The revival of Iran’s nuclear activities. Perspectives and risks for the European Union

This article is a contribution from our partner EU-Logos Athena.
 
On 8 May 2018, US President Donald Trump announced the withdrawal from the Iranian nuclear agreement (Joint Comprehensive Plan Of Action, JCPOA), reached by the P5+1 countries (USA, Russia, China, France, United Kingdom and Germany) in July 2015 and implemented in January 2016. This provoked the reintroduction of sanctions against Hassan Rohani as well as secondary sanctions against companies (also those Europeans’ ones) involved in many activities with those Iranian entities subjected to sanctions. Looking for mediation and support from the European Union (EU), Iran re-started its nuclear activity by moving further away from the terms of the Agreement. Firstly, in this article, we will discuss about the content of the JPCOA. Secondly, the perplexities and reflections of the experts on the Iranian nuclear issue will be brought to light, with particular attention to the EU role, managing to avoid repercussions on its security and its economy in the medium term. In conclusion, you will found a framework about the high-level risks considering various factors: on the one hand, the EU’s efforts to respect the Agreement and on the other hand the limits of maneuver in a complex scenario in which US secondary sanctions seriously affect the European economy.

1. What is JCPOA?

The JCPOA is an international agreement on nuclear energy: it was reached between Iran, the P5 + 1 (the five permanent members of the United Nations Security Council and Germany) and the EU on 14 July 2015 in Vienna. The Agreement provides that:

1. Iran has to maintain a level of enrichment of uranium not exceeding 5%, below the threshold of 90% necessary to make nuclear weapons,
2. Iran has to eliminate existing stocks of 20% enriched uranium, which will be converted into reactor fuel or brought to an enrichment level below 5%
3. Centrifuges are used to enrich uranium and the agreement provides for the prohibition of installing new ones. Moreover it must reduce the number of the active ones by two thirds, bringing them from 19 thousand to 6 thousand,
4. Iran will redesign and rebuild a modern heavy water research reactor in Arak, based on an agreed conceptual project, using enriched fuel up to 3.67%
5. Western countries announce the lightening of the sanctions against Iran. Tehran will have access to: $ 4.2 billion from oil sales, about $ 1.5 billion from gold and other precious metal imports, petrochemical exports and the Iranian auto industry and easier access to humanitarian transactions,
6. The embargo on conventional weapons to Tehran will be removed in 5 years but the ballistic missile one remains in force for 8 years.

After the signature of the Agreement, High Representative Federica Mogherini and Iranian Foreign Minister Javad Zarif stated that: “Today is an historic day. It is a great honor for us to announce that we have reached an agreement on the Iranian nuclear issue […] This is an historic day also because we are creating the conditions for building trust and opening a new chapter in our relationship. This achievement is the result of a collective effort […] Thanks to the constructive engagement of all parties, and the dedication and ability of our teams, we have successfully concluded negotiations and resolved a dispute that lasted for more than 10 years” (EEAS Website, Joint statement by EU High Representative Federica Mogherini and Iranian Foreign Minister Javad Zarif). From the White House, US President Barack Obama said: “Today, after two years of negotiations, the United States, together with our international partners, has achieved something that decades of animosity has not – a comprehensive, long-term deal with Iran that will prevent it from obtaining a nuclear weapon […] In those days, the risk was a catastrophic nuclear war between two super powers. In our time, the risk is that nuclear weapons will spread to more and more countries, particularly in the Middle East, the most volatile region in our world”.
The agreement, welcomed by the entire international community, was signed on the eve of the elections in the United States and Iran, which saw the elections of the new Republican administration and the reconfirmation of Hassan Rohani in Tehran. In 2016, one year after the Agreement’s implementation many banks still hesitated to undertake business affairs with Iran as they risked incurring the primary US sanctions (which according to the Agreement remained unchanged). Tehran complained that Washington was not doing enough to reassure European banks and companies that wanted to undertake some business affairs with Iran because they feared legal consequences from the US. For its part, Trump’s administration was arguing that Iran kept conducting missile tests between October 2015 and March 2016, despite the ban of the Agreement. On 8 May 2018, after two years of mutual accusations, President Donald Trump announced his withdrawal from the JCPOA claiming that the latter did not contain sufficient measures to halt Iran’s progress towards a military nuclear capability nor was it useful to limit its missile arsenal and counteract its activities in the Middle East. Shortly thereafter, Washington reinstated all the sanctions that had been suspended, including those affecting foreign companies who were undertaking business affairs with Iran, many of which are located in the EU.
Specifically, US reinstated sanctions against Tehran:

1. On the purchase of dollars by the Iranian government;
2. On gold/precious metals’ trade ;
3. On direct or indirect sale, supply and transfer to or from Iran of graphite, raw metals or semi-finished products such as aluminum, steel, coal and software for the integration of industrial processes;
4. On significant transactions involving the purchase or sale of Iranian national currency (rial), or the maintenance of accounts denominated in rial outside Iranian territory;
5. On the purchase, subscription or facilitation of the emission of Iranian sovereign debt;
6. On the Iranian automotive sector.

Overall, secondary sanctions are aimed at companies that trade with Iran: they expect that all of them, wherever they are headquartered, must respect US sanctions when dollars are used to carry out transactions.
 

2. Experts opinions

After the US withdrawal, the EU repeatedly urged Iran to refrain from initiatives that could undermine the Agreement and welcomed any diplomatic efforts to find a way out of the crisis with Tehran. However, starting from January 2019, Iran has taken “preliminary activities for designing” a modern process for 20% uranium enrichment for its 50-year-old research reactor in Tehran, signaling a new danger for the nuclear deal. The Iranian nuclear agreement states that the enrichment threshold must remain stable at 3.67%. Despite the European warnings, this first phase was followed by another in July 2019. Indeed, after the announcements in January, Tehran responded to the threats and officially started the second phase of the plan by increasing its uranium enrichment level, causing a stir among European countries that asked for more time to mediate even with the US, but without success. On 4 September 2019, Iranian President Hassan Rohani announced the start of the third phase of withdrawal from the Agreement on the nuclear program. Tehran specified that the Iranian nuclear agency wanted to implement the extension of the internal nuclear technology and applying its own scientific research. Since that day, 20 IR-6 model centrifuges and 20 other IR-4 models have been activated and the further acceleration in the uranium enrichment process was announced. At this moment, experts estimate that, in less than one year, Iran would have the amount of uranium needed to produce an atomic bomb.
According to Professor Sven Biscop, honorary member of the European Security and Defense College (ESDC), director of the “Europe in the world program” at the Egmont Institute and professor at Ghent University, the EU has to develop its vision and translate it into an operational strategy continuing to support the Agreement with Iran. According to him, the priority is to convince Iran to do the same. In order to support the Agreement, the EU should seek to cooperate with other permanent members of the UN Security Council (China and Russia above all).
According to Steven Blockmans, Senior Research Fellow and director of the Foreign Policy and Institutions Unit of CEPS, the EU has to work to maintain the Agreement and reduce the effects of US restrictive measures on European companies, creating mechanisms to protect the legitimate interests of investors and economic operators. According to him, it would be up to the European Commission to prepare such plans, creating a long-term energy partnership and a bilateral investment agreement directly with Iran. On 6 August 2018, the EU adopted the “Blocking Statute”, which allows European operators to obtain compensation for damages resulting from US extraterritorial sanctions from the people who caused them. It also allows EU operators to recover in court damages caused by the extra-territorial application of the specified foreign laws. Moreover, it prohibits people from the EU to comply with these sanctions, unless the Commission authorized it.
Moreover, as it has been pointed out in the publication of the German Marshall Fund “Europe Needs to Go Forward with the Iran Nuclear Deal, With or Without the United States”, the EU must act as guarantor of the Agreement, following the example of France which, on 15 July, proposed to Iran the opening of a $ 15 billion credit line to save the nuclear deal. European countries are not willing to to defend Iran, rather to ensure that it respects the Agreement. In January 2019, the creation of the “Instrument in support of the trade exchange” (INSTEX) by France, Germany and the United Kingdom was only the first step towards independence from the US, always keeping in mind to avoid the effects of secondary sanctions. Indeed, the INSTEX is a European special-purpose vehicle (SPV) established to facilitate non-USD transactions and non-SWIFT to avoid breaking U.S. sanctions. The European trade vehicle was conceived as a way to help match Iranian oil and gas exports against purchases of EU goods.

3. EU limits and possibilities

The main tools that the EU has so far adopted to deal with secondary US sanctions and maintain the Agreement are:

1. the “Blocking Statute” (Regulation 2271/96), which prevents European companies from adapting to US secondary sanctions,
2. the creation of INSTEX,
3. the extension of the mandate of the European Investment Bank (EIB), which would be granted the power to provide guarantees on financial activities with Iran.

However, it seems that the EIB has no intention of effectively supporting investments towards Iran. This is mainly due to the fact that the Bank also finances itself on the US financial market, and it is feared that exposure to Iran will scare off potential buyers of securities. Furthermore, about a third of its transactions are conducted in dollars. Indeed, the only way for the EU to support investment in Iran and to continue processing payments to and from the country would be to create totally “isolated” financial institutions, with no exposure to the US.
On 15 February 2019, the High Representative of the Union for Foreign Affairs and Security Policy Federica Mogherini met Mohammad Javad Zarif, Minister of Foreign Affairs of the Islamic Republic of Iran, on the sidelines of the conference on security in Monaco. On that occasion, the firm determination of the EU to shield the Agreement (considered fundamental for both regional and global security), and therefore the creation of INSTEX was reiterated to demonstrate the European will to preserve the Agreement. Furthermore, on 16 June 2019, the EEAS Secretary General Helga Maria Schmid confirmed the EU’s continued commitment to the Agreement, which is the key to increase stability and security in the Middle East.
On 9 July, 2019, the foreign ministers of France, Germany and the United Kingdom and the High Representative expressed their concerns : Iran is carrying out activities incompatible with the commitments undertaken under the Agreement, especially because the International Atomic Energy Agency (IAEA) confirmed that Teheran had begun to enrich uranium above the established maximum limit. On that occasion, the EU expressed its deep concern about the fact that Iran was not respecting many of its commitments and thus encouraging them to maintain a compliant behavior. On 8 September 2019, IAEA confirmed that advanced centrifuges were installed in Natanz. France, Germany, the United Kingdom and the High Representative were deeply concerned by these activities . For this reason, they asked Iran to cooperate with the IAEA. On 25 September 2019, on the sidelines of the General Assembly of the United Nations, the High Representative Federica Mogherini said: “I will not hide that it is increasingly difficult to do it and we have discussed today the fact that we will try and continue keeping the agreement in place and overcome the difficulties we are facing. What I believe is that every step that has been taken so far by Iran – and I underline so far – is reversible. We have constantly called upon Iran to reverse these decisions and go back to full compliance which has been the case until recently. Because this is in the interests of all. Let me add that this is in the security interests of all of us and is also in the economic interest of Iran. I hope that rationality will prevail and that this meeting today will contribute to preserving the agreement also in the future”. On 26 September 2019, Iran further enriched uranium with advanced centrifuges. This provoked Washington’s reactions on the following day as they repeatedly stated they wanted to hold talks with Iran on a broader agreement. However, Tehran excluded the talks until the sanctions were lifted.
The EU seems to have done the necessary to both maintain the agreement and to safeguard the interests of its companies by protecting them from the US secondary sanctions. At operational levels, limits are clear . In addition to the Blocking Statute, the EU established INSTEX. However, these measures are still in their primordial phase and their functioning has not yet been clarified (and regulated). They didn’t assess their effectiveness in the medium and long term. By analyzing the information provided so far, INSTEX can only protect small and medium-sized companies from the US secondary sanctions (because they don’t necessarily use the dollar). Beyond being projected to the US market, most of the largest European companies trading abroad use the dollar. This makes them vulnerable to Washington’s secondary sanctions. At the same time, only the big companies can satisfy the needs of the Iranian market to make them respect the Agreement. Experts estimated that the Iranian economy contracted by -7% since the US withdrawal from the Agreement. In particular, there was a sharp decline in the oil sector of 35% and it will continue throughout 2020. Inflation, which in 2018 peaked at 40%, is likely to exceed 50%. The fall of the Iranian rial, which lost 100% of its value in 12 months, eroded the purchasing power of large Iranian companies on international markets. European small and medium-sized enterprises are apparently immune from sanctions as well as they are unable to reverse or have an impact on Iranian economy. The EU therefore risks remaining between two fires. On one hand, indeed, European and member-state big companies are caught up in the fabric of the US secondary sanctions that managed to affect market decisions and choices. On the other hand, the EU has no objective capacity to create an effective financial system able to give some guarantees to Tehran and to keep Iran within the Agreement. However, the weight of recent EU decisions in order to make itself increasingly immune to Washington’s sanctions, as well as having a strong political impact, has to be considered as a springboard for the creation of an increasingly autonomous system, which could improve the EU strategic independence .
 
Maria Elena Argano