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To stay or not to stay: Will Europe’s new trade initiative make a difference for Iran?

To stay or not to stay: Will Europe's new trade initiative make a difference for Iran?
Photo: Flickr / Blondinrikard Fröberg.
Dr Tarja Cronberg

‘Today we have taken a significant step forward in delivering our commitment under the Iran nuclear deal to preserve sanctions relief for the people of Iran.’ These were the words of Jeremy Hunt, Foreign Secretary of the UK, as he introduced the so-called Special Purpose Vehicle (SPV), which is the latest attempt by the E3 (France, Germany and the UK) at preserving the 2015 Iran nuclear deal, or the Joint Comprehensive Plan of Action (JCPOA).

The SPV seeks to facilitate trade between Europe and Iran, which was undermined after the US administration of President Donald J. Trump withdrew from the JCPOA in May 2018. Since August, the US has re-imposed extraterritorial sanctions, punishing companies in third countries, including in Europe, trading with Iran.

What makes SPV different from the previous European initiatives, which proved to be largely ineffective? And what impact can it be expected to have on the Iranian economy and policy?
 

How the SPV is supposed to work

After the US exit, the EU declared its full commitment to the nuclear deal and its intention to counteract the US withdrawal and protect European companies from the extraterritorial reach of US secondary sanctions. In line with this policy, the EU introduced several initiatives, all of which, however, have proven largely ineffective.

These initiatives included, among others, the activation of the 1996 EU blocking statute that prohibits European companies from complying with US secondary sanctions on Iran, and authorization of investments in Iran through the European Investment Bank. None of these measures, although acted upon, have been able to prevent the exit of European companies from Iran. The blocking regulation has not been enforced in any concrete case and the European Investment Bank effort failed as the bank was eager to maintain its access to US capital markets. Additionally, the European financial messaging system, the SWIFT network, has disconnected most Iranian banks in fear of US sanctions.

The hope is that the SPV, also called INSTEX (Instrument in Support of Trade Exchanges), will be more effective than the previous instruments in honouring the European commitments to save the JCPOA. The SPV is focused, at least in the first phase, on non-dollar transactions and non-sanctioned goods, including food and medicine. Although the latter are exempt from sanctions, European banks have been reluctant to facilitate payments for fear of American penalties. The SPV will function as a clearinghouse for Iranian imports and exports balanced in a mechanism in which a company exporting goods to Iran will get paid though another importing goods from Iran. The details are still to be worked out and the SPV will take some months to become operational. It requires a corresponding entity on the Iranian side, which is yet to be established.
 

The Iranian response

After the US exit Iran has applied a wait-and-see policy and restricted the nuclear program as agreed, a fact that has repeatedly been confirmed by the International Atomic Energy Agency (IAEA). While waiting, Iran has turned eastwards, towards China, India and Russia and to its neighbours, particularly Iraq. Even so, the main priority is to engage with Europe.

Iran has stressed that its continued compliance with the JCPOA is conditional to the others respecting their side of the bargain, notably by abiding with their commitments regarding sanctions relief. However, due to the US sanctions and their impact on third parties, this requirement is not being met. Instead of prospering from an increase of international trade and investment, the economic situation in the country is rapidly deteriorating.[1] Thus far, however, the government has chosen to stay in the deal, largely due to European commitments to save the deal.

The parliamentarians have been more sceptical. According to a parliamentary expert, 70 per cent of the parliamentarians—not only of those groups who have been opposed to the deal but also of those who support the government—view the JCPOA as an empty shell.[2] The EU’s response, before the SPV, has been seen as too slow and not courageous enough. In January 2019, the secretary of the Supreme National Security Council of Iran publicly stated that Europe had missed the chance to save the nuclear deal.

The SPV, even before its registration announcement, has been a reoccurring theme in the Iranian press. When the announcement finally came the government saw it as a first step and a litmus test for future Iranian policies. Abbas Araghchi, deputy foreign minister and one of Iran’s top negotiators for the JCPOA noted: ‘The goal of this mechanism is so that all of the receipts and payments between Iran and Europe, imports and exports, go through this mechanism,’  Iran will have ‘complete benefit’  once other countries and non-European companies have access to it. The head of Iran’s Trade Promotion Organization in turn commented that Iran will not solely rely on the SPV for developing foreign trade and will rather use its own capacities and capabilities in doing so. Iran’s Expediency Council Secretary Mohsen Rezaie called the proposal ‘blackmail,’ accusing Brussels of breaching its JCPOA commitments.

The SPV does not come without conditions. Iran should fully implement its nuclear-related commitments and fully cooperate with the IAEA. Furthermore, Iran would need to implement legislation to meet anti-money-laundering standards set by the Financial Action Task Force (FATF)[3], a requirement that was immediately called humiliating by the chief of Iran’s judiciary. The laws have been passed by the parliament but not yet confirmed by the Guardian Council. Mediation by the Expediency Council is taking place.
 

The Less-For-Less Policy

In Tehran, December 2018, right before the EU announcement, there was an active debate among both parliamentarians and government officials about a ‘less-for–less’ policy. According to the Iranian understanding, partial withdrawal from the deal would be possible.[4]  The US re-imposition of nuclear sanctions could be reciprocated by reducing restrictions on the nuclear program. There were two alternatives on how to construct this policy:

  • Limited easing of the JCPOA restrictions. These could target issues such as limitations on research and development (R&D), limitations on fissile material or those on the heavy water supply.
  •  Radical easing of the JCPOA restrictions. The main proposal here has been to raise the level of allowed uranium enrichment, now 3.67 per cent, to 20 per cent.

A ‘less-for-less’ policy was seen as an emergency measure due to the lack of EU action and a need to respond to domestic political pressure. But how much less would be enough? The first alternative would be enough for those supportive of the deal in principle but critical of the lack of economic benefits. Raising the enrichment level to 20 per cent has been an often-used threat in the press both by the President of Iran and the head of the Atomic Energy Agency. Both the nuclear sector and the military see the JCPOA as a limitation of their R&D possibilities such as nuclear fuel for submarines, but even the military supports the deal if there are guarantees for the economic benefits.[5]

The less-for-less policy is about managing the political pressure within the framework of the JCPOA assuming that partial withdrawal is possible. In parliament, there is also an effort by some of the conservative members to collect signatures for leaving the Non-Proliferation Treaty (NPT). This is a reoccurring proposal when the country has been under sanctions. Current efforts are unlikely to lead to any action, but if approved, would mean the collapse of the JCPOA.

Neither the ‘less-for-less’ policy nor the NPT-exit initiative are about nuclear weapons, at least not in the current political situation. They reflect the vacuum created by the US exit and the criticism of the EU’s inaction. Had there been real interest in nuclear weapons, an immediate exit would have been the obvious choice.
 

The Future of the SPV

Does the SPV create the conditions for Iran to stay in the JCPOA? The SPV is essentially a message of hope for the deal’s survival for all the remaining partners, including Russia and China. The JCPOA is an important success story for the role of diplomacy in non-proliferation. For Iran, the SPV is also a concrete demonstration that the Europeans are serious about their opposition to the US exit and the extraterritorial sanctions. The multilateral rule-based international order is an important value as such.

Nevertheless, the Iranian judgement on the SPV will be based on the economic benefits. In this sense it is a real litmus test on the future of the JCPOA. The SPV is, even if the design works, not a solution to the problems of the Iranian economy. Nor will it compensate for the losses due to sanctions. At this stage, it will only draw a clearer divide between sanctioned and non-sanctioned items. Its immediate economic impact covers humanitarian trade. This means that agricultural and medical products as non-sanctioned items will be available through normal channels and hopefully at normal prices.

Politically, the SPV will sideline the speculations in Tehran for a less-for-less policy as it requires Iran to fully comply with the JCPOA. If it provides economic benefits it will be an argument for more engagement rather than more resistance. It will provide trust and a possibility to expand to non-European companies. Nevertheless, the mechanism will not only be judged by its own merits. External factors will influence its fate. The statement by the E3 quoted in the beginning concludes: ‘The Iran nuclear deal remains central to international efforts to halt nuclear proliferation and is crucial to the security of the region. But we are clear, this commitment does not in any way preclude us from addressing Iran´s hostile and destabilising activities.’

 

[1] According to the Finnish Embassy´s economic review (November,2018): Oil exports are down from 3 million B/Day to 1 million, inflation is around 59% and the currency down one third. Import restrictions have been approved and unemployment is rapidly increasing. Migration has increased, both the elites and Afghan refugees, by a total estimated to 750 000 since March 2018.

[2] Author´s interview with an advisor to the speaker of the Iranian parliament in Tehran, December 11, 2018.

[3] The FATF is an intergovernmental body established in 1989 to counter terrorism financing, money laundering and other threats to the global financial system. The FATF currently has 38 member states.

[4] Iran has stated that it will treat a re-imposition of the sanctions specified in Annex II as grounds to cease performing its commitments under this JCPOA in whole or in part. https://www.state.gov/documents/organization/245317.pdf p.18/104

[5] Author´s interview at the Center for Strategic Defence Research under the Supreme Leader, Tehran, December 11, 2018.

ABOUT THE AUTHOR(S)

Dr Tarja Cronberg is a Distinguished Associate Fellow with the SIPRI European Security Programme.