The Iran deal is a done deal

By Aaron Arnold, May 16, 2018

This past week President Trump dropped a hand-grenade on the Joint Comprehensive Plan of Action (JCPOA), leaving European leaders scrambling to keep the deal intact as the United States moves to re-impose unilateral sanctions against Iran. Europe’s leaders must balance the strategic security of keeping Iran’s nuclear program at bay or risk further political fallout with the United States, possibly jeopardizing EU-US business interests.

 

Although the text of the JCPOA is somewhat convoluted, and there are clearly faults in terms of what happens after the agreement, the bargain itself is simple: In exchange for US, UN, and EU sanctions relief, Iran agrees to curb its nuclear program. Thus, without sanctions relief, Tehran would have little interest in keeping its end of the bargain. In order for the European Union to assure Iran of continued sanctions relief, it will need to find a way to protect EU business from potential secondary sanctions—that is, US unilateral financial or economic sanctions imposed on EU companies for conducting business with Iran. In his statement on Tuesday, President Trump threatened secondary sanctions, noting: “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States.”

 

So far, there seems to be a strong lobby in favor of protecting EU business interests in Iran by proposing sanctions-blocking measures to guard against US secondary sanctions. Ultimately, however, it will be business, not political decisions, that will spell the end of the JCPOA— a lesson almost learned in 1982.

 

 

Are there any lessons from 1982? In the early 1980s, the Soviet Union began constructing an ambitious pipeline that would connect its western-Siberian gas fields to European distribution networks, increasing its production by almost 40 percent. In order to reduce costs and improve efficiency, as well as lay the groundwork for a much larger footprint in the Western European energy markets, the Soviet Union began contracting with European suppliers and financiers.

 

Fearing increased Western European energy dependence on the Soviet Union, President Reagan moved to restrict US companies from working on the pipeline project. Using the Soviet Union’s harsh crackdown on pro-democracy movements in Poland as a pretext, the Reagan administration imposed strict trade controls, under the Export Administration Act, to suspended the export licensing for any US firm trading in pipeline-related goods and services. This also included several US subsidiary firms operating in Europe, like Dresser SA—a subsidiary of Texas-based energy services and technologies supplier, Dresser Industries.

 

Europe was not happy. The sanctions were seen as an extraterritorial extension of US jurisdiction, and the issue was brought before the European Council for a legal resolution. In August 1982, France ordered Dresser SA to proceed with its shipment, in direct violation of US law. By September, the United Kingdom had also ordered its companies to comply with its contracts and fulfill pipeline-related orders. As tensions mounted and with no legal resolution in sight, President Reagan eventually backed down and repealed the sanctions before events spiraled further out of control. Unfortunately, because this dispute was solved politically instead of through legal processes, the question of secondary sanctions and extraterritorial jurisdiction remains largely unaddressed. If the Trump administration decides to aggressively enforce secondary sanctions against UK and EU firms for their business dealings with Iran, it will likely test the legal boundaries of US extraterritorial jurisdiction.

 

But how far will the United States go? Cooler heads prevailed in the early 1980s—qualities that are seemingly absent in Trump’s administration. Whether or not the Iran deal stays intact largely depends on how the Trump administration decides to enforce re-imposition of sanctions. Prior to the JCPOA, US sanctions against Iran were a mish-mash of executive orders, legislation, and regulations that targeted Iranian oil, shipping, insurance, and re-insurance sectors, and blocked Iran from accessing the US financial system, as well. Coupled with UN and EU sanctions, Iran saw major declines in its oil production and was eventually cut off from the global financial system. Ultimately, this pressure from the United States and global partners contributed to Iran’s decision to negotiate with the P5+1 (US, UK, France, Russia, China, and Germany).

 

Under the JCPOA, the United States removed sanctions against several designated entities, such as the National Iranian Oil Company, and promised to issue waivers against enforcing many of the secondary sanctions against Iran’s financial, energy, shipping, and insurance sectors—many of which were found in the Comprehensive Iran Sanctions Divestment Act of 2010 and the National Defense Authorization Act of 2012. However, other sanctions regimes remained in place, such as those targeting terrorism, human rights violations, and trafficking in proliferation-sensitive goods and technologies.

 

Traditionally, in terms of enforcing secondary sanctions, the United States has taken a rather conservative approach, recognizing the potential blowback against American economic and security interests. In fact, prior to the JCPOA, the United States had only enforced secondary sanctions against two banks—Kunlun Bank in China and Elaf Bank in Iraq—for facilitating transactions on behalf of sanctioned Iranian banks. Although a provocative move—to impose US jurisdiction against non-US bank—the political and economic fallout was tempered by the sanctioned banks’ relatively small footprint on the US and global financial system, as well as broader international support in terms of isolating Iran from the global banking system.

 

How the Trump administration will administer its re-imposition of sanctions against Iran is slowly coming into focus. Shortly after Trump’s announcement, the Secretary of the Treasury, Steven Mnuchin, noted that companies will be given a wind-down period of anywhere from three-to-six months to end previously existing contracts with Iran.

 

Does the EU have any options? Since then, the political dynamics have changed. While the United States has unilaterally withdrawn from the JCPOA, Germany, France, and the United Kingdom have expressed their commitment to remain in the deal. French finance minister, Bruno Le Maire, has proposed measures to protect French and EU business from US secondary sanctions such as a legal basis to ignore US sanctions and decisions by foreign courts.

 

Such measures are similar to those imposed during the 1981-82 trans-Siberian pipeline debacle, where French and UK governments ordered their companies to comply with contractual arrangements with the Soviet Union. Given the interconnectedness between US, EU, and UK economies, however, these approaches are likely to be ineffective. Recent cases, such as the civil asset forfeitures against China-based North Korean financial networks and major fines and penalties imposed against Chinese telecommunications giant ZTE show that few companies and individuals exist beyond the long arm of US jurisdiction.

 

If the Trump administration aggressively targets EU or UK firms, the EU may move to insulate its economic interests from US jurisdiction by lessening its dependence on the US dollar and the US financial system. However, developing alternative banking channels is no easy task. But given recent de-risking trends, which seek to avoid—rather than try to deal with—the risks associated with anti money-laundering and know-your-customer regulations, there may be a growing appetite for such alternatives.

 

The EU does have a few big guns it could employ in response to Trump’s actions. For example, the EU could freeze US assets. Alternatively, the EU could block US financial institutions from SWIFT—the Belgium-based global financial communications system, which blocked Iran in 2012. These scenarios, however, are unlikely and riddled with political and economic landmines.

 

The end of the deal. Simply put, whether or not Iran remains committed to the JCPOA now rests largely in the UK and the EU’s ability to uphold their commitments. To do so, however, means that UK and EU firms fulfill existing and future contracts with Iran, as well as continuing to permit Iran’s access to the global financial system—possibly violating US sanctions. In the end, however, this is an economic decision, not a political one, and it is unlikely that the EU’s bulwark is strong enough to restrain multinational corporations’ economic interests for the sake of keeping political commitments to Iran. Germany’s trade with Iran, for example, sits at approximately $3.8 billion—less than 2 percent its of trade with the United States. It would be economically unwise to put those business relationships in jeopardy. It is this reality that will force the EU and the UK to concede to US unilateral sanctions. A bitter pill to swallow, indeed, and one that forces the JCPOA to collapse.


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