EU Punches the US in the Face Over Trade with Iran

03.10.2018 Author: Salman Rafi Sheikh

NEO JOURNAL COLLAGE

As we analyzed previously for NEO in this piece, the US policy of sanctions vis-à-vis Iran has put it in diplomatic isolation, forcing its most trusted ally since the Second World War, Europe, in an antagonistic position. While the reason for this geo-political distance lies in a series of withdrawals and policy reversals the Trump administration has made and done, the case of Iran stands out mainly because the entire US Middle East policy is now focused on Iran, namely the imperative of forcing the later into utmost submission to the advantage of Israel and the House of Saud. But EU is making sure to stem the tide of US unilateralism not just because the EU doesn’t believe in the US-Israeli rhetoric about Iran’s violations of the deal, but also because the EU wants to maintain a productive relationship with Iran: buy its oil and exploit its big market to its advantage; hence, the EU decision to put in a fresh legal framework to facilitate trade and help Iran bypass US sanctions.

This landmark development took place on the sidelines of the US General Assembly’s annual session in New York when EU foreign policy head Federica Mogherini and Iranian Foreign Minister Mohammad Javad Zarif, announced a “special purpose vehicle” (SPV). The EU head thus explained the SPV, “in practical terms, this will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world.” Importantly enough, this vehicle would “facilitate payments related to Iran’s exports, including oil,” added Mogherini.

Needless to say, the creation of this mechanism will also keep JCPOA, intact. On a larger geo-political terrain, the EU now stands in full agreement with Russia and China regarding the necessity of bypassing US sanctions for any transactions and trade deals with Iran. And, it cannot be emphasized enough that by thus placing a legal framework in practice, EU has now made a firm comeback in global geo-politics as an independent player, changing its erstwhile position of always playing a second fiddle to the US.

Accordingly, the EU is no longer mincing words when it comes to taking a stand on the US policy of sanctions. The EU commission has already expressed that they consider the ‘secondary sanctions’ imposed by the US on European companies illegal. According to new rules, put in place in August 2018, European companies, particularly those that do trade with Iran and are in turn sanctioned by the US, have the right to challenge US sanctions in European courts and seek compensation from the US government or American companies. Let’s not forget that the blocking statute, the framework that protects EU companies, isn’t here for the first time. In 1996, this status was issued when the US had put secondary sanctions on Iran and Cuba. Back then, the mere issuance of this statue had forced the US to suspend sanctions. Whether we can expect such a reversal from the Trump administration is not hard to guess due to the overwhelming pressure coming from Saudi Arabia and Israel for sanctioning Iran and thus cripple its economy. What, therefore, we can expect is a visible institutional EU-US schism on Iran.

But through SPV, this crippling now longer seems strong enough to bite Iran hard. According to this, Iran will now be able to keep at least the 40% of its oil exports that go to the EU market in place, allowing EU energy giants to invest in the Iranian economy. It also opens an easy escape route for countries, such as India, who want to continue to trade with Iran but have given in to the US pressure.

Equally significant is the possibility that the SPV will allow the Belgium based SWIFT system to be bypassed, preventing the US from interfering as and when it deemed fit, consequently ending up with its dollar de-weaponised.

This system, if it gets fully functional soon enough, will thus sync very well with Russian and Chinese policy measures that seek to create a financial system independent of the US influence or interference. Success of this system, therefore, may very well lure Russia and China into its orbit and thus pave way for a new era of financial cooperation between EU and Russia-China and even other reluctant players in the region. For one thing, the SPV will put Euro, instead of dollar, as the chief trade and reserve currency, for another, it will also pave the way for Euro to play a more active role in the global financial system. With EU thus weaponising its own currency, the currency wars will no longer be played just between China and the US.

Well, this is what the US could expect from Europe: a full counter-attack after Washington’s refusal to allow EU companies doing business with Iran to be exempted from sanctions. This counter-attack is big as it has the potential to completely re-write how the EU deals with the US and how it deals with the rest of the world, including chief US competitors, Russia and China. With the US already in the middle of a trade war with China, a ‘war of attrition’ between the US and EU should bring the anti-US parties closer.

Salman Rafi Sheikh, research-analyst of International Relations and Pakistan’s foreign and domestic affairs, exclusively for the online magazine “New Eastern Outlook”.