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The Iran deal is on life support. Can Europe revive it?
The Iran deal is on life support. Can Europe revive it?
The Coronavirus Crisis is a Diplomatic Opportunity for the United States and Iran
The Coronavirus Crisis is a Diplomatic Opportunity for the United States and Iran

The Iran deal is on life support. Can Europe revive it?

Originally published in euronews

The key question is whether the sum total of what Europe can offer Iran is sufficiently robust – financially and symbolically – to give those in Iran who argue for restraint and continued engagement a chance. 

President Donald Trump’s decision to exit the nuclear agreement with Iran earlier this month has set off a scramble to save the deal. But while European diplomats hope to scrape by through preserving as much of the deal’s dividends for Iran as possible, business leaders are planning for the worst. The fate of the Joint Comprehensive Plan of Action (JCPOA) may lie in the balance between these two outcomes.

The JCPOA is, at its core, a straightforward trade: Iran pledged to cap its nuclear program and allow for international inspections in return for much-needed relief from a web of international sanctions that largely froze Tehran out of the global financial system. The UN’s nuclear watchdog has repeatedly confirmed that Iran has kept its end of this bargain, and over the past two years, major international companies started to dip their toes in the Iranian market.

Trump’s disdain for the agreement resulted in an ultimatum to Europe at the start of this year: rewrite the JCPOA, or we walk away. Negotiations between the US, France, Germany and the UK nearly closed the gaps between the two sides, but for the White House this did not suffice. On 8 May, Trump announced that the U.S. was not only ending its participation in the JCPOA, but snapping back its entire arsenal of sanctions against Iran – and those who do business with it.

For Europe, keeping the deal alive, even without the US, is imperative. This is based neither on the economic dividends it has provided – trade with Iran last year was a meagre 0.6 per cent of the bloc’s total dealings – nor on the notion that somehow Iran’s domestic and regional policy is beyond reproach – it isn’t. Rather, it is predicated on a consensus that the nuclear agreement, secured after years of difficult negotiations, is serving its primary purpose and removed a major source of tension in a turbulent Middle East. “As long as the Iranians respect their commitments”, declared European Commission President Jean-Claude Juncker, “the EU will of course stick to the agreement … which is essential for preserving peace in the region and the world”.

President Hassan Rouhani is under pressure from hardliners to deliver guarantees that Iran’s continued compliance with the JCPOA yields the dividends to which it is entitled. Iranian hardliners have already declared their scepticism about Europe either having the will or the capability to withstand the US strong-arming it. For Europe, resisting Washington’s coercion means keeping the trading channels with Tehran open despite the pressure of US sanctions. This entails a combination of protections for European companies, such as a revised 1996 “Blocking Statute” to be implemented before US penalties become enforceable this summer, and inducements for Tehran, such as financing via the European Investment bank and processing Iran’s oil payments in a way that bypasses US restrictions.

While there is no foolproof way to shield Iran’s economy completely from the repercussions of a US exit or from continued uncertainty, the E3 (France, Germany and the UK) could develop a package whose political and economic value would be greater than the sum of its individual elements. The package could contain two sets of short-term and long-term elements.

The most immediate challenge is to keep Iran’s oil exports flowing into Europe.

The most immediate challenge is to keep Iran’s oil exports flowing into Europe. The EU would have to protect energy companies with a small footprint in the US to continue purchasing Iranian oil and gas, and empower pertinent European central banks to process related payments. Movement of funds could occur at the “net level”, that is, Iran’s revenues from exporting oil to Europe could be used to pay for Iran’s imports from Europe. The EU could also publish a general licence and describing an acceptable standard for due diligence and regulatory compliance for its companies to conduct legitimate business with Iran, thus providing them with a legal shield against secondary US sanctions.

The EU could replace its so-called 1996 Blocking Statute that prohibited European companies from complying with secondary US sanctions imposed on Iran with legislation that supports its companies when they press charges against US regulators at the International Court of Justice or International Chamber of Commerce. It could also establish a “clawback” clause for recovery of damages incurred for alleged sanctions violations through imposing tariffs on US exports to the EU.

The E3 – along with other willing EU member states – could announce a joint effort by their state-owned export credit or investment agencies to cover the risks, including those related to sanctions, that their companies might face in trading with Iran. In the past few months, a number of European governments have taken significant steps to facilitate legitimate trade with Iran by sharing the risks through such a mechanism, but the E3 can spearhead a more systematic, multilateral effort. France’s Agence Française de Développement, Germany’s Kreditanstalt für Wiederaufbau and the UK’s Department for International Development could launch a joint effort to support infrastructural development projects in Iran and enter into negotiations with Tehran to select projects and extend loans as soon as possible.

Medium-term measures would require more time to negotiate and implement, but could signal the seriousness of the European commitment to the JCPOA as well as to developing a cooperative and mutually beneficial relationship with Iran. The EU could create a multilateral Euro-denominated trading bank comprising state-owned and medium-size to smaller private banks. Its aim would be to pool these institutions’ resources and share risks, process payments, and provide credit guarantees and insurance services to European private-sector firms seeking to trade with or invest in Iran, and share due diligence and compliance information.

The European Commission could move Iran from the list of potentially eligible to fully eligible countries for receiving loans from the European Investment Bank to finance large public or private sector projects, and negotiate a framework for the bank’s operations in Iran. Also, the EU and Iran could negotiate and sign a long-term energy partnership, which in return for Iranian natural gas supplies to Europe via existing or new pipelines would provide Iran with access to cutting-edge renewable energy technologies.

Finally, the EU and Iran could enhance civil nuclear cooperation, including construction of new civilian nuclear power reactors in return for an agreement to turn Iran’s enrichment plants into joint European-Iranian ventures or staff them with European nationals.

Such measures affirm a commitment that so long as the Iranians stay at the table, Europe will take the lead in salvaging the deal, even in the face of significant pressure from their transatlantic ally. Success could, in turn, eventually serve as a platform for discussing regional flashpoints, or cooperating on issues such as civil nuclear technology, banking reform or the environment.

But diplomatic will must also contend with commercial realities. Even before the US withdrawal, many multinational companies and most international banks were hesitant to conduct business with Iran. As sanctions move from potential to actual, the list of European firms announcing their intention to wind down existing operations grows by the day.

Sales of civilian airplanes to Iran by Airbus and Boeing, for example, which were among the most financially substantial and symbolically significant agreements struck with Tehran after the lifting of sanctions, will no longer receive the necessary licences from US authorities. France’s TOTAL, which struck a multi-billion Euro deal to work on Iran’s South Pars gas field, has announced that unless it is granted an exemption by Washington, it will abandon the project by early November. Polish energy firms, German banks and Danish shipping companies are among those who have made similar declarations. US Secretary of State Mike Pompeo’s speech on 21 May outlining a pressure-centric approach to “crush” Iran’s economy is likely to accelerate this exodus.

European officials acknowledge that their ability to convince the private sector is limited.

European officials acknowledge that their ability to convince the private sector is limited. As the French president, Emmanuel Macron, put it: “the French president is not the CEO of Total”. Companies are responsible to shareholders; regardless of any diplomatic side benefits, they will not do business in Iran may at the cost of losing access to the US market, or being slapped with massive fines by the long arm of US enforcement authorities.

The key question is whether the sum total of what Europe can offer Iran is sufficiently robust – financially and symbolically – to give those in Iran who argue for restraint and continued engagement a chance. Without it, Europe will have lost an opportunity to keep a renewed nuclear crisis from adding to the long list of tensions within the region that would eventually reach European shores in the form of refugees and more radicalism, and Iran will have little incentive to make new compromises with a partner who failed to deliver. Trump did not kill the deal, but how Europe’s leaders navigate between Washington’s reach and Tehran’s expectations over the coming weeks could well determine if it can survive.

The Coronavirus Crisis is a Diplomatic Opportunity for the United States and Iran

Originally published in Foreign Policy

Washington and Tehran could use the public health emergency to show goodwill, dial down tensions while saving face, and avoid a dangerous confrontation.

If Iran’s leaders thought things couldn’t get worse, they were wrong. The country faces three simultaneous crises: a public health emergency that is worsening by the hour, tensions with the United States that have once again grown in the past few days, and an economic picture that could go from troubled to dire in a matter of months.

The confluence of a coronavirus pandemic, security threats, and financial troubles has deepened the political system’s legitimacy crisis in the wake of last month’s parliamentary elections that saw the lowest turnout in the Islamic Republic’s history. Washington might view this as a validation of its so-called maximum pressure strategy against Tehran, but if it fails to capitalize on this moment to de-escalate tensions and lay the groundwork for a mutually beneficial diplomatic settlement, the leadership in Tehran is likely to become more aggressive in the region, increasing the risk of a conflict that neither side appears to want.

Since the dramatic escalations of late 2019 and early 2020, which culminated in the killing of the Islamic Revolutionary Guard Corps commander Qassem Suleimani and Iranian missile strikes on Iraqi bases hosting U.S. forces, both Iran and the United States appeared content to return to their respective corners.

But there has been a steady stream of incidents in Iraq, with at least seven attacks near U.S. diplomatic facilities inside Baghdad’s Green Zone and U.S. military installations in Iraq throughout January and February. These attacks spiked on March 11 following a barrage of rockets that killed three members of the U.S.-led coalition, including two Americans, and injured more than a dozen others at an Iraqi army base, Camp Taji, north of Baghdad.

U.S. Secretary of Defense Mark Esper subsequently assessed that “Iranian-backed Shiite militia groups” were responsible. Secretary of State Mike Pompeo warned ­that “those responsible must be held accountable.” A day later, the United States retaliated against an Iranian-backed Iraqi militia in Iraq, which in turn fired more rockets into Camp Taji on March 14 and again on March 17.

The impact of the rapidly spreading disease and collapse in oil prices will likely present almost unprecedented challenges to an economy that is already beset by government mismanagement and U.S. sanctions.

This latest moment of peril is playing out against the backdrop of a dramatic COVID-19 outbreak in Iran, which has the third-highest number of confirmed cases and fatalities anywhere in the world. The Iranian government was slow in responding to the outbreak; and when it finally realized its scale and scope, Tehran was hampered by shortages caused by sanctions. Moreover, the government has kept a worryingly tight grip on the information flow to save face, prompting fears that the death toll—currently listed as 988—is probably much higher than the official figures suggest.

With Tehran’s initial response being dismissive of the risks of the virus’s spread and slow to mobilize against it, the government is now pleading for international assistance. Having already scored several calamitous own goals in recent months—raising fuel prices with little warning in November 2019, then violently suppressing subsequent protests, and in January downing a Ukrainian civilian airliner in the apparent belief it was an incoming U.S. missile—the government’s response to the coronavirus crisis could increase the population’s sense that its leadership is incompetent.

Meanwhile, the impact of the rapidly spreading disease and collapse in oil prices will likely present almost unprecedented challenges to an economy that is already beset by government mismanagement and under siege from U.S. sanctions.

One Iranian official calculated a drop of 18 percent in trade as a result of the pandemic—and that was before Iraq, a key regional trade partner, announced a full closure of the two countries’ common land borders and the price of crude tumbled below $30 per barrel. (While Iran’s exports have been blocked by the United States since April 2019, it has continued to make sales to China, albeit at sharply reduced levels.) The combination of reduced regional trade, evaporation of remaining oil revenue, and COVID-19’s impact on domestic business could prove catastrophic.

But that doesn’t mean that Tehran will bow to U.S. pressure and back down. Indeed, since May 2019, when the Iranian government chose to counter U.S. maximum pressure with a blend of nuclear and regional provocations, the system’s hard-liners have contended that high-risk brinkmanship yields greater dividends than restraint.

Feeling besieged and with no obvious diplomatic exit ramp, Iran might conclude that only a confrontation with the United States might change a trajectory that’s heading in a very dangerous direction.

The coronavirus outbreak has now put more pressure on the leadership’s calculus. Feeling besieged and with no obvious diplomatic exit ramp, Iran might conclude that only a confrontation with the United States might change a trajectory that’s heading in a very dangerous direction. This is also the view of Gen. Kenneth McKenzie, the head of U.S. Central Command, who told Congress on March 10 that the outbreak “probably makes them, in terms of decision-making, more dangerous rather than less dangerous.”

With U.S. President Donald Trump focused on the domestic economic and electoral effects of the coronavirus and the Iranian leadership highly reluctant to display any weakness to the United States, neither side is likely in the mood to engage the other.

That would be a missed opportunity. Indeed, both Washington and Tehran have floated ideas that, if acted upon, could break the current vicious cycle. Pompeo has urged the Iranian government—which furloughed tens of thousands of convicts due to fears of an epidemic in prisons—to free U.S. prisoners and other dual and foreign nationals on humanitarian grounds. The death of any of those inmates from COVID-19 would be a stain Iran might find hard to erase.

Conversely, Iran has asked the International Monetary Fund for emergency funding and a substantial list of essential equipment ranging from gloves and masks to portable respiration and X-ray machines. If the Trump administration stands in the way of such basic needs—by voting against an IMF loan to Iran—the United States would find it hard to overcome the impression that it had acted inhumanely.

The most logical and mutually beneficial outcome would be a two-phased humanitarian de-escalation.

The most logical and mutually beneficial outcome would be a two-phased humanitarian de-escalation. Iran would need to first agree to furlough all detained foreigners as the U.S. facilitates the transfer of medicine and medical equipment Iran needs to contain the outbreak and save lives without any sanctions-related delays.

In the second phase, the U.S. government could agree not to block the IMF loan to Iran while Tehran freezes its nuclear escalation and reins in its allied groups in Iraq, preventing any further attacks on U.S. forces and assets. This phase could also comprise another prisoner swap, either on par with the one-for-one exchange that happened back in December or, even better, a broader exchange of prisoners. This would be a win-win: putting tensions with Iran on ice, providing Trump with another success in his efforts to free Americans detained abroad, and providing Tehran with some economic reprieve and the means to save lives at home.

Since 2018, when the Trump administration pulled out of the nuclear deal with Iran, Washington and Tehran have been on a collision course pitting unrealistic U.S. demands against Iranian inflexibility. For either side to let a possible diplomatic off-ramp pass by would mean that a dangerous and deadly situation might again take a turn for the worse.

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