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How the EU plans to get around US sanctions on Iran

August 7, 2018

The EU is using new regulations to persuade companies to continue working with Iran. But protection against US secondary sanctions remains difficult in practice. Bernd Riegert reports from Brussels.

EU and Iranian flags
Image: Getty Images/AFP/E. Dunand

The European Union's top foreign affairs representative Federica Mogherini and three EU foreign ministers, Jeremy Hunt from the UK, Jean-Yves Le Drian from France and Heiko Maas from Germany, have jointly condemned American sanctions against Iran.

While the US has withdrawn from the Joint Comprehensive Plan of Action — otherwise known as the Iran nuclear deal — which aims to ensure Iran's peaceful use of nuclear energy, the EU, China, Russia and Iran continue to uphold the agreement. Now the EU wants to circumvent the current US sanctions, which will also punish European companies that do business with Iran.

Read more: Trump's sanctions on Iran worry German business

The EU Commission considers the 'secondary sanctions' imposed by the US on European companies illegal. The Americans are seeking to ban European carmakers, banks and energy companies from doing business with Iran. If they violate the ban, their assets in the US may be seized. Even American companies dealing with European companies, which in turn are engaged in Iran, face penalties.

Blocking US sanctions

For this reason, the EU has adopted a so-called 'blocking statute' in order to ward off the effects of American sanctions. The updated legislation comes into force on August 7. "European companies should be protected," said an EU official in Brussels. "But we aren't dictating to companies what economic decisions they make. No company can be forced to invest in Iran."

Iran's Foreign Minister Javad Zarif and EU Foreign Affairs Commissioner Federica Mogherini, in May 2018
Iran's Foreign Minister Javad Zarif and EU Foreign Affairs representative Federica Mogherini, May 2018Image: picture-alliance/Photoshot/European Union

With the new rules European companies are granted the right to challenge US sanctions in European courts and seek compensation from the US government or American companies. In practice, this path promises to be cumbersome and costly and even the Commission acknowledged that there is no precedent in such cases.

The blocking statute has never been implemented, although one was issued for the first time in 1996 in connection to economic sanctions against Cuba and Iran. Back then, the threat was enough to persuade the US to suspend secondary sanctions.

Read more: Iranian president denounces US 'psychological warfare'

In the current dispute over Iran, the US government at the end of July expressly refused to exempt European companies from secondary sanctions. US President Donald Trump likes confrontation and has waged a war of words with Iran's leadership. Conversely he says he is also ready for a no-strings-attached summit meeting.

Donald Trump signing the withdrawal from the nuclear deal with Iran in May 2018
Donald Trump signing the withdrawal from the nuclear deal with Iran, May 2018Image: picture-alliance/Xinhua/T. Shen

The EU Commission is unable to quantify the amount of economic damage for companies that are subject to America's secondary sanctions. But many companies and banks have already announced their intention to withdraw from Iran, especially ones that have corporate assets or real estate in America which the US government could get their hands on.

To follow or not

The blocking statute prohibits European companies from abiding by American sanctions. However, a company can always say that it is pulling out of Iran for business reasons and not because of US sanctions. A senior EU official made it clear in Brussels that it was not about punishing European companies twice, but is meant as a deterrent.

The EU is also sending a clear political message to the US that they will not just submit to American unilateralism, which is also why EU foreign policy chief Mogherini and the three European foreign ministers announced their commitment to a financing channel and further oil and gas exports from Iran.

The US administration's goal is to completely shut Iran out of the global money market and to reduce its energy exports, its main source of foreign currency, to zero. Additional sanctions on oil and gas companies are scheduled to be instated in November. The EU now wants to check whether the member states' central banks are able to maintain further transactions with Iran's state bank.

France carmaker Renault is staying in Iran for the time being
French carmaker Renault is staying in Iran for the time beingImage: ILNA

Relying on Iran

However, many banks, including Deutsche Bank, have put Iran on the back burner. For them, unhindered access to the US financial market is much more important. Even the European Investment Bank (EIB) is extremely cautious. Bank President Werner Hoyer said in July that the EIB would no longer be able to participate in Iranian businesses, saying "we can no longer play a role in international financing there." But the EU Commission is now encouraging the bank to do just that and has given them the legal authority to do so.

Those affected by US sanctions are mainly French and Italian companies. The French energy company Total no longer wants to continue with a large €5 billion project. Italian companies have cancelled planned investments. The same goes for Germany's Siemens.

The French auto maker PSA wants to again reduce its business in Iran. Renault on the other hand wants to stay for the time being. The European aircraft manufacturer Airbus has 100 orders from Iranian airlines on its books. How many of the planes can actually be delivered is unclear, as they contain American parts.

"We want to show that we are still committed to the Iran agreement," said a senior EU official. The hope now is that the leadership in Teheran which is under increasing economic pressure will continue to abide by the agreement and not resume making nuclear weapons.

Bernd Riegert
Bernd Riegert Senior European correspondent in Brussels with a focus on people and politics in the European Union