union should first receive firm assurances that Trump will waive nuclear-related sanctions in May before it even debates the tougher measures against Iran’s missiles program proposed by the US and reportedly supported by the E3 during a meeting with EU foreign ministers on Monday this week. The E3 should also consider how political and legislative measures within the US could better guarantee US commitments to the nuclear deal. This could entail extensions in the length of time between each waiver of US secondary sanctions related to Iran’s nuclear program (thereby easing the unpredictability surrounding Trump’s actions), and pressing for progress in the Airbus aviation deals with Iran explicitly permitted under the nuclear deal.

Third, Europeans should prepare for the worst-case scenario – namely, a US withdrawal from the agreement and snap-back sanctions in May – and minimise the damage that will ensue. Pompeo’s appointment should be a trigger for European policymakers and companies to step up contingency planning to salvage the deal even without the US. For Iran to continue implementing the restrictions on its nuclear program, there must be a degree of political and economic incentives. As outlined elsewhere, Europe could provide this package to Iran by using a range of political and technical tools that ring-fence companies from the enforcement of US secondary sanctions through legal carve-outs, sector-specific exemptions, political understandings, and reviving the EU Blocking Regulation.

In current talks with the US, Europe should privately stress its willingness to pursue alternative options to preserve the nuclear agreement. A significant benefit of outlining a contingency plan at this stage is the deterrence impact it may have on Trump’s decision to kill the deal through highlighting the isolation the US would face. In short, Europe should outline, as it has done on the issue of trade and the Paris climate accord, that it will work with like-minded coalitions to fill the gaps left by US withdrawal.

This strategy may not, in the end, alter the decision by Trump to execute his campaign promise to “dismantle” the “disastrous deal” with Iran. But this approach at least provides Europe with the political capital to try to salvage the agreement and thereby secure its own non-proliferation goals. If Iran’s nuclear program expands in respond to Trump’s withdrawal, other regional powers, such as Saudi Arabia, have warned that they will do the same. A firm European position in defense of the diplomatic accord may also reduce the growing risk of confrontation between Washington and Tehran in the Middle East, for which Europe will inevitably bear the cost. This approach also sets a precedent that Europe is a credible international partner, demonstrating political willingness to safeguard international norms at a time when global leadership is lacking. 

Photo Credit: EU