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May 16, 2018 | 09:00 GMT

12 mins read

Why the EU and Iran Have Little Hope of Rescuing the Nuclear Deal

A protester holds a banner criticizing U.S. President Donald Trump and a portrait lauding Iranian Supreme Leader Ali Khamanei during an anti-U.S. demonstration in Tehran after Friday prayers on May 11.
(STR/AFP/Getty Images)

"Abandon the Nuclear Non-Proliferation Treaty!" "Restart uranium enrichment!" "Kick the inspectors out!" In the wake of U.S. President Donald Trump's withdrawal from the Iranian nuclear deal, hard-liners in the Islamic republic have called for any number of actions — including following Trump out of "Barjam," the Persian acronym for the landmark agreement officially known as the Joint Comprehensive Plan of Action (JCPOA). Mindful of the pressure from hard-liners — as well as the consequences of a fierce response from Tehran – Iranian Foreign Minister Javad Zarif sat down with European leaders on May 15 in a desperate attempt to salvage the nuclear deal.

Iran's leaders, both elected President Hassan Rouhani and the unelected Supreme Leader Ali Khamenei, have signaled so far that Tehran will chart a more pragmatic course — at least initially — and make overtures to the Europeans in an effort to obtain guarantees that the Continent's biggest actors will mitigate the impact of new U.S. sanctions on Tehran, especially as the latter contends with the aftermath of widespread protests and economic fragility. But if Iran fails to salvage some of the deal with Europe amid uncompromising U.S. measures, its leaders might need to look elsewhere to aid the country's ailing economy — if not cave in to some of the demands of the Iran's hard-liners.

The Big Picture

The remaining signatories to the Iranian nuclear deal are scrambling to salvage the agreement following the United States' withdrawal. As the European Union looks at ways to entice Iran to stay in the deal, Tehran will seek guarantees that Brussels will resist the White House's sanctions. Their success will be critical in saving the beleaguered deal.

Exhausting the European Option

As Zarif speaks to EU leaders about how the bloc might circumvent U.S. sanctions, he is reprising the role of predecessor Kamal Kharrazi, who sat down with the European Union's most prominent members — and not the United States — in 2003 to discuss Tehran's nuclear program. After the International Atomic Energy Association reported in 2003 that Iran had ceased implementing safeguards on its nuclear program, the so-called EU3 — France, Germany and the United Kingdom — launched talks with Iran alone. The United States, by contrast, declined to participate, preferring to exert immediate pressure on Iran amid worries about Iranian influence in Iraq in the wake of the U.S. invasion of the country. The three European countries and Iran quickly struck a deal, but it failed to survive under the weight of U.S. pressure and the eventual election of Iranian President Mahmoud Ahmadinejad in 2005.

Mindful of its past experiences, the European Union will be anxious about the prospects of success for any deal not involving the United States, although Iran cannot afford to alienate the European Union and its three signatory JCPOA states — again, France, Germany and the United Kingdom — by exiting the deal and restarting its nuclear program. Unlike the United States, the European Union's concerns regarding Iran are restricted to the Islamic republic's nuclear program, rather than its broader regional activities. Accordingly, Brussels is willing to cooperate with Tehran to continue the JCPOA in spite of Washington's withdrawal if the deal restricts Iran's nuclear program. After all, the signing of the nuclear deal in 2015 fostered greater business between the European bloc and Iran. Currently, the European Union purchases an estimated 700,000 barrels of Iranian oil per day, and although uncertainty regarding U.S. intentions prevented more trade from coming to fruition, European firms planned a number of investments in Iran that included energy, vehicle and rail deals, as well as an agreement by Airbus to sell it 100 aircraft.

Iran cannot afford to alienate the European Union and its three JCPOA signatory states –- France, Germany and the United Kingdom –- by exiting the deal and restarting its nuclear program.

A Dearth of Options

Iranian officials have said they would like Brussels to provide guarantees to Tehran within 45 days to two months, but the extent of the new sanctions complicates any hopes that Europe and Iran can find some sort of deal. By Aug. 7, Washington will, in addition to other measures, bar any foreign company selling civilian aircraft to Iran or investing in the country's automotive sector from doing business in the United States. By Nov. 4, it will implement similar prohibitions on any foreign company investing in or trading with Iran's energy sector, along with other sanctions. Unsurprisingly, both measures will severely curtail both general European investment and trade with Iran and European oil imports from the Middle Eastern country.

Brussels has few options if it wishes to sidestep the U.S. sanctions on non-energy trade. The European Union could impose "blocking" regulations to inhibit the imposition of U.S. sanctions on EU territory by prohibiting European companies from complying with Washington's sanctions. The bloc considered similar regulations, including freezing U.S. assets, in the 1990s to protect firms conducting business with Cuba and Iran from running afoul of U.S. sanctions, which Brussels viewed as an extraterritorial application of U.S. law that undermined European sovereignty. The blocking regulations protected companies doing business with Cuba, although the European Union never required the measures for Iran because it reached an exemption deal with the United States for investments in Iran's energy sector. This time, however, the United States is unlikely to be as accommodating.

Others have suggested establishing a clearinghouse that could conduct energy transactions with Iran in euros as alternatives to dollar-denominated loans. However, any European firms engaged in such business would still be subject to Washington's sanctions if they are active in the United States, and Washington could pressure Brussels to act against EU firms conducting financial messaging services. Essentially, European companies would face a choice between doing business with Tehran or with the United States, but for most multinational European companies, there can be only one answer: the United States.

European companies would face a choice between doing business with Tehran or with the United States, but for most multinational European companies, there can be only one answer: the United States.

Alternatively, the European Union could seek exemptions from the Trump administration. But because they would blunt the sanctions' intent — to hurt Iran's economy — the United States would be unlikely to agree to exceptions, unless the European Union offers substantially more than it did to the United States in the runup to Trump's announcement last week. Ultimately, the European Union has three to six months to try to salvage a deal — a period Iran will closely observe before making any decision with regard to its nuclear program.

The Carrot and the Stick

The United States has meticulously crafted its latest sanctions as part of its carrot-and-stick approach to ensure other countries fall into line. Under the new regulations, U.S. authorities will close existing U.S. accounts — or prohibit the opening of any new accounts — belonging to any foreign bank that processes payments through Iran's central bank for any transaction, not just oil deals. (For foreign central banks, the new U.S. measures would only apply to energy-related transactions.) Washington's ultimate aim is to hit the correspondent banking system, which underpins international financial transactions and involves two banks in different countries establishing accounts with each other to facilitate global money transfers. For European banks with a correspondent banking relationship with the United States, losing that access is simply not an option.

Still, the United States could offer some exemption mechanisms in an effort to invite compliance. If a country significantly reduces its oil imports from Iran, the United States could waive the sanctions to permit that country's banks to maintain a relationship with the central bank of Iran. This waiver process could entice countries to accede to the U.S. push to reduce oil imports from Iran, since their lenders would remain free to conduct other transactions with the Iranian central bank. The European Union and its member states have yet to discuss whether they will emulate South Korea and pursue this possibility. Regardless, European companies are likely to start decreasing their imports from Iran before the sanctions take effect on Nov. 4.

But in the end, the United States might not offer such sweeteners, even to its allies. According to the Treasury Department's Office of Foreign Asset Control's (OFAC) guidance on the sanctions, the State Department will make determinations on possible exemptions based on the rate of reduction in import volumes, the termination of import contracts and other related signs that a country is trying to substantially reduce its imports of Iranian oil. Trump's predecessor, Barack Obama, established the reduction figure at roughly 18 percent, but the present administration could set the bar significantly higher in order to hurt Iran much sooner. Moreover, each exemption will only last 180 days, meaning countries must substantially reduce their oil imports from Iran every six months in order to continue qualifying for the potential exemptions. And as Saudi Arabia, one of Iran's biggest regional rivals, could step in to replace the entirety of Iran's oil exports to Europe if necessary, the White House may choose not to issue any waivers at all to applicants intent on importing energy.

A chart comparing the amount of oil various countries import from Iran.

The incumbent administration could also attach other conditions to the exemption process — as it did with the aluminum and steel import exemption process in March — in a bid to extract concessions from the European Union on Iran. In so doing, Washington could attempt to force Brussels to impose sanctions on Iran's ballistic missile program and regional proxies or, in theory, it could even try to oblige the European Union to sanction the Lebanese militant group Hezbollah. Such demands from the United States would create even greater discomfort for the bloc, as it would aim to maintain a balance between Tehran and Washington. By fulfilling potential U.S. demands on this front, the Europeans would have little choice but to hurt Iran in some matters so that they could aid it on others.

If Washington compels Brussels to substantially decrease its imports of Iranian oil, Tehran would have little recourse but to divert energy exports to alternative markets, particularly Russia and China. The two countries are even less willing to comply with U.S. sanctions than the European Union, but neither market can fully absorb all the Iranian crude oil that currently goes to Europe. In all likelihood, Europe's crude oil imports will decline — the major question is by how much.

Brussels' Last Stand

As in the early 2000s, any new deal between Europe and Iran is unlikely to be sustainable for more than a few months or years in the absence of U.S. involvement — especially as the United States did not target oil exports by targeting correspondent banking relationships a decade and a half ago.

Faced with such prospects, the European Union must decide whether to draw lines in the sand as it did in the 1990s. Using blocking legislation, the union could play hardball by introducing a clawback clause that would enact tariffs on U.S. imports as means of recovering U.S. fines imposed on EU companies doing business with Iran. French Finance Minister Bruno Le Maire has even suggested that the European Union could form an agency similar to OFAC to monitor whether or not foreign companies are complying with EU law, as the European Union argues that the United States' extraterritorial application of sanctions undermines European sovereignty.

Such aggressive measures would obviously escalate the situation, but some European countries believe the U.S. withdrawal threatens the Continent by forcing Europe to become more dependent on Russia for energy and by encouraging Tehran to restart its nuclear program. 

 

For many in Europe, the U.S. withdrawal is just the latest example of the Trump administration's refusal to back a rules-based order and the norms of the international community.

German Chancellor Angela Merkel turned heads on May 10 by noting that "Europe must take its destiny in its own hands." For many in Europe, the U.S. withdrawal is just the latest example of the Trump administration's refusal to back a rules-based order and the norms of the international community, having previously abandoned the Paris Agreement on climate change and the Trans-Pacific Partnership on trade, reduced funding for critical U.N. departments and jeopardized the entire functioning of the World Trade Organization. Given the Washington's ostensibly cavalier attitude, Brussels could decide to stand up to the United States on the nuclear deal, just as it has on Trump's steel and aluminum tariffs

But as always, splits are rife within the European Union, meaning the United States — and Iran — will strive to exploit the divisions within it. In order to take action against the United States, the European Union will require unanimity on most accounts, which means Washington could rely heavily on support from EU members such as Poland and others to block Brussels' moves. But the requirement for unanimity could also undermine U.S. aims: Iran's economic ties and energy trade with European countries could encourage some EU members to withhold their support for blocwide sanctions against the country. As a result, the European Union is likely to appease no one in the process.

All of this does not bode well for Iran and the European Union's efforts to hammer out a new deal that would persuade Iran to remain in the JCPOA. Still, Iran could decide to continue adhering to the nuclear deal — even if Brussels can offer it no succor — because restarting its nuclear program would likely push the European Union to fall in line with the United States and foster a unified drive to reintroduce sanctions on Tehran. In such a case, the European Union could trigger the U.N. Security Council's automatic sanction snapback mechanism under Resolution 2231 — which is not subject to a veto by China or Russia.

If the European Union joins the United States in reimposing sanctions on Tehran, it is sure to invite a furious response from Iran's hard-liners — a response that could ultimately threaten the Continent's security. This leaves the European Union will little choice but to push for a new deal between the United States and Iran. But given the Trump administration's desire to comprehensively halt Iran's regional aspirations — and perhaps change its leadership in the process — all of Brussels' efforts could be in vain. And with the chances of transatlantic consensus effectively nil, Iran will look to weather Trump's tempest by charting a course for China and Russia.

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