EU Offers Up a Meager Workaround to U.S. Iran Sanctions

After months of trying, the European Union on Thursday finally announced a scheme to partially sidestep the Trump administration’s renewed sanctions on Iran, a bid by Europe to quiet the death rattles of the Iran nuclear deal. But the initiative, of modest economic value if big political symbolism, is unlikely to do much to placate Tehran’s pleas for economic dividends from staying in the deal.

Led by Germany, France, and the U.K.—the three European countries most involved in drafting the 2015 nuclear deal—Europe formally launched INSTEX, a special financial vehicle designed to enable Iran to keep trading with European firms despite Washington’s ban on doing business with the country. The new organization—to be headquartered in France, run by a German, and supervised by the British—will start out enabling trade only in humanitarian items, including food, medicine, and medical devices, diplomats said.

The eventual hope is that the new organization gets buy-in from more EU member states and that it can eventually expand its trade to other items, such as energy and industrial goods. But that depends on the willingness of European firms, especially big ones, to risk U.S. sanctions by doing business with Tehran.

The modest scope of INSTEX, as it finally emerged, stands in sharp contrast to Europe’s original vision for the body. The so-called Instrument in Support of Trade Exchanges  was meant to prop up the nuclear deal after the U.S. withdrawal last year by allowing Iran to barter oil for European industrial goods without having to use U.S. dollars or go through the U.S. financial system. But those ambitious visions of bucking U.S. financial dominance were undermined by big business itself, wary of falling afoul of the U.S. Treasury. Big European firms that for years champed at the bit to gain (or regain) access to the Iranian market have shown little interest in thwarting the Trump administration, for example, and many have bailed out altogether.

“There’s little sign that major European companies, especially those with significant U.S. exposure, could be convinced to invest in Iran” through the new entity, said Jake Reynolds, a Middle East expert at Wallbrook, a London-based global risk consultancy. “For many companies, the possibility of being blocked from their U.S. customers outweighs any opportunities in the Iranian market.”

And the new initiative comes at a time when Europe’s attitude toward Iran is hardening, after a recent long-range missile test that rattled policymakers and a series of assassinations on European soil that soured relations between many European countries and Tehran. The painful road to INSTEX reflects Europe’s desire to push back against Tehran’s more disruptive behavior while still standing up to U.S. President Donald Trump’s unilateral withdrawal from the deal, with which Iran has fully complied.

“Despite recent Europe-Iran tensions, European leaders remain committed to upholding the deal as a pillar of their Middle East policy,” Reynolds said.

U.S. officials appeared to shrug off the new European device. A White House spokesperson said that “the United States questions the efficacy of the [special purpose vehicle] and remains committed to fully enforcing its sanctions on the Iranian regime.” A U.S. Embassy spokesperson in Germany warned that companies engaging in “sanctionable activity involving Iran risk severe consequences” but said the new organization would not in any way affect the U.S. campaign to apply maximum financial pressure on Iran.

That might be because the new entity will offer modest, if welcome, benefits for the Iranian economy and people by initially facilitating only trade in food and medicine. Those items are meant to be allowed into Iran even under U.S. sanctions, but many banks are so leery of violating Treasury rules on doing business with Iran that even permitted transactions had suffered.

“It’s not a ‘circumvention’ of U.S. sanctions or anything like that, since all this trade is permitted,” said Brian O’Toole, a former U.S. sanctions official at the Treasury Department who is now at the Atlantic Council.

“But Iran still needs this because banks won’t facilitate the transactions on their own, and food and medicine exports to Iran have dried up” since Trump pulled out of the Iran deal last May. He compared the European vehicle to provisions in the original Iran deal that allowed for trade in humanitarian products even while intense pressure was put on the rest of the Iranian economy.

Whether the limited benefits from the new INSTEX are enough to satisfy Iran are a different question. For months, senior officials in Tehran have been pressuring Europe to find a way to salvage economic ties and help deliver the economic benefits promised under the 2015 deal. Iranian President Hassan Rouhani, in particular, is under pressure domestically to get something out of the deal, which hard-liners at home opposed.

The head of Iran’s nuclear energy agency this week called on Europe to get the new trading entity up and running “before it is too late,” warning that Iran would have little reason to keep complying with the nuclear deal if it doesn’t see any economic dividends. Iran’s deputy foreign minister on Thursday called INSTEX a “first step.”

One big problem is different expectations. Iran hoped that signing the deal would lead to an influx of big-ticket European investments in areas such as energy, aviation, and industry, Reynolds said, while European leaders are aware that their blue-chip companies are loath to risk U.S. sanctions by heading to Iran.

At a meeting of foreign ministers in Romania on Thursday, Belgian Foreign Minister Didier Reynders said it was up to individual companies to decide whether to invest in Iran.

O’Toole said, for the immediate future, the new European financial vehicle should be enough to ensure that Iran continues complying with the terms of the Barack Obama-era nuclear deal, which capped Tehran’s ability to enrich uranium and kept it from producing a nuclear weapon.

“But that may not hold over the medium to long term,” he said.