European leaders’ efforts to salvage the 2015 Iran nuclear agreement, aka the Joint Comprehensive Plan of Action (JCPOA), hang in the balance as their flagging bid to maintain economic links with Tehran in the face of US sanctions prompts growing Iranian non-compliance with the deal.
Europe vowed to save the UN-backed JCPOA—which offered Iran sanctions relief in exchange for scaling back its nuclear programme—after the US unilaterally withdrew from the agreement in May 2018 and re-imposed sanctions. Washington argued that the JCPOA failed to address Iran’s ballistic missile programme and “malign” influence across the Middle East—essentially support for militant Islamic forces, such as Hezbollah in Lebanon and Hamas in the Palestinian territories.
The European Union, however, has been unable to prevent a severe slump in Iranian trade. From January to September 2019, Europe’s exports to Iran fell by 50% while its Iranian imports plunged by over 90% compared to the same period the year before. In addition, Iran has seen overall foreign direct investment more than halve since the return of US restrictions on commerce.
Washington’s imposition of secondary sanctions has frustrated Europe’s efforts to maintain economic ties as the measures apply to non-American entities. European companies are deterred from conducting dollar-denominated transactions with Iran, especially if they have exposure in the US, as doing so could result in financial penalties. An EU blocking statute prohibiting compliance with the US measures has gained little traction and a barter-based trading mechanism, Instex, designed to circumvent the restrictions, has had little impact.
Instex, a special purpose vehicle conceived over a year ago by Britain, Germany and France, encountered delays; bureaucratic and sanctions-related. At the same time, its intended exchange of EU products for Iranian oil and gas has been limited to the provision of humanitarian goods, largely because of US threats to sanction the project.
President Donald Trump’s tough enforcement of US sanctions, meanwhile, has sent the Iranian economy into a tailspin. And with little in the way of compensating European economic support, Iran began breaching the JCPOA last year through the enrichment of its stockpile of uranium. The violations culminated in early January when Tehran said it would scrap enrichment limits.
Dispute mechanism triggered
Subsequently, Britain, Germany and France triggered the JCPOA’s dispute resolution mechanism, which allows for up to 65 days of mediation. If discussions fail to persuade Iran to meet its obligations, UN sanctions could be re-imposed and the deal would be dead in the water.
Faced with such a prospect, the EU said in February that it would extend the dispute resolution period indefinitely, aware that it may not secure Tehran’s compliance until Iranian trade with Europe is much improved. Iran will press hard for the latter because the coronavirus (COVID-19) pandemic’s impact on the country, where there is the worst outbreak of the virus in the Middle East, has piled yet more pressure on its sanctions-wracked economy.
Last month, Instex and its Iranian counterpart, STFI, finally completed their first piece of business, namely the export of medical equipment. The Europeans have promised more transactions and enhancements of the trading mechanism.
Yet few details of this inaugural deal, valued at just over half a million dollars, were disclosed, likely betraying lingering jitters over possible US sanctions-related penalties. Moreover, Tehran was not impressed with Instex’s debut, Iranian foreign ministry spokesman, Abbas Mousavi, describing it as a “good omen” but much less than the country anticipated.
“What the Islamic Republic of Iran expects [from now on] is for the Europeans to fulfil the rest of their commitments in various fields [such as] banking, energy and insurance,” he said.
With Washington apparently reluctant to ease its sanctions regime to help Iran cope with the pandemic, the Europeans will be under yet more pressure from Tehran to expedite economic assistance, particularly now that conservatives and hardliners dominate the country’s parliament following elections last month, in which thousands of their more moderate opponents were disqualified from running.
Hardline camp
The hardline camp has long been sceptical of the JCPOA and may not be too concerned about its possible collapse. As such, they will probably not shy away from further non-compliance as leverage for European trade. Yet for as long as secondary sanctions are in place, the prospects of Instex becoming an effective commercial channel are not great, even though it has drawn Russian approval and growing support within Europe—six more countries became shareholders in the project late last year.
The EU, meanwhile, has sought to keep relations with Tehran on an even keel by promising 20 million euros’ worth of humanitarian aid and supporting Tehran’s appeal to the IMF for $5bn of emergency funding to help combat the coronavirus upheaval. Though Washington plans to block the latter over concerns that the funds would be used for other purposes, some suggest that there are nevertheless steps that the IMF could take to address US unease.
The EU’s efforts might temporarily assuage Iranian frustration over the loss of commerce. But it seems that unless the Europeans determinedly challenge the US sanctions regime they may have to tolerate further Iranian breaches of the JCPOA that could eventually make the deal unsalvageable.
Yigal Chazan is head of content at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.
