The USA has officially exited the Joint Comprehensive Plan of Action (JCPOA), commonly referred to as “the Iran deal”. Their departure comes with a revival of sanctions against Iran – and anyone who engages in business with them. The first round of sanctions came into effect in August of this year, and will be followed by a second round this month. European officials, nonetheless, are committed to upholding their deal with Iran, considering it crucial to the EU bloc’s collective national interests. And yet, this means Europe is susceptible to sanctions from the USA – a sticky situation, all around. In theory, Europe could use a financial mechanism to sidestep the problem, but exactly what this will look like, or whether this will be implemented at all is yet to be determined.
From the get-go, the Iran deal was put in motion to allow nuclear inspectors into the country, thereby ensuring Iran was not engaged in enriching uranium – a key step in the building of nuclear weapons. The JCPOA allowed for routine inspections of Iran’s nuclear program, in exchange for the lifting of crippling economic sanctions on the Middle Eastern country. Since the deal’s inception in 2015, Iran has stood by the agreement (more or less.) However, despite its relative effectiveness, President Trump has stated the deal is “horrible” and “defective,” subsequently pulling-out of the pact his predecessor negotiated.
In contrast, the EU – in an effort spearheaded by France – is committed to upholding the agreement, as they see it as a crucial element in guaranteeing the security of “Europe, the region, and the entire world”, by keeping Iran in compliance with the IAEA (The International Atomic Energy Agency). China and Russia are also keen to uphold the accord, and are both seeking to do so by countering American sanctions.
“Europe can no longer rely on the United States alone for its security.” French President Emmanuel Macron has said. “We remain committed to implementing the nuclear deal, as a matter of respecting international agreements, and of our shared international security, and expect Iran to play a constructive role in this regard,” read a joint statement issued from France, Germany, and the UK.
A work-around mechanism that side-steps the American-dominated banking system would allow the European Union to continue buying oil and goods from Iran. However, refusing to follow the USA’s lead opens the bloc up to retaliatory sanctions from the United States.
Here’s how a work-around might be structured: the global economic banking system is currently dominated by American financial institutions. This means that continuing to engage with Iran economically is difficult as it would be necessary to bypass the United States’ banking system. In theory, a special purpose vehicle could act as something of a clearing house. Iran’s proceeds from sales of oil and gas could be offset by any purchases they make – in other words, a form of barter – which would replace explicit financial transactions. But in practice, no European country has agreed to host this vehicle, for fear of American reprisals. Should they agree to follow this economic model, it would need to be up and running by next year.
Needless to say, the United States government is not happy about the prospect of a work-around mechanism, and has threatened to counter any such attempt with individual sanctions. Even if it were possible to launch such a scheme in the near future, according to estimates made by European officials, only about 30-40 per cent of existing trade with Iran could be preserved – and that’s an optimistic estimate. This is because many large European companies have strong financial and trading ties with the USA – and in effect, they have already pulled out of Iran, or are in the process of doing so to avoid being slapped with penalties. In contrast, Washington has granted waivers to eight countries, such as Turkey, allowing them to continue to purchase Iranian energy, sanction-free, in order to keep the energy market stable. However, such waivers are not permanent.
Creating such a work-around would essentially cause a breach in America’s hold on international transactions, something Americans may not like, especially if the effort is replicated. The American government sees it as an attempt to undermine their foreign policy. And, even if such an effort does fail, it is likely to cause further political distance between the Trump administration and European governments.
Russia is less exposed to American penalties, and will continue to openly trade in oil and gas from Iran, which they will, in turn, sell to other countries. While the fact that upholding the Iran deal puts Russia and the EU on the same side, French President Emmanuel Macron, in renewed declarations, stated that the EU needs a “true European army”, to stand against Russia and other threats. France is the foremost state advocating this policy, but has also received tentative support from Germany. “Peace in Europe is precarious,” Macron stated.