Europe unlikely to avoid Trump’s Iran sanctions

This effort to evade US sanctions by US allies exacerbates tensions in the transatlantic alliance and risks undercutting the effectiveness of sanctions.
Sunday 30/09/2018

Prompted by the unilateral US withdrawal from the nuclear deal with Iran, the remaining signatories are urgently trying to maintain the agreement, both for strategic reasons and to preserve its trade benefits.

A British, French and German proposal to develop an independent channel for maintaining trade with Tehran, however, is unlikely to succeed and risks undermining the effectiveness of European economic sanctions.

The three European countries (E3) are pursuing the establishment of a special purpose vehicle (SPV) to evade US sanctions and maintain trade with Iran. The proposed SPV would act as an accounting firm, tracking credits against imports and exports without the involvement of commercial or central banks.

For example, Iran could export oil to a French firm, accumulating credit that could be used to pay for imports from an Italian manufacturer without funds touching Iranian hands. By using credits instead of cash, the SPV would not require fund transfers outside of the European Union. Supporters contend this would shield the funds from US sanctions.

While the E3 may see merit in preserving the nuclear deal through an SPV, such a mechanism is counter to broader EU policy interests of ensuring the effectiveness of UN and EU economic sanctions. Creating a shell mechanism to potentially skirt US sanctions is unlikely to prove a viable alternative to the global financial system nor an effective means of shielding European firms from US sanctions because the United States would likely consider these to be prohibited transactions.

Moreover, the SPV undermines the European Union’s ability to enforce the more than 30 sanctions programmes it currently has in place, as well as future sanctions programmes.

The looming November “snapback” of US sanctions on Iran, particularly on its oil sector, is the primary driver of the European Union’s search for an alternate payment mechanism. EU leaders fear that Iran will continue to comply with the nuclear deal only if it can still export oil. Once the significant US sanctions snap back into place following their multi-year suspension under the nuclear deal, any firm engaging in proscribed business with Iran may be subject to US sanctions.

The European Union has taken steps to mitigate the effect of US President Donald Trump’s decision to withdraw from the Iran deal. In August, the European Union amended its 1996 Blocking Statute, which enables European firms to seek compensation for damages from US sanctions and allows for potential penalties against European companies that comply with US sanctions without the European Commission’s approval.

The amended Blocking Statute, however, will not effectively shield EU companies from US sanctions. Those firms will need to weigh the benefits of doing business with Iran against potential sanctions penalties. The proposed SPV seeks to change that calculus by distancing EU trade with Iran from the global financial system and reinforcing the Iran nuclear deal.

With the SPV, the E3 are seeking to effectively carve out Iran’s struggling oil sector from US sanctions, creating a lifeline for the nuclear deal but at the risk of escalating confrontation with the United States. Although the SPV seeks to remove the global financial system from EU-Iran trade, its bartering process will mean that EU firms are regularly intertwined with their Iranian counterparts, creating a heightened risk.

Similar to the Blocking Statute, the SPV may give EU firms a false sense of immunity from US sanctions. The extraterritorial aspects of the US Iran sanctions mean that most large EU firms are unlikely to use the SPV. At least ten major European firms, including those in the energy industry, have assessed that the risks of doing business with Iran far outweigh the commercial benefits.

Creating a mechanism to evade US sanctions sets a dangerous precedent. UN, EU and US sanctions are largely effective because of the global financial system’s compliance, without which the effects of sanctions will diminish. Should the SPV prove successful, Russia, China and other states with a strategic interest in undercutting US sanctions likely will follow suit.

The European Union clearly disagrees with the US withdrawal from the nuclear deal with Iran but taking steps to undermine the integrity of a valuable tool — economic sanctions — risks turning policy disagreement over one issue into a strategic divergence.

The SPV risks undermining the European Union’s own sanctions enforcement by creating a precedent that could be applied to any sanctions programme now or in the future. The broader negative implications of championing such a mechanism outweigh the incremental trade that could be facilitated. Whether or not the SPV proves viable, this effort to evade US sanctions by US allies exacerbates tensions in the transatlantic alliance and risks undercutting the effectiveness of sanctions.

This article was reprinted with permission from the Atlantic Council’s IranSource blog (http://www.atlanticcouncil.org/blogs/iransource).

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