What Europe Can and Can’t Do to Save the Iran Nuclear Deal

(Bloomberg) -- European countries played a key role in negotiating the landmark 2015 international accord that restricted Iran’s nuclear program in return for relief from sanctions that had strangled its economy. Now they’re scrambling to salvage the deal after the U.S. pulled out and Iran exceeded agreed limits on its enrichment of uranium. Iran faults Europe for failing to open up promised business opportunities. Facing new ultimatums that could escalate into a full-blown nuclear crisis, Europe is trying to find ways to engage Iran without enraging the U.S.

1. Why is this Europe’s problem?

European governments vowed to keep the agreement viable after U.S. President Donald Trump, an outspoken critic of the accord brokered by his predecessor, quit the deal in May 2018 and later reimposed sanctions on Iran. Europe’s interest in a peaceful resolution to the Iranian nuclear issue is partly about business opportunities, but also because it recognizes that another Middle Eastern military conflict would unleash new waves of economic and political instability throughout the region.

2. How is Europe doing so far?

Not very well. Europe’s main response since May 2018 has consisted of symbolic gestures and calls for compliance with the accord. Policies that could provide the sanctions relief Iran seeks have been slower to develop. The European Union rolled out almost a year ago a new version of its so-called Blocking Statute, which is meant to protect European companies doing business with Iran against U.S. backlash. The rules let companies seek compensation in EU courts for damages arising from U.S. sanctions, but they haven’t been enforced yet. Similarly, the EU’s Instrument for Supporting Trade Exchanges, or Instex, was set up to facilitate trade with Iran, but after almost a half-year of operation, the clearinghouse is just starting to process transactions.

3. What exactly is Instex?

A financing and barter exchange set up to get around U.S. domination of the global financial system, Instex is meant to provide European companies a trading vehicle to sell goods and services to Iran without using dollars, routing transactions through U.S. banks or moving money across the Iranian border. It could also help shield them from running afoul of “secondary sanctions” that punish non-U.S. banks, companies and people who do business with Iran. The first transactions are for food and humanitarian aid -- categories that fall outside the reach of sanctions anyway -- but Instex could someday be expanded to include Iranian crude.

4. What is Iran expecting?

Iran says that Instex needs to cover its international oil exports for the nuclear deal to survive. After all, President Hassan Rouhani was only coaxed into the nuclear accord after being promised global trade that could boost Iran’s economy. The arrangement seemed to succeed at first. The economy rose out of recession on the back of higher crude exports. Drawn to Iran’s market of 80 million people, overseas construction and oil companies as well as aircraft and car manufacturers like Airbus SE and PSA Peugeot signed early deals. European banks and renewable energy developers were just starting to trickle into Iran when the mood music suddenly changed.

5. What went wrong?

Investment petered out and economic growth plunged after Trump was elected. By the time he removed waivers in April that had allowed some countries to continue buying Iranian oil without sanctions, Iran’s currency had lost two-thirds of its value and its economy was headed into a second year of recession. Shutting down Iranian oil exports to key buyers such as China, India and Turkey could plunge its economy into full-blown crisis and set off domestic political shocks. Iran’s response has been to defy limits on uranium enrichment written into the accord. It’s also been accused of raising tension in the Persian Gulf by attacking or hassling oil tankers passing through the critical Strait of Hormuz.

6. What’s holding Europe back?

European nations still haven’t been able to put policies in place to back up their rhetoric. Deep business ties between Europe and the U.S. mean lawmakers risk a backlash from frustrated companies that don’t want to give up their American sales for a chance to do business with Iran. The EU’s inchoate security infrastructure forces the bloc to rely on the U.S. for much of its defense. Perceived threats from a revanchist Russia and rising China divide the bloc along geographic and economic lines. Taken altogether, the EU is showing how hard it is to muster the unity needed to sidestep its biggest ally.

7. What does this mean for Iran?

Iran has pledged to continue exceeding nuclear limits every 60 days unless it receives promised trade benefits. EU leaders have signaled such violations will only ramp up tensions and could yield even more sanctions. It might also spell the end of Iran’s flirtation with western economies and accelerate the shift to new trading partners. China’s Belt and Road Initiative has already tagged Iran as a key partner and Russia has become an important arms supplier to the Tehran government. Iran may be tempted to expand those ties.

The Reference Shelf

• Europe calls on Iran to ‘act responsibly’ and comply with the nuclear accord.
• Bloomberg explains U.S. threats against trading with Iran.
• The reaction of Iran’s supreme leader, Ayatollah Ali Khamenei, to European trade efforts.
• Bloomberg Businessweek describes Iran’s “resistance economy.”
• Bloomberg Opinion’s Lionel Laurent weighs the ins and outs of Instex.

To contact the reporter on this story: Jonathan Tirone in Vienna at jtirone@bloomberg.net

To contact the editors responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net, Andy Reinhardt, Mark Williams

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