The Iranian nuclear deal: the challenge of the European Union

02 December 2018 /

This article has originally been published on the website of our partners EU Logos Athena.

On the 14th July 2015, the Joint Comprehensive Plan of Action (JCPOA) – also known as the Iranian nuclear deal – was signed. The parties involved were Iran and the 5 + 1 group (the five permanent members of the UN Security Council: China, France, Russia, the United Kingdom, the United States, plus Germany and the European Union). The primary objective was to prevent Iran from developing a technology that would allow it to build atomic bombs. As a consequence of the agreement, the economic sanctions previously imposed by the United States (USA), the European Union (EU) and the UN Security Council (UNSC) were removed at the beginning of 2016[1]. However, on May 8th, US President Donald Trump announced his country’s withdrawal from the Iranian nuclear agreement and the subsequent implementation of US secondary sanctions (affecting third countries that have economic relations with Iran) suspended back in January 2016[2]. In this article, we will first address to the reasons that paved the way towards the nuclear agreement and explain its content. Furthermore, the controversial position of the EU will be outlined, taking into account the expert opinions on the strategic role it has assumed, especially since the announcement of the US withdrawal. In conclusion, considering the delicate international economic, financial and geopolitical balance, this article will try to explain whether the EU has and can play a leading role in neutralizing the effects of the confrontational relationship between Iran and the USA.

What is the JCPOA?

During the 2000s, Iran increased its nuclear program, thus creating frictions with Western countries. In August 2002, the National Council of Resistance of Iran – a dissident group – publicly revealed the existence of two undeclared nuclear facilities: the heavy water production plant in Arak and the Natanz enrichment plant[3]. The International Atomic Energy Agency (IAEA) inspectors visited Natanz and in May 2003, Iran allowed IAEA inspectors to visit the Kalaye Electric Company but refused to allow them to take samples[4]. In June 2003 and faced with the prospect of being referred by UNSC, Iran undertook negotiations with France, Germany and the United Kingdom (EU 3). However,the US refused to be involved in these negotiations. In October 2003, an agreement known as the Tehran Declaration was reached between Iran and the EU 3, namely: Iran agreed to cooperate fully with the IAEA and temporarily suspend all uranium enrichment[5]. This was followed by the Paris agreement of November 2004, in which Iran agreed to temporarily suspend enrichment and conversion activities[6]. In 2005, Mahmoud Ahmadinejad was elected president of Iran, and from the beginning he outlined his policy in favor of developing the country’s nuclear program. The following year, the UN approved its first resolution asking Iran to stop its uranium enrichment and transformation activities. Between 2006 and 2010, the UNSC adopted a total of six resolutions (1696, 1737, 1747, 1803, 1835, 1929) imposing gradual sanctions on Iran, including freezing assets of people and companies related to the enrichment program, and banning the supply of nuclear technology into the country[7]. Simultaneously, both the EU and the US adopted unilateral financial sanctions against Iran.

In June 2013, Hassan Rohani, considered a relatively moderate member of the regime, won the Iranian elections. A few months later, the first contact between the American and Iranian leaders was established. Furthermore, Iran, the permanent members of the UNSC and Germany (P5 + 1) had already reached a temporary agreement in November, known as the Joint Plan of Action, which limited the Iranian nuclear program. According to the interim agreement, Arak’s heavy water reactor ceased its activity and Iran pledged to reduce a large part of its enriched uranium reserve[8].

After intense negotiations, the signature of the Joint Comprehensive Plan of Action (JCPOA), also known as the Iranian nuclear agreement, was announced on the 14th of July 2015. The agreement was reached by Iran and the 5+1 group (UNSC members plus Germany, in addition to the EU). The main objective was to prevent Iran from developing a technology that would allow it to build atomic bombs, but would allow it to continue the program for the production of nuclear energy for civil use. As a consequence of the agreement, the economic sanctions previously imposed by the USA, EU and UNSC were removed at the beginning of 2016 (issued with Resolution 1747) [9].

The three main points of the agreement are the containment of the Iranian nuclear program for at least a decade, the lifting of international sanctions and increasing inspection. In practice, it involved a decrease in the number of centrifuges (from 19,000 to 5,060). Indeed, according to the agreement, those in excess had to be brought to under the control of the IAEA in Natanz. Furthermore, the JCPOA provided that enriched uranium higher than 3.67% had to be shipped out of Iran or diluted, and the amount of enriched uranium had to be less than 300 kg. The limitation of plutonium production was part of the agreement as well. On the one hand, Arak’s heavy water plant had to be modified so as not to produce military plutonium. On the other hand, Iran pledged not to build new heavy-water reactors for fifteen years. As Iran ratified the additional IAEA protocol, it agreed to undergo inspections for fifteen years once the agreement entered into force[10]. On January 16th 2016, the IAEA published a report stating that Iran had fulfilled the constraints of the agreement, ceasing its enrichment of uranium. On February 11th 2018, Iran’s heavy water stock was 117.9 tons, and between 2016 and 2018, Iran had not stored more than 300 kilograms of uranium hexafluoride, containing up to 3.67% of uranium 235. From February 12th 2018, the stock had fallen to 109.5 kilograms[11].

On May 8th 2018, US President Donald Trump announced his country’s withdrawal from the JCPOA and the reintroduction of new sanctions against Iran, because “The Iranian regime is the leading state sponsor of terror. It exports dangerous missiles, fuels conflicts across the Middle East, and supports terrorist proxies and militias such as Hezbollah, Hamas, the Taliban, and al Qaeda”[12]. Iranian President Hassan Rouhani then promptly replied that Tehran would not abandon the nuclear deal and would continue to move forward with the other signatories. To justify and reinforce the decision to withdraw from the agreement, President Trump claimed to possess evidence provided by Israeli intelligence. It supposedly demonstrated Iran had not fully complied with the JCPOA, which waspublicly confirmed by Prime Minister Benjamin Netanyahu on April 30th 2018. . EU High Representative for Foreign Affairs and Security Policy, Federica Mogherini, immediately replied that the nuclear agreement belonged to the entire international community and that the EU was determined to preserve it[13].

The role of the EU and the expert opinion

The EU has been among the promoters of the agreement to establish a political balance, especially between the two sides of the Atlantic. Since 2006, the EU has implemented and strengthened all the UN sanctions, while imposing autonomous ones. In addition to the application of UN sanctions, the EU imposed a wide range of autonomous economic and financial sanctions on Iran over the past decade, including:

Restrictions on the trade of goods: a prohibition of arms export to Iran, (or of) assets that would have been used in enrichment-related activities, an import ban on crude oil, natural gas, petrochemicals and petroleum products.
Restrictions in the financial sector: freezing of the activities of the Central Bank of Iran and the main Iranian commercial banks, setting up notification and authorization mechanisms for transfers of funds above certain amounts to Iranian financial institutions.
Measures in the transport sector: impeding access to EU airports for Iranian cargo flights, prohibiting the maintenance and servicing of Iranian cargo aircraft or ships carrying goods or prohibited materials[14].

On January 16th, 2016, after the entry into force of the JCPOA, the European Council revoked all the economic and financial sanctions that were nuclear-related against Iran. However, some restrictions remain in force[15]. The lifting of sanctions in line with the JCPOA has facilitated trade and economic relations. In 2016, in the first fiscal year following the implementation of the JCPOA, imports from Iran reached 5.5 billion Euros, an increase of 344.8%, whereas EU exports amounted to 8.2 billion, an increase of 27.8%. In 2017, imports from Iran exceeded 10.1 billion and exports to Iran reached a peak of 10.8 billion[16]

However, the US decision had direct repercussions on Iran’s relations with other countries. Annalisa Perteghella, a researcher at the Institute for International Political Studies (ISPI) and an expert in Iranian politics at the MENA Center Institute, pointed to the effects of the US withdrawal. US secondary sanctions could be applied to any person in the world. Thus, through these measures, the US affects third countries which maintain economic relations with those countries subject to sanctions, such as the EU[17]. So the EU seems to be the most involved actor in this dispute: Iran will only respect the JCPOA if it can continue to maintain its economic, energy and trade relations with the EU. For this reason and following the US withdrawal from the agreement, the EU has taken two important measures to protect its companies from secondary sanctions while safeguarding its trade relations with Iran. First, on August 6th 2018, the EU reactivated the Blocking Regulation, which prevents European companies from complying with US requests and exempts European subjects from court rulings and decisions of administrative authorities outside of the EU. However, according to Annalisa Perteghella, the Regulation has more of a political value than an economic one: the US has the power to exclude the international financial institutions that have relations with Iran from its financial system. The second measure concerns the addition of Iran to the list of countries eligible for loans from the European Investment Bank (EIB). However, the Bank also finances itself in the US financial market, and the fact that exposure to Iran would frighten potential buyers of bonds causes alarm. According to the expert, this is the reason why the EU has very few instruments to contain the effects of American sanctions on the short term[18].

According to Cornelius Adebahr, a researcher on European foreign policy at Carnegie Europe, the EU must preserve the international agreement. In his essay “Europe cannot save the Iran deal, but it must try”, he states that Europe neither has the political power to defend the agreement nor to assume the role as a bridge between Teheran and Washington. At the same time and despite the economic influence, it (the EU?) cannot manage to withstand the pressures from the United States, at least not in the short term. However, in the long run it may turn out to be a central player, creating alternative payment channels that are not subject to US sanctions, making any dollar transaction impossible, hence achieving a sort of financial independence. According to the expert, the EU’s current position is critical because it neither has the political weight to influence US policy nor the economic force to reassure Tehran. The only role it can have is to slow down a new nuclear escalation as much as possible[19].

The EU tips the scale

The EU is a global trade power and its economic policy aims to support growth by investing in transport, energy and research. The EU GDP in 2017 was 15.36 billion Euros, and together with the US and China, it is one of the three biggest global players in international trade[20]. In 2017, the US GDP was 16876.80 Euros, and it has significantly increased after the election of President Donald Trump[21]. According to a research conducted by Astrid Viaud, Doctor of the Catholic University of Louvain (UCL), the withdrawal of the agreement and the reintroduction of autonomous sanctions by the US can also be seen as a commercial strategy aimed at slowing the growth of American commercial competitors in Iran. President Trump’s strategy is therefore to stop the economic power of the EU. According to this research, the EU has a relative strong economic power on one hand, but on the other, its political instruments to enforce the agreement are limited to a symbolic response to the US. At this point, the EU must rely on the diplomatic support of Beijing and Moscow to eradicate instability in the Middle East and thus to guarantee its commercial, maritime and energy markets[22].

In concrete terms, between May and June 2018 and response to President Trump’s announcement, the EU has taken measures to protect the interests of European companies investing in Iran and to demonstrate commitment to the JCPOA[23].

On June 6th, the European Commission adopted an update of the external lending mandate of the European Investment Bank (EIB). Furthermore, through the update of the Blocking Regulation, the EU has sought to amortize the effects of US extraterritorial sanctions[24]. However, the EU was aware that its measures did not commit the EIB to actually support projects in Iran, because the governing bodies of the EIB have the power to decide whether to undertake such financing activities in line with the relevant rules and procedures. On July 6th, a joint JCPOA committee chaired by the High Representative, which brought together the EU, E3 (France, Germany and the United Kingdom), Russia, China and Iran was held at ministerial level in Vienna. All stakeholders present reaffirmed their full commitment to and continued implementation of the nuclear agreement. On August 7th, the updated EU Blocking Regulation came into force to mitigate the impact of sanctions on the interests of European companies that carry out legitimate business activities with Iran. The Blocking Regulation aims to protect the established legal system and the interests of legal persons exercising the rights recognized by the Treaty on the Functioning of the European Union from the unlawful effects of the extraterritorial application of such legislation[25]. At the same time, the EU has also committed itself to maintaining cooperation with the US, which remains a key partner and an ally[26].

Recently, on the 24th September 2018, in New York, a ministerial meeting took place between the E3 group (Germany, France and the United Kingdom, with the High Representative)[D1] , China, the Russian Federation and Iran. Participants reviewed the process of identifying and implementing practical solutions to issues arising from US unilateral withdrawal from the agreement, considering that Iran actually continued to fully implement its nuclear-related commitments, as confirmed by twelve consecutive reports of the IAEA. The participants also emphasized that they intend to protect the freedom of economic operators engaged in legitimate business activities with Iran, considering that, in any case, the updated Blocking Regulation has a limited effectiveness against American sanctions[27]. On the same day during a joint press conference with Iranian Foreign Minister Mohammad Javad Zarif, Federica Mogherini confirmed that the EU intends to develop a “Special Purpose Vehicle” (SPV) by November as a technical tool to circumvent the impact of US sanctions[28]. A SPV is a legal entity created to fulfill narrow, specific or temporary objectives and it is typically used to isolate a company from financial risk[29]. This means that EU Member States will establish a legal entity to facilitate legitimate financial transactions with Iran and allow European companies to continue trade with Iran in accordance with EU legislation. This legal entity could be open to other partners in the world. European diplomats described the SPV proposal as a means of creating a barter system, similar to the one used by the Soviet Union during the Cold War, meaning to exchange Iranian oil for European assets. Several analysts suggest that it could result in a trade-in system that would allow companies to bypass the international bank transfer system (SWIFT). Credits for oil or goods imported from Iran by an EU company could be used to pay an EU exporter for his goods or services to Iran. The SPV would operate in Euros rather than US dollars, while the US authorities will not be able to process transactions, unlike the SWIFT system[30].

It seems that the EU wants to ensure it is perceived as an international actor able to manage, observe and enforce the terms of the agreement with Iran in the long term. However, the US withdrawal caused a chain reaction that increased tensions with the entire Middle Eastern area. Iran, at least until now, has not shown any concrete sign of rethinking regarding the JCPOA: this represents a sort of « double-edged » link with the EU and other signatories. Their situation is actually more complex than Iran, because the EU the US are not only historical allies but one of the major trading partners. In other words, the EU wants to be able to balance its approach by maintaining a strategy that can be beneficial for all the parties involved. The maintenance of trade relations with the US remains imperative and essential for the European economy and for its member states. However, it seems that the decision concerning the SPV can be considered as a high diplomatic act. The SPV will not only allow the survival of the agreement, but also a loophole to circumvent the US secondary sanctions. Confirming what has been explained by the experts, even if in this case the EU cannot have a decisive political impact, thanks to its economic and diplomatic power it can turn out to be a central actor that maintains relations both with Iran and with the USA.

This article is written by Maria Elena Argano. We would like to thank EU Logos Athena for this contribution!