Trump’s Iran sanctions: an explainer on their impact for Europe

Trump’s Iran sanctions: an explainer on their impact for Europe

Iran sanctions mini-series


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ECFR presents the first in a mini-series on the likely impact of US sanctions on economic ties between Europe and Iran.

President Donald Trump’s decision to withdraw the United States from the Iran nuclear deal has placed the European Union and the US on opposing sides of a complex sanctions framework. In recent months, the US has touted its unilateral sanctions as a powerful tool for forcing other countries to halt their business with Iran. European governments have sought to minimise the these sanctions’ impact on European companies without opening a major rift in the tense transatlantic relationship.

The EU, China, and Russia remain party to the deal – formally known as the Joint Comprehensive Plan of Action (JCPOA) – because it places unprecedented restrictions on Iran’s nuclear programme, thereby contributing to global security. European countries have vowed to hold the deal together (albeit by a thread) for so long as Iran adheres to its terms. Iran reaffirmed its compliance this month. To ensure that Tehran continues to keep its side of the bargain, the EU has scrambled to maintain economic ties with Iran even as a wave of European companies suspend their dealings with the country.

Follow the ECFR sanctions series:

In this series of commentaries, ECFR assesses the likely impact of US sanctions on economic ties between Europe and Iran, covering strategically important areas such as trade in essential goods, energy, and banking. The series examines how European governments can minimise the fallout of their attempts to maintain Iranian compliance with the nuclear deal.

Part 1: Trump’s Iran sanctions: an explainer on their impact for Europe
Part 2: Iran: The case for protecting humanitarian trade
Part 3: Can Iran weather the oil-sanctions storm?

So far, European firms have largely complied with US secondary sanctions. It is unclear whether they will continue to do so, and to what extent, in the long term. In the coming months, the outcome of the dispute will create a precedent for transatlantic cooperation on future sanctions, and will shape other states’ perceptions of European strength and sovereignty in economic policy.

The US ultimatum: pick a side

Since Trump’s withdrawal from the JCPOA in May this year, American officials have travelled the world to issue an ultimatum to non-US companies: stop doing business with Iran or you will be denied access to the US market and financial sector. This threat has proved even more effective on European companies than the hefty fines they previously received for non-compliance with US sanctions on entities in Iran and Cuba.

For most companies in Europe, the balance of interests is clear: their business dealings in the US, and their dependency on the US financial system, dwarf any connection with Iran. European firms that operate in non-sanctioned areas of trade with Iran or that do not rely on the US are attempting to maintain their business with Iranian entities. Nevertheless, they face numerous operational difficulties resulting from the impact of US secondary sanctions on third parties, including financial institutions and the insurance sector.

European business executives often make the point that they are answerable to their shareholders and board of directors, and that European governments’ promises to shield them from US sanctions are cold comfort. During the last round of US sanctions against Iran, in place during 2010-2012, American regulators often investigated European companies. At the time, with little serious political pushback from European governments, these investigations resulted in a series of large fines on the firms. The experience had a major impact on many European companies’ calculation of risk.

Revived US Secondary Sanctions

Under the JCPOA, the US agreed to lift some of its sanctions targeting Iran’s nuclear programme. For non-US companies, easing secondary sanctions was crucial – otherwise, they could forfeit their business in the US and face fines. In January 2016, the US rolled back some important secondary sanctions targeting Iran’s energy and banking sectors, and the EU lifted similar sanctions. These measures paved the way for European companies to re-enter the Iranian market.

Shortly after Trump’s decision to withdraw from the JCPOA, the US began to reintroduce its nuclear-related secondary sanctions on Iran. The US provided companies with 90-180 days to wind down their operations related to Iran. The sanctions are being reintroduced in two waves. The first, which came on 7 August, covers commercial planes, cars, precious metals, and carpets; the Iranian government’s purchase of US dollar banknotes; and the exchange of Iranian rials (including for funds outside Iran). This wave of sanctions also applies to European companies that provide associated services, such as shipping in these sectors.

Europe still needs to do much groundwork if it seeks to minimise the impact of US secondary sanctions

The second wave will come on 4 November, targeting Iran’s energy, financial, insurance, shipping, and port sectors, as well as non-US financial entities’ transactions with the Central Bank of Iran and other designated Iranian banks (whose identity remains unclear). These sanctions will be particularly damaging for Iran’s economy, as they are designed to significantly reduce the oil exports the Iranian government largely depends on for revenue, and to block Iran’s access to global financial networks. It remains unclear whether the US will issue waivers and exemptions for specific countries to continue importing Iranian oil after November.

In June, the US administration revoked or limited general licenses that it previously issued under the JCPOA. This includes General License H, which enabled US-owned foreign entities to engage in a range of activities involving Iran.

European response

France, Germany, and the United Kingdom have called on the US to “avoid taking action which obstructs [the JCPOA’s] full implementation by all other parties to the deal”. The Trump administration has not only ignored these calls but adopted a maximalist position on sanctions, even suggesting that European companies may come under direct sanctions if they continue to trade with Iran. In response, senior figures in Germany and France have called for measures that preserve European sovereignty in trade and foreign policy, including through the creation of payment channels that are independent of the US.

Beyond all the talk, Europe still needs to do much groundwork if it seeks to minimise the impact of US secondary sanctions. It has taken some small yet tangible steps. In August, the EU revived its Blocking Regulation, first introduced in 1996, to include US secondary sanctions targeting Iran. Designed to dissuade European companies from adhering to US extraterritorial sanctions, this measure allows EU entities to recover damages arising from US sanctions through civil legal claims against “the persons causing them and nullifies the effect in the EU of any foreign court rulings based on them”. In theory, the Blocking Regulation forbids EU citizens and companies from complying with the US sanctions.

In practice, given European multinationals’ ongoing retreat from Iran, there is little to indicate that the measure will have much impact unless it is fully enforced – through, for example, a legal suit in an EU court brought by a company to seek compensation for damages it has suffered as a result of US sanctions. There is very little precedent for such action. Moreover, the Blocking Regulation allows companies to apply for exemptions where they can show that ignoring US secondary sanctions would seriously damage their interests (as many could). However, the Blocking Regulation provides some legal comfort to relatively small European companies that have a limited presence in the US market.

The European Commission recently earmarked €18 million of a €50 million package for projects “in support of sustainable economic and social development” in Iran, including €8 million in assistance to the private sector. This figure is incredibly low compared to the €20 billion in trade between the EU and Iran in 2017. Nevertheless, like the Blocking Regulation, it is a noteworthy political gesture of defiance against US sanctions policy.

The EU has yet to decide on critical issues such as the extent to which its banking sector will maintain links with Iran after November, as well as how it will prevent a significant reduction in Iranian oil exports. Like Japan, India, and Iraq, many European companies are engaged in talks with the US administration over how the secondary sanctions will operate, and whether the US Treasury can exempt companies in strategically important areas of trade (such as energy). European governments are also pushing for US exemptions to protect the Belgium-based SWIFT financial information service from current pressure to disconnect Iranian banks in November.

During 2010-2012, the EU and the Obama administration were broadly united on their Iran policy goals and sanctions framework. They saw sanctions as a useful tool for coercing Iranian leaders into negotiations on restricting the nuclear programme. This shared perception facilitated coordination between Europe and the US on their sanctions framework and enforcement. The transatlantic political consensus allowed the long arm of US sanctions to stretch yet further into European territory.

Today, European governments find themselves in a far more challenging transatlantic relationship. They have few ways to shield European companies from US sanctions and little appetite to impose the kind of substantive countermeasures that could moderate the Trump administration’s approach to sanctions enforcement, such as counter-tariffs. Europe may begrudgingly acquiesce to Washington’s position on Iran – a country in which it has a relatively small economic stake, and which it often views as a destabilising force in the Middle East. Yet if it fails to devise a more effective response to US secondary sanctions, Europe will create a long-lasting precedent for successive US administrations to control European trade and foreign policy.

Read more on: European Power,Transatlantic relationship,The Middle East and North Africa,Iran

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