Europe's Unequal Exchange with Iran: the Missing Links

European officials ought to be lauded for their current brave efforts to preserve the Iran nuclear agreement despite the US's exit and the mounting economic warfare against Iran.  To the surprise of many in the international community, Europe has displayed an unexpected political will to stand up to US and its bullying by siding with Iran on the agreement and taking a number of important steps to save it.  The latter include adopting a new "blocking regulation" aimed at protecting the European firms in Iran from US's secondary sanctions, allocation of 18 million EUROS to support the private sector in Iran, and designing a special barter system known as the Special Purpose Vehicle (SPV), whereby Iran-Europe trade would bypass the US Dollar and US financial system.  

Certainly, the SPV is a welcome step forward and, while its precise details are yet to be fleshed out, marks a significant improvement over the past few months' inaction, when the onslaught of companies' exodus from Iran was ill-matched with tangible action by the European governments, who profess to fully abide by the terms of the agreement known as the Joint Comprehensive Plan of Action (JCPOA).  As expected, the US officials are deeply disappointed and US Secretary of State Mike Pompeo has been unable to hide his frustration with the uncooperative Europeans who refuse to accommodate the US's bellicose policy against Iran.  Indeed, at the recent UN Security Council meeting chaired by President Trump, various European governments took the opportunity to express their profound disagreement with his decision on the JCPOA, which serves Europe's economic and security interests.

But, as the November US deadline on oil embargo on Iran looms large, the question is what can the SPV actually achieve?  From Iran's vantage, what matters are not paper agreements but concrete steps that translate into economic benefits.  There is a consensus in the expert community that the large European companies, which have interests in the US market, would not be willing to take any risks by utilizing the SPV.  That leaves the big energy, auto, manufacturing, insurance, and transportation companies such as Total, Danieli, Alianz, Peugeot, and Maersk, out of the picture, which are essentially irreplaceable by smaller companies.  It is therefore unclear, for example, how Europe can continue importing oil from Iran without the participation of the giant European oil and transportation companies?  The SPV is explicitly geared toward the small and medium-sized companies willing to engage in trade with Iran because of their purportedly limited transactions with the US market and, obviously, at this point it is simply impossible to predict how those smaller European companies react to the SPV and whether or not they are willing to take any risks? After all, the aim of any medium-sized company is to grow in size and expand its reach and that simply means that many of them will be hesitant to participate in the SPV arrangement with Iran out of fear of future reprisals by the US.

Realistically speaking, then, it is a safe bet that the SPV will not make much of a difference in the present state of affairs marked with the flight of European companies from Iran and declining Iran-European trade in the aftermath of US's exit from the JCPOA.  This trend will likely continue for the foreseeable future and the SPV will matter more as a political gesture than a serious economic remedy that would satisfy Iran's legitimate demand that the Europeans deliver on their JCPOA obligations by maintaining normal trade with Iran and sustaining their oil imports and allowing Iran's access to European financial system. The SPV must therefore be complemented by additional steps that would result in Iran's access to EURO and the Central Bank's ability to conduct normal transactions with the European banks including the European central banks.  A more effective remedy would be the establishment of a special Iran-EU trade bank that would permit normal EURO-denominated trade with Iran, instead of an arduous barter system, in light of Iran's pre-JCPOA unhappy experience with barter resulting in the loss of billions of dollars. 

Indeed, if Europe is serious about preserving the JCPOA, it must commit itself to direct EURO-based trade with Iran, partly by the various European governments issuing credit to finance trade with Iran and also entering into special arrangements with their own energy companies for the sake of maintaining energy trade with Iran. Unfortunately, one of the problems with the SPV is that it is presented as an alternative to normal trade with Iran, as mentioned above, which is absolutely necessary in order to preserve the JCPOA and its various articles on normalization of trade with Iran.  Not only that, Europe must be prepared to levy sanctions on US companies if US acts on its threats and sanctions European companies involved with Iran.  From Iran's point of view, it is immaterial what the Europeans' concerns and scope of interests with US are, what matters is both sides' obligations under the JCPOA, which is now somewhat skirted by the Europeans, who openly admit that their aim is to bring some economic benefits to Iran but not so much that Iran would continue its "malaign" activities in the region. Such statements, e.g., by the British Foreign Secretary in his recent interview with the US media, reinforce the Iranian suspicion that the West European governments want to deliver a half loaf to Iran, while simultaneously demanding full compliance of Iran with its JCPOA obligations.

In fact, at the General Assembly summit, the European leaders did not lose an opportunity to hammer that point in unison, repeatedly warning Iran that if it as much as blinks on its JCPOA commitments then all bets are off.  Clearly, such warnings were issued in response to Iran's threat of resuming its nuclear activities if Tehran concludes that the economic benefits of the JCPOA are not forthcoming.  But, in light of the above-said, even with the SPV, Iran will be deprived of harvesting the benefits of the JCPOA, which imposes severe restrictions on Iran's nuclear program.  A direct intervention of Europe's central banks is still missing and it is difficult to imagine how Europe can deliver the promises to Iran as long as it falls short of the necessary steps to normalize trade with Iran.  The SPV in fact institutionalize the abnormal status of Iran-European trade and is a leap backward in some sense, instead of being a timely remedy, i.e., a wholly insufficient initiative by itself that at best would make only a marginal difference with respect to Iran's current economic isolation resembling the pre-JCPOA era.

In conclusion, Europe ought not take Iran for granted and expect an unequal exchange that smacks of a 'nuclear Orientalism'.  Either it fulfills its full obligations under the JCPOA or it must expect Iran to reciprocate by reconsidering its approach toward the agreement.