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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?
Iran: Preserving the Nuclear Deal
Iran: Preserving the Nuclear Deal

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.

Iran: Preserving the Nuclear Deal

U.S. withdrawal from the Iran nuclear deal has exacerbated tensions between the two countries and endangered the agreement. In this excerpt from our Watch List 2019 for European policymakers, Crisis Group urges the EU to uphold the deal conditionally and to handle other security concerns in the region separately.

The Trump administration’s decision to exit the 2015 Joint Comprehensive Plan of Action (JCPOA) and unilaterally reimpose sanctions on Iran as part of a “maximum pressure” campaign has put the agreement in significant jeopardy and set the U.S. and Iran on a possible collision course. The remaining signatories to the deal, including the EU and three member states (France, Germany and the UK, collectively known as the E3), are striving to preserve it and Iran has continued to adhere to it. But as sanctions take a severe toll on the Iranian economy, the urge to retaliate against the U.S. withdrawal is building up in Tehran. The accord’s collapse would lead to a renewed and perilous nuclear crisis at a time when tensions across the Middle East are already high, including between Iran and regional powers such as Saudi Arabia and Israel.

The EU and its Member States Should:

  • Uphold the JCPOA so long as Iran remains in compliance with its nuclear obligations and implement mechanisms such as the Special Purpose Vehicle (SPV) to ensure the accord delivers at least some of its anticipated economic dividends.
     
  • Undertake more effective public diplomacy, particularly toward Iran and the European private sector, to clarify its policies and explain the complexity of European efforts in adopting such mechanisms.
     
  • Continue discussions with the U.S. regarding member state exemptions on secondary sanctions, particularly with regards to humanitarian trade with Iran.
     
  • Separate efforts to save the JCPOA from their response to other security concerns, including purported plots against Iranian dissidents on European soil and Iran’s ballistic missile tests and transfers.
     
  • Encourage Iran to deepen and widen ongoing EU-Iran discussions on Yemen to include other regional issues as well as Iran’s ballistic missile program and human rights.

Threats to Diplomacy and Regional Stability

In May 2018, President Donald Trump announced that the U.S. would terminate its participation in the JCPOA and reimpose sanctions lifted in 2016 as part of the nuclear agreement. Washington’s repudiation of the JCPOA is part of a wider “maximum pressure” campaign against Iran seeking to not only coerce Iran into renegotiating the terms of a concluded and functioning multilateral accord, enshrined in a UN Security Council resolution, but capitulating to a longer list of U.S. demands on Iran’s regional policies and ballistic missile program. The risks in the coming year are threefold: that Iran, seeing dwindling benefits from its continued adherence to the JCPOA, decides to curb or terminate its participation in the accord, sparking a renewed nuclear crisis; that the U.S. and Iran will keep edging toward a direct conflict; and that regional frictions between U.S. and Iranian allies could escalate and draw in other parties.

If Iran’s dividends from the nuclear deal keep shrinking, hardliners in Tehran who call for abrogating the JCPOA and assuming a more confrontational posture in the nuclear realm and the region could gain ground. Sanctions have already weakened Iran’s economy, driving a significant devaluation of the rial, pushing up inflation, curbing the country’s oil revenue (some limited oil waivers notwithstanding) and sinking the economy into a recession. With a parliamentary election in 2020 and a presidential vote in 2021, pragmatic politicians associated with an increasingly fruitless diplomatic approach could lose ground to more hard-line forces critical of international engagement.  

At the same time, tensions over Iran’s regional role and a U.S.-led drive to curb it could leave Washington and Tehran jostling for the upper hand across a string of regional flashpoints, from Afghanistan and the Gulf to Iraq, Syria and Lebanon. Tensions between Iran and Israel are of particular concern, with Israel acting more frequently to counter what it perceives as Tehran’s rising influence across the Levant. A confrontation between Hizbollah and Israel, for example, could rapidly escalate in Lebanon and Syria, drawing in Iran and the U.S. in support of their respective allies.

Bolstering the Deal and Broadening Dialogue

As core participants in the nuclear deal, the EU and three of its member states have thus far delivered a consistent and unified message against Washington’s JCPOA withdrawal and sanctions. High-level European participation in the upcoming ministerial meeting on the Middle East in Warsaw, which will likely see significant U.S. emphasis on criticising Iran, could erode this message and European credibility in Tehran. EU measures to protect the deal, such as the blocking statute introduced in August 2018 and the SPV expected in early 2019, backed by the E3 and designed to facilitate European trade with Iran in a way that bypasses U.S. sanctions, are critical to forestalling the accord’s collapse, and should be fully implemented. Such efforts would be more effective alongside more robust political signalling and public diplomacy campaign underscoring the extent of the EU’s work to preserve the JCPOA, both to the European private sector and Iran itself. Visits by high-level EU officials to Iran, outreach to Persian-language media platforms explaining EU decisions and policy, and the production of readily-accessible information in Persian of relevant EU statements and announcements could each serve to increase the visibility and explain the importance of EU decisions on Iran. Brussels should also intensify its consultations with the Islamic Republic to allow the establishment of an EU delegation in Tehran.

In parallel with these efforts, the EU should encourage the U.S. to issue extended and ideally expanded sanctions waivers for member states, and press for clarity on nuclear and humanitarian exemptions. It can also maintain its dialogues with Tehran on Yemen (there were four rounds of discussions that France, the EU, UK, Germany and Italy held with Iran in 2018) while exploring wider avenues of engagement on both regional and domestic issues. Such conversations may be crucial for eventual talks on building on the nuclear agreement, not least if the U.S. chooses to re-engage diplomatically in due course. 

Preserving the JCPOA does not preclude the EU from pressing Tehran on other security issues, particularly alleged assassination attempts against Iranian dissidents on European soil, renewed ballistic missile testing, and potential Iranian weapons transfers to local allies in the Middle East. The JCPOA does not constitute a carte blanche for Iran to behave in ways that damage European interests. Still, should the EU and its member states eventually place targeted sanctions on Iran, it should make it clear that these measures do not prejudice continued cooperation on the nuclear front.