Legal Pushback Against US Could Safeguard EU Interests in Iran

EghtesadOnline: Europeans spent much of last year trying to convince US President Donald Trump to do no harm to the nuclear deal Iran signed with world powers in 2015, also known as Joint Comprehensive Plan of Action.

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27 January 2018

Trump’s policy toward Iran is clearly at odds with European interests. Even if he can be persuaded to renew the US sanctions waivers next due in May, he is very likely to continue the charade of unpredictability.

This uncertainty has chilled the business appetite of European companies doing business with Iran, reads an opinion piece that recently appeared in the American publication Foreign Policy. Excerpts follow:

Some European officials state in private that the best option is for Europe to muddle through in the hope that Trump will eventually shift his position. But muddling through just won’t do, according to Financial Tribune.

Trump is likely to continue increasing his maximalist demands unless Europe flexes its political muscle.

In order to protect its economic and security interests, Europe must not only reject Trump’s ultimatum, which would be a kiss of death for the nuclear deal, but also push back. Europe should put in place a viable contingency plan if the United States continues backtracking on the deal and let Washington know it’s ready to use it.

As parties to the nuclear deal, France, Germany and Britain are best placed to coordinate such a strategy. Europe will need to present a package (together with China and Russia) that can entice Iran to continue abiding by the core elements of the current nuclear agreement.

Iranian officials have signaled that Tehran would consider remaining in the nuclear deal even if the United States walks away so long as it serves the country’s national interests. The Iranian leadership is likely to carefully consider if Europe can offer a pathway for Iran to continue its gradual political and economic reintegration with the world.

The most fundamental aspect of such a deal will rest on whether non-American companies are able and willing to do business with Iran. If Trump refuses to reissue the next sanctions waivers required by the nuclear deal, US secondary sanctions that impact non-American companies would snap back into place.

Should such sanctions be reimposed, European companies with commercial interests in the United States would be significantly impaired from importing Iranian oil and undertaking financial transactions with the country. Should they decide to ignore such secondary sanctions, their assets in the United States (which far outweigh existing business with Iran) would be subject to penalties.

To prevent such an event, European governments will have to take steps to shield their companies from the punitive reach of these sanctions and create an environment where companies such as Total, Airbus, Shell and Siemens can continue their business in both Iran and the United States. To do so, Europe should focus on several priorities.

Negotiating Exemptions, Reviving Blocking Regulation

First and foremost, European governments and businesses should privately consult with US officials and Congress on creating exemptions to the enforcement of any nuclear-related secondary sanctions that may impact them.

The model of the Russia sanctions package last year can be adopted to urge US lawmakers to put in place a warning and waiver system to exempt European companies from enforcement. If Washington refuses this approach, European governments should publicly warn that in any instance where the US Treasury actively enforces secondary sanctions targeting European companies dealing with Iran, the European Union will revive measures similar to its “blocking regulation”.

The EU blocking regulation was introduced in 1996 in response to attempts by the Bill Clinton administration to extraterritorially enforce US sanctions prohibiting certain trade with Libya, Iran and Cuba.

Europeans resisted these attempts, which were very costly for their energy interests. They did this first through political channels and then through legal pushback (which finally worked, and Clinton issued waivers suspending the impact of these sanctions on European companies).

The blocking regulation essentially made it illegal for European companies to adhere to US extraterritorial sanctions (and thereby provided them with some legal cover not to pay their US fines). The EU regulation was accompanied by measures that allowed European companies to claw back costs imposed on them by US regulators.

Today, attempting to use these mechanisms will not be cost-free for European companies (many of which have considerable assets in the United States that could be subjected to Treasury Department penalties). Nor will it be cost-free for transatlantic relations. European companies are not likely to do business with Iran at the possible expense of forfeiting their market share in the United States. But this sort of legal pushback can boost Europe’s political leverage in negotiating with the Trump administration and making it think twice.

It is worth it, given the alternative costs of expansion of Iran’s nuclear program and raising the possibility of military confrontation.

Put simply, EU officials must tell Trump: If you fine our companies’ assets in the United States, we will reclaim those costs by penalizing US assets in Europe. This would cause a major trade conflict that the Europeans want to avoid by all means. But the option and the precedent exist.

Boosting Cooperation With Asian Powerhouses

Second, to bolster the EU’s bargaining position, European governments should increase their coordination with China, Russia and Asian economic powers such as India, South Korea and Japan.

All share a concern about the overreach of US secondary sanctions.

France and Britain should coordinate with Russia and China at the UN Security Council, particularly on how to prevent the reimposition and enforcement of UN nuclear-related sanctions against Iran so long as Tehran is fulfilling its obligations.

Resolving Financial Deadlocks

Third, Europe and Iran must resolve the banking and financial deadlocks that have significantly impaired economic ties. This has become a problem even for major European companies such as Airbus.

European governments can step up efforts to provide companies with paths to financing deals with Iran, which are an alternative to current banking structures exposed to the US financial network. Some European countries have already issued credit lines and started to consider how to introduce banking mechanisms exclusively for deals with Iran.

The EU can also lay the groundwork to allow the European Investment Bank, founded with the mission to contribute to EU policy objectives, to extend financing to medium-sized European companies struggling to undertake projects inside Iran. The EU can offer greater technical assistance and expertise to Iran in this effort.