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Can the Europeans save the Iran nuclear deal?

As long as its oil export is not significantly reduced, Tehran will remain in the nuclear deal to avoid unnecessary friction with EU and isolation

Gulf News

With United States President Donald Trump announcing his decision on May 8 to withdraw from the 2015 Iran nuclear deal — formally known as the Joint Comprehensive Plan of Action (JCPOA) — signed by Iran, the US, Russia, China, Britain, France, Germany, and the European Union — the fate of the accord was hanging by a thread. Why? Since Trump took office and threatened a US exit from the deal, high-ranking Iranian officials, including Iran’s Supreme Leader, Ayatollah Ali Khamenei, repeatedly and strongly countered that if the US abandoned the deal, Iran would follow.

Yet, as European leaders — primarily of Britain, France, and Germany — scrambled to save the deal in the aftermath of Trump’s move, Iran’s reaction was calculated. While expressing mistrust to the Europeans, Khamenei noted: “Without receiving a strong guarantee from these three European countries, we won’t stick to the nuclear agreement.” The tweet of Iran’s Foreign Minister, Javad Zarif, revealed that Iran’s decision was not one of confrontation but diplomacy. “In response to US persistent violations and unlawful withdrawal from the nuclear deal, as instructed by President [Hassan] Rouhani, I’ll spearhead a diplomatic effort to examine whether remaining JCPOA participants can ensure its full benefits for Iran. Outcome will determine our response,” tweeted Zarif.

One critical question remains: Can Europe save the deal?

Based on US laws, foreign companies have between 90 to 180 days to phase out existing contracts with Iran and discontinue any economic dealing with that country or face US penalties. The draconian sanctions on the Iranian banking system and its energy sector will come into effect on November 4. The Europeans have unanimously complained about the extraterritoriality of US laws. On May 9, for example, French Finance Minister Bruno Le Marie criticised the US withdrawal from the nuclear deal as “an error”, slamming the US as playing the role of the “economic policeman of the planet”.

In theory, Europe can utilise three mechanisms to save the nuclear deal.

It can first engage in business with Iran with euros rather than dollars, thereby bypassing the critical US link. In January, France’s state-owned investment bank, Bpifrance, announced a plan comprising euro-denominated export guarantees for French companies selling goods and services to Iran. This policy would bypass US laws. Italian authorities also worked out a similar deal with Tehran to fund investments in Iran worth up to €5 billion (Dh21.9 billion) via the Italian state-owned holding company Invitalia.

These measures could work for small-scale European businesses, but they will not convince European multinational giants with major US interests and transactions to work with Iran. For instance, the European aviation giant Airbus will lose orders totalling $20.8 billion (Dh76.5 billion) received from Iran, as stated by US Treasury Secretary Steven Mnuchin. Moreover, the French oil giant Total, which, in association with Chinese group CNPC, signed an agreement for a $5 billion investment to develop Iran’s South Pars natural gas field, will also likely have to walk away.

Even smaller companies may not risk a ban from the US market as a result of engaging in business with Iran. Helima Croft, the global head of commodity strategy at RBC Capital Markets, wrote in a research note on May 8: “We think that a revival of the threat to lock noncompliant corporates out of US capital markets provides the White House with a pretty powerful stick.”

Europe could next reactivate the so-called 1996 Blocking Statute, which bans EU companies from complying with Washington’s sanctions and protects them from penalties imposed by overseas courts. This option, which is currently subject to debate across Europe, has never been used and is unlikely to be used with respect to trade with Iran. The reason is simple: The EU would risk an all-out trade war with the US by protecting its economic relations with Iran. Experts find the prospect of a unanimous agreement dim.

Europe’s third option is to convince Trump within the next six months to exempt European companies from existing sanction laws. Such an exemption, according to experts, could primarily shield strategic sectors such as energy, banking, and aviation.

This third option is flawed for at least two reasons, however.

First, it ignores the strategy that the Trump administration has established to force Iran to fold and accept the US conditions, including an indefinite extension of limits on Iran’s uranium enrichment and other nuclear activities, which have expiration dates under “sunset clauses” in the nuclear deal and restrictions on the development of its missile programme. Exempting European companies would defeat the entire purpose of restoring the nuclear-related and crippling sanctions.

Second, even if the Trump administration exempts European corporations from nuclear-related sanction laws, Iran is listed as one of the two countries — the other being North Korea — that is under severe monitoring and pressure to comply with the Anti-Money Laundering and Countering Financing of Terrorism measures. The US administration is not the only regulatory agency of relevance for AML/CFT enforcement. The US Department of Justice, which operates independent of the White House, is another major agency that has the legal authority to investigate entities based on suspicions of working with organizations within Iran that are accused of money laundering and terrorism-related activities.

In short, the three major European countries will not be able to provide Ayatollah Khamenei with a guarantee that Europe will not abide by the American sanctions. Even if in the unlikely scenario they do, such a guarantee would not stand on solid ground. Europe is unlikely to involve itself in an all-out war with the US to maintain its economic relations with Iran, considering the significant interdependence of Europe and the US economies as the two main poles of capitalism.

Will the Europeans’ failure to confront Trump lead to Iran’s exit from the nuclear deal? Iran’s economy faces several “uber-challenges” according to Masoud Nili the economic advisor to Iran’s president. As such, Iran’s number one priority is maintaining the current level of its export of oil and revenue. Iran’s oil exports hit 2.6 million barrels per day in April up from roughly 1.1 million in 2014, when sanctions were still in place.

Trump’s ability to strangle Iran’s oil market is limited, however. Section 1245 of the National Defence Authorisation Act for Fiscal Year 2012, which governs the implementation of oil sanctions on Iran, provides that the implementation of sanctions requires an evaluation as to “whether the price and supply of petroleum and petroleum products produced in countries other than Iran is sufficient to permit purchasers to reduce significantly in volume their purchases from Iran”. Oil prices already hit a three-and-a-half-year high after Trump’s announcement.

The bottom line is that as long as Iran’s oil export is not significantly reduced, it will remain in the nuclear deal to avoid unnecessary friction with Europe and isolation. Once its oil export is severely curtailed, however, it will abandon the deal.

Shahir ShahidSaless is a political analyst and freelance journalist writing primarily about Iranian domestic and foreign affairs. He is also the co-author of Iran and the United States: An Insider’s View on the Failed Past and the Road to Peace.

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