As of July, Iran is officially in breach of the Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear deal. Tehran’s decision to violate the agreement has come as the result of a fast-escalating crisis between Iran and the United States, which has stopped just short of a full-blown military confrontation. Amid seemingly daily reports of new incidents and accusations, many are reminded of the lead-up to the Iraq war in 2003.^[1] The current standoff at the Strait of Hormuz is as much an indictment of European diplomacy as it is a story of the dramatic deterioration of US-Iran relations. If the Iran deal is to be saved, the Europeans must throw their full weight behind the special purpose vehicle (SPV) INSTEX.

When the Trump administration unilaterally abandoned the nuclear deal in May 2018, its European signatories (EU, UK, France, Germany) pledged to take a leading role in delivering sanctions relief to Iran. There were particularly high hopes for INSTEX when it was set-up in January 2019.^[2] INSTEX was intended to act as a sort of Euro-denominated clearinghouse. Since receiving or sending payments to trade with Iran would violate US sanctions, INSTEX would match the Euro receipts of companies selling goods to Iran with the Euro payments of companies buying goods from Iran. On the Iranian side, a similar SPV would eliminate the need for cross-border monetary transactions. Theoretically, these measures would circumvent rather than break US sanctions.^[3] Yet when confronted with the threat of US extraterritorial sanctions, European companies fled the Iranian market, causing a collapse in bilateral trade. INSTEX only became operational in late June and remains strictly limited to humanitarian transactions (which are not even subject to the US sanction regime). The EU’s efforts to defend the deal have only served to underline the bloc’s impotence in the face of its companies’ fear of US secondary sanctions.^[4]

Iran was not alone in opting for “strategic patience” in response to the Trump administration’s hardline approach.^[5] This has arguably also become the de-facto European strategy. The EU has chosen to do the least possible to keep Iran in the agreement while waiting out the remainder of Donald Trump’s term. Brussels has prioritized minimizing tension with Washington at the expense of reneging on its promise to provide economic benefits to Tehran.

Considering how little of these benefits Iran has reaped, it is genuinely surprising how long it took Tehran to begin its withdrawal from the JCPOA. For thirteen months after the Trump administration imposed the first in a series of progressively harsher sanctions, Iran stuck to the agreement. As the US’s maximum pressure campaign crippled Iran’s economy and EU sanction relief was not forthcoming,^[6] Tehran eventually opted to abandon compliance and shift to a policy of active resistance. This set into motion the current spiral of escalation between the United States and the Islamic Republic.^[7]

As things stand, Tehran refuses to negotiate from a position of weakness and the US refuses to reconsider sanctions until it does. This now offers the EU an opportunity to break out of its bystander role. Iran may come to the bargaining table if the EU can convince its companies to resume trade with Iran. The most promising avenue to accomplish this goal would be to expand INSTEX to also cover non-humanitarian goods. Such a political move will only be successful with significant buy-in from private European businesses and banks. As many EU members as possible should be recruited to sign up to INSTEX not only to diffuse the risk of participation, but also to facilitate the establishment of a burden-sharing mechanism to cushion the impact of potential US sanctions. This could eventually evolve into an EU institution specifically tasked with protecting European companies from secondary sanctions.^[8]

By extension, the EU should also move to expand membership of INSTEX beyond its borders. In the short term, enlisting the participation of China and Russia – who maintain influence over the business dealings of their private companies but also seem to be less susceptible to the threat of US sanctions – would significantly strengthen the INSTEX. At the very least, this will buy time for diplomatic efforts to find a more permanent solution.

While the prospect of a full-scale war between Iran and the United States is apparently not enough to spur European leaders into action, perhaps considering the wider implication of continued passivity will. US secondary sanctions have been highly effective in forcing European companies and banks into compliance – perhaps over-compliance – with US policy on Iran. So far, the impact of US sanctions on the EU has been fairly limited due to the previously low amount of trade with Iran.^[9] If the Europeans fail to push back against the imposition of such extraterritorial sanctions, this could set a dangerous precedent. The apparent effectiveness of these sanctions on Iran may tempt US policymakers to employ similar sanctions against more important EU trade partners such as China or Russia, resulting in far more serious consequences for the European economy.^[10] The EU should do everything in its power to preserve the core elements of the nuclear accord with Iran, not only to prevent yet another destructive war in Middle East, but also to safeguard its economic sovereignty.

References

Picture by Blondinrikard Fröberg

Foy, Henry, and Demitri Sevastopulo. “Kremlin Throws Weight behind EU Effort to Boost Iran Trade.” Financial Times. July 18, 2019.

Geranmayeh, Ellie, and Manuel Lafont Rapnouil. “Meeting the Challenge of Secondary Sanctions,” 2019.

Gramer, Robbie, and Keith Johnson. “Unraveling of Iran Nuclear Deal Exposes Europe’s Weakness.” Foreign Policy. July 8, 2019.

Hafezi, Parisa. “Iran Says ‘active Resistance’ Is an Antidote to Trump’s Warnings.” Reuters. July 4, 2019.

Khatinoglu, Dalga. “Iran’s Exports To EU Drop Sixteen Fold As Europe Stops Buying Iranian Oil.” Radio Farda. May 4, 2019.

Laurent, Lionel. “Europe Tries to Sidestep the U.S. Finance System.” Bloomberg. May 2, 2019.

Rome, Henry. “Why Iran Waits: Staying in the Nuclear Deal Is Its Worst Option, Except for All the Others.” Foreign Affairs, 2019.

Scazzieri, Luigi. “The EU Can Keep the Iran Deal Alive.” Centre for European Reform, 2019. https://www.cer.eu/insights/eu-can-keep-iran-nuclear-deal-alive.

Scott, Emma. “Trump’s Withdrawal from the Nuclear Deal Strengthens Iran’s Hardliners.” Friends of Europe, 2019. https://www.friendsofeurope.org/insights/trumps-withdrawal-from-the-nuclear-deal-strenghtens-irans-hardliners/.

Sevastopulo, Demetri. “Trump’s ‘Maximum Pressure’ Iran Strategy Stokes War Fears.” Financial Times. June 17, 2019.

Zable, Stephanie. “INSTEX: A Blow to U.S. Sanctions?” Lawfare. March 6, 2019.

^[1] Demetri Sevastopulo, “Trump’s ‘Maximum Pressure’ Iran Strategy Stokes War Fears,” Financial Times, June 17, 2019.

^[2] Stephanie Zable, “INSTEX: A Blow to U.S. Sanctions?,” Lawfare, March 6, 2019.

^[3] Lionel Laurent, “Europe Tries to Sidestep the U.S. Finance System,” Bloomberg, May 2, 2019.

^[4] Luigi Scazzieri, “The EU Can Keep the Iran Deal Alive,” Centre for European Reform, May 16, 2019, https://www.cer.eu/insights/eu-can-keep-iran-nuclear-deal-alive.

^[5] Henry Rome, “Why Iran Waits: Staying in the Nuclear Deal Is Its Worst Option, Except for All the Others,” Foreign Affairs, January 10, 2019.

^[6] Robbie Gramer and Keith Johnson, “Unraveling of Iran Nuclear Deal Exposes Europe’s Weakness,” Foreign Policy, July 8, 2019.

^[7] Emma Scott, “Trump’s Withdrawal from the Nuclear Deal Strengthens Iran’s Hardliners,” Friends of Europe, May 15, 2019, https://www.friendsofeurope.org/insights/trumps-withdrawal-from-the-nuclear-deal-strenghtens-irans-hardliners/
Parisa Hafezi, “Iran Says ‘active Resistance’ Is an Antidote to Trump’s Warnings,” Reuters, July 4, 2019.

^[8] Henry Foy and Demitri Sevastopulo, “Kremlin Throws Weight behind EU Effort to Boost Iran Trade,” Financial Times, July 18, 2019
Ellie Geranmayeh and Manuel Lafont Rapnouil, “Meeting the Challenge of Secondary Sanctions,” European Council on Foreign Relations, June 25, 2019.

^[9] Dalga Khatinoglu, “Iran’s Exports To EU Drop Sixteen Fold As Europe Stops Buying Iranian Oil,” Radio Farda, May 4, 2019.

^[10] Ellie Geranmayeh and Manuel Lafont Rapnouil, “Meeting the Challenge of Secondary Sanctions.”