Europe Should Challenge the U.S. Sanctions on Iran

(Bloomberg Opinion) -- Iran’s decision to scale down its commitments under the 2015 nuclear deal abandoned by President Donald Trump signifies a serious foreign policy failure for the EU and its member states. They have acted too meekly and ineffectively in the face of unilateral U.S. sanctions, and this unnecessary softness may well come back to haunt them as the U.S. use of extraterritorial sanctions expands.

Last year, after Trump pulled the U.S. out of the agreement known as the Joint Comprehensive Plan of Action, meant to restrict Iran’s nuclear program, European leaders refused to follow suit and moved to protect the deal as the U.S. reimposed harsh sanctions on Iran. First, the EU expanded an existing device, the so-called blocking statute, meant to protect European companies against extraterritorial U.S. sanctions. The statute declares it a transgression to comply with the sanctions, nullifies any foreign court decisions based on them and enables European companies to seek compensation in EU courts for any damages arising from them.

Then, the EU moved to set up a special purpose vehicle to enable trade with Iran to bypass normal financial channels, which would have exposed such trade to U.S.  sanctions enforcement. After months of buck-passing, Instex, the Instrument for Supporting Trade Exchanges, was set up in France at the end of January.

These measures were meant to show Iran that Europe was willing to confront the U.S. in order to protect JCPOA. The reason they failed to work is that, as implemented, they amounted to no more than window-dressing.

The blocking statute doesn’t guarantee European firms any reasonable compensation for potential U.S. fines because European courts’ rulings are unenforceable in the U.S. Besides, it’s not even implemented, for example, in French national law, which exposes Iran’s erstwhile business partners such as oil major Total or the French carmakers to U.S. sanctions without any protection. In any case, the statute provides firms with an easy way out: They don’t even have to pay small fines in Europe for complying with U.S. trade restrictions if they can prove to the European Commission that trying to bust the sanctions would result in serious damage to their operations or to EU interests. Most large firms have taken this path.

The only time the blocking statute ever helped the EU was back in 1997 and 1998, when the bloc used it as a negotiating tool in hammering out deals with the Clinton Administration that protected European firms from U.S. measures linked to Cuba sanctions. These deals recently have been put into question by the Trump Administration’s decision to toughen the Cuba restrictions. And in general, Trump appears to be uninterested in any compromises with European allies when it comes to sanctions that project U.S.  policy beyond its borders. They are expected to acquiesce, or else.

Instex, for its part, is, for now, merely a mechanism for humanitarian deals permissible under the U.S. sanctions. It avoids money transfers to and from Iran, making it possible instead for Iran’s European trading partners to pay each other as they sell or receive goods of equal value from the Islamic Republic. But the U.S. may still go after it for potential anti-money-laundering violations, making it risky for any private company to use. Besides, as my colleague Lionel Laurent noted last week, Instex is yet to start operations.

Iran now demands more from the European signatories of the JCPOA and threatens to stop observing uranium enrichment restrictions in 60 days unless they deliver more trade. Not much can be done within that time frame with the EU’s current toolbox: It doesn’t offer private business substantial protection from U.S. ire. But Europeans can and should work to defang extraterritorial U.S. sanctions. Otherwise the EU, the member states and European multinationals are exposed to the unpredictable vicissitudes of domestic U.S. politics.

What if Trump, with his disrespect for allies, gets re-elected in 2020? What if he, or Congress as it tries to tie his hands, pushes through crippling sanctions on China, Russia or Europe’s other major trading partners? None of this can be ruled out, and it’s possible that the U.S. will choose to act more as Europe’s competitor than its friend regardless of who sits in the White House. U.S.-proofing European economic interests is  a necessity.

That’s not a hopeless cause, even if European concerns about a possible trade war with the U.S. make drastic action difficult. For example, the EU is probably right not to exert more pressure on the Brussels-based global financial messaging service, Swift, to scale down its compliance with U.S. sanctions. It could create chaos in the global financial system and lead the U.S. to punish the EU with trade restrictions. Going to such lengths just to make a case against extraterritorial sanctions probably wouldn’t be smart.

There is, however, something Europe can do: use the U.S.  legal system to curb the U.S. government’s sanctions ambitions. Sascha Lohmann of the German Institute for International and Security Affairs in Berlin suggested as much in a brief earlier this year. He noted that the U.S. executive branch’s increasingly expansive interpretation of the international reach of U.S. sanctions barely has been litigated in U.S. federal courts. Foreign companies charged with sanction-busting choose to make a deal and pay a fine rather than fight such battles. And yet, Lohmann noted, the U.S. Supreme Court recently may have made legal challenges easier by strengthening the so-called presumption against extraterritoriality. 

The EU could proactively mount legal challenges in the U.S. to the way sanctions legislation is interpreted and enforced. This would, of course, take time – probably too much time for JCPOA to be saved. But at least using the U.S. legal system to challenge executive overreach is not the kind of hostile action that would justify a trade war. It would be respectful enough and at the same time potent enough to at least try to secure Europe’s economic interests.

Even if the legal challenges fail, the message to Washington will be that U.S. dominance, where it doesn’t serve a greater good, will be challenged. Besides, Europe should exhaust its options before contemplating more forceful, and potentially more costly, pushback against the U.S. – and in any case, it’ll be better than simply turning the other cheek as the EU has done so far despite all the rhetoric to the contrary.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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