US sanctions return to Iran
On 5 November the United States reinstated another round of economic sanctions on Iran. It follows President Donald Trump’s decision in May to pull out of the nuclear deal — officially known as the Joint Comprehensive Plan of Action (JCPoA) — which lifted the sanctions in exchange for Tehran curbing its nuclear programme. While Iran’s compliance had been repeatedly confirmed, Mr Trump criticised the agreement for not dealings with the country’s ballistic missile programme or its destabilising activity in Syria and Yemen. Washington now wants to not only scupper the nuclear deal, but also cripple Iran’s economy through targeting its energy and banking sectors.
It’s not clear whether President Trump expected anyone to follow the US in withdrawing the UN Security Council backed deal. No one has. The remaining signatories — the EU, Germany, France, the UK, China and Russia — all want to preserve it. They see no better way of preventing Iran from becoming a nuclear power. For the EU in particular, the JCPoA was hailed as a symbol of the bloc’s growing diplomatic clout, as well as an advert for its common foreign policy. Europe is now pushing back against the sanctions in the hope of saving the deal.
To do so, Europe has been developing a new trading mechanism — a Special Purpose Vehicle (SPV) — that would keep the foundations of the JCPoA in place and allow for, as EU foreign policy chief Federica Mogherini puts it, “legitimate financial transactions with Iran”. Commercial ties have been key to keeping Iran in the deal.
In theory the idea is relatively straightforward. The US sanctions reintroduced on 5 November target, amongst others, Iran’s oil industry and Central Bank. Washington wants to reduce Iranian oil exports to zero, cut it off from the global financial network, and punish anyone, including allies, who helps Tehran stay afloat. The SPV however, would act as a new payment channel, circumventing the US financial system to shield companies in Europe and elsewhere from US penalties should they trade with Iran. Think of it as a complex barter system, allowing Iran to export to one country and then use credits for purchasing goods from another.
In practice it is much tricker. US Secretary of State Mike Pompeo says the SPV won’t work. He has a point. By slapping down an ultimatum — trade with Iran or trade with us, but not both — Washington has put the fear into the business world. Many multinationals involved with Iran won’t want to run the risk of losing access to US markets, even if Europe has promised protection. European oil companies, many with strong financial ties to the US, have already cancelled Iranian contracts. Major energy companies in China and India have also stopped placing orders.
The technical details of the SPV are still to be revealed. It’s likely to be limited at first, at least until Europe tests the waters. It may even just focus on small and medium-sized businesses who trade with Iran but have little-to-no US footprint. But before it can be launched an EU country must decide to host a physical base for the transactions, potentially eliciting further US punishment. So far there have been no volunteers.
Whatever happens, the sanctions will be messy. Iran’s economy — which is dominated by oil exports — is already weak; its currency has plummeted while inflation and unemployment are up. Millions of ordinary Iranians will suffer the most, with medicine supplies now at risk. Hardliners within the regime will argue the nuclear deal was doomed from the start. Moderates will struggle to be heard. While President Trump hopes the pain from the sanctions will force Tehran toward a better compromise, it’s more likely to act as a rallying point against Washington.
The sanctions may have other, more unintended consequences, too. If Mr Trump’s administration is not careful its bullying will alienate allies, pushing them — together with the likes of China and Russia — towards efforts to check American power. This will end up hurting Washington in the longer term. While the SPV remains in its infancy, over time it could set the foundations for a new financial architecture able to disrupt, if not compete with, the dominant US system. In bluntly weaponising the dollar, Mr Trump would only have himself to blame.
As for Europe, it is caught in a bind. The nuclear agreement had been an example of close transatlantic cooperation. It had shown that while the US and the EU had diverging interests and attitudes towards international politics, there was still room for deals to be made on the most important issues of peace and security. This has now been shattered. Europe will worry about looking both weak and strategically irrelevant.
Despite Washington’s audible triumphalism there are no winners from these sanctions. If Iran feels the same, and sees no way out, be prepared for even more instability in the Middle East.
Published November 2018