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Stuck Between the U.S. and Iran, Europe Is Running Out of Options

(Bloomberg) -- No one spelled out Europe’s predicament over the escalating stand-off between the U.S. and Iran quite as bluntly as Russia.

It’s up to “the Europeans, who committed to find a solution to the problem created by the Americans, to fulfill their promise,’’ said Foreign Minister Sergei Lavrov, during a joint news conference in Moscow with his Iranian opposite, Mohammad Zarif.

Stuck Between the U.S. and Iran, Europe Is Running Out of Options

That won’t be easy, because after a year of casting around for ways to enable companies to safely circumvent U.S. sanctions to trade with and invest in Iran, Europe has come up empty. That is unlikely to change in the next 60 days, in which case the 2015 nuclear deal with Iran could be headed for a slow death.

Europe has again found itself squeezed between hostile governments in Washington and Tehran, after President Hassan Rouhani threatened on Wednesday to abandon some of the limits to its controversial nuclear fuel program that Iran agreed to in 2015, in exchange for the lifting of international sanctions.

Manfred Weber, the candidate of Europe’s Christian Democrats for European Commission president called for EU-Iran talks to avoid further escalation, when asked about the spat at the EU’s summit in Sibiu, Romania on Thursday. Speaking on Deutschelandfunk radio, former German foreign minister Sigmar Gabriel said new U.S. sanctions were to blame for the rising tensions with Iran and had made a war in the region more likely.

‘Hasn’t Delivered’

Iran’s beef is with the U.S., which withdrew from the agreement last year. And it’s likely to continue getting support from Russia and China, which in the past have continued to do business in Iran and buy its oil, despite U.S. sanctions.

But Europe was the target of Rouhani’s ultimatum on Wednesday, demanding that it start countering the effects of mounting U.S. sanctions within 60 days, or see Iran start walking away from the deal, too.

“They’re giving the Europeans a last chance,’’ said Sir Richard Dalton, who served as Britain’s ambassador in Tehran from 2003 to 2006. “So far, Europe hasn’t delivered in a single one of the areas – transport, trade, investment, banking – where it promised Iran cooperation in 2018, when the U.S. pulled out.’’

Dalton described Rouhani’s announcement as carefully calibrated, so as not to immediately collapse the 2015 Joint Comprehensive Plan of Action, while at the same time persuading a domestic audience that the government was pushing back against U.S. economic pressure.

Iran’s economy contracted by 3.9 percent in 2018, and is forecast to shrink by a further 6 percent this year, according to the International Monetary Fund. The recent U.S. decision to end all waivers of sanctions against countries that buy Iranian oil exports is likely to exacerbate the country’s economic woes further.

‘In Full’

In a joint statement Thursday with the foreign ministers of France, Germany and the U.K., EU foreign policy representative Federica Mogherini recommitted the bloc to keeping the 2015 nuclear deal alive. The statement also urged Iran to stick to its obligations under the agreement “in full” and avoid escalation.

Stuck Between the U.S. and Iran, Europe Is Running Out of Options

“We reject any ultimatums and we will assess Iran’s compliance based on its performance,” the foreign ministers said in their statement.

Europe’s thankless position isn’t new. It has been caught between hawkish policies in the U.S. and Iran ever since international inspectors first confirmed the existence of Iran’s secret nuclear fuel program in 2003.

Uncomfortable Deja Vu

Still bruised from the U.S. decision to invade Iraq just months earlier, France, Germany and Britain took on the task of negotiating a solution with Tehran that the U.S. could accept. Their aim was to avoid a repeat of the Iraq war, and of the deep rifts that it caused within Europe as governments were forced to choose whether to back or oppose U.S. policy. Unlike the U.S., European nations also had significant economic interests to lose.

Iran’s ultimatum, together with the recent U.S. deployment of an aircraft carrier group and B-52 bombers to the Gulf, suggest those risks are back.

U.S. Secretary of State Michael Pompeo canceled a meeting with German Chancellor Angela Merkel to visit Baghdad on Tuesday where he told Iraqi leaders the threat from Iran is growing. He told the Daily Telegraph that he’d received intelligence “that suggested it was a good time for me to go.”

Europe’s governments are probably in a weaker position to push back against U.S. foreign policy choices than they were in the lead-up to the Iraq war, when France, Germany and a number of others joined with Russia to forcefully oppose the Iraq invasion.

Secondary Sanctions

That’s in part because Washington has since developed the use of secondary sanctions against non-U.S. companies into a powerful deterrent. The U.S. fined France’s BNP Paribas SA $8.9 billion in 2015, for busting its sanctions on Iran, Cuba and Sudan. Last month, the German unit of UniCredit SpA agreed to pay $1.3 billion for busting U.S. sanctions on Iran. Companies, and governments, have become cautious.

The EU is setting up a special purpose vehicle to help European companies safely finance the export of goods to Iran. Even this limited vehicle, however, known as the Instrument in Support of Trade Exchanges, has yet to start work. It would in any case do little or nothing to aid investment or trade in the wider Iranian economy.

Europe’s troubles aren’t only with the U.S. In what could be seen as a veiled threat, Rouhani also talked Wednesday about the role Iran plays in reducing the flow of drugs and refugees to Europe. Iran hosts about 1 million registered refugees from Afghanistan, and as many as 1.5 million more who are unregistered.

At the same time, the non-financial stakes for Europe in defying the U.S. on Iran may also have risen in recent years. President Donald Trump has made it clear his government sees both support for Europe’s defense in the North Atlantic Treaty Organization, and trans-Atlantic trade as negotiable in ways that no U.S. president has before.

“The underlying issue,’’ said Dalton, the former U.K. ambassador, “is whether Europe remains a sovereign force.’’

©2019 Bloomberg L.P.