EU’s rearguard won't safeguard global firms from Trump Iran sanctions

The blocking measure is symbolic but multi-nationals are left with stark choice in trading partner, Iran or America

U.S. Secretary of State Mike Pompeo, right, speaks to European Union's Foreign Policy Chief Federica Mogherini ahead of the at the 25th ASEAN Regional Forum Retreat in Singapore, Saturday, Aug. 4, 201Show more

Europe’s tit-for-tat adoption of a “blocking mechanism” to protect businesses engaged in Iranian trade following US sanctions is likely to have drawn a wry smile from former US Treasury Secretary John Snow.

The George W Bush appointee was chairman of a private equity company in 2007 when its takeover of an Austrian bank hit a legal glitch. US sanctions on Cuba required the newly-bought bank to close around 100 Cuban customer accounts.

The Viennese government got wind of the development and started legal proceedings under the European blocking mechanism on behalf of the Cubans. The issue never came to fines or court after the US Treasury issued a waiver to exempt the accounts.

Yet the incident provides the sole precedent for the blocking legislation that was deployed against US sanctions on Tuesday.  These target Iranian currency trading, gold dealing, industrial imports and the automotive sector and are acknowledged to have a wide secondary impact.

Brussels has banned compliance with the US sanctions regime. Its new rules allow businesses and others to use the courts to safeguard existing business.

Officials close to Federica Mogherini, the EU’s foreign policy chief, see the defence of the 2015 nuclear pact as a test of Europe’s role as a guarantor of the deal.

Like America, the Europeans view Iran’s regional aggression and massive expansion of its missile arsenal as amounting to a severe security challenge. One official said Tuesday “there is much we would like to see change about Iran’s behaviour”.

However, the bloc is united on Iran’s continuing compliance with the terms of the 2015 deal, citing the International Atomic Energy Agency’s failure to find any transgressions of the restrictions the agreement imposes.

The blocking mechanism is a key first line of defence against the US withdrawal. For now, Tehran remains committed to the agreement.

“It’s a tremendously important step to take,” said Nathalie Tocci, the special advisor to Ms Mogherini on Tuesday. “It signals to the Iranians as well as obviously to the rest of the international community that the EU is moving to respond and contain the impact of US primary and secondary sanctions.”

The scope of Europe’s retaliation is likely to be limited by several factors. As the Austrian case proves there is little precedent for how the blocking mechanism works. Even if the laws did provide a powerful tool, companies would still face a choice between trade with the US market and Iran’s.

Trans-Atlantic trade far exceeds European trade with Iran. In 2017 the $23 billion European trade with Iran was dwarfed by more than $700 billion of trade with America.

Alistair Burt, a minister of state for the Middle East in the British foreign office, conceded the disparity would limit the effectiveness of the EU ban.

“It’s a commercial decision for a company, whether or not they continue working in Iran,” he said.  "If a company fears legal action taken against it and enforcement action taken against it by an entity in response to American sanctions, then that company can be protected as far as EU legislation is concerned.

“However the practicalities of the US saying we don’t want to have anything to do with companies trading in Iran will be very different," he added “It can’t replace the commercial decision a company will take but will provide a measure of protection.”

Many European companies have already voted with their feet. Daimler, the German automotive firm and has announced it will cease Iranian business, just months after announcing a joint venture. The French automaker PSA has taken a similar decision while Renault has but business on ice. Total, the French exploration giant, has withdrawn from a $5 billion concession awarded by Iran. Globally focused companies cannot afford the luxury of keeping trade ties to an Iranian economy that is already in turmoil.

Legal firms describe the moves away from Iranian business as prudent corporate planning. Therefore, the adoption of the legislation has a greater political significance that commercial impact.

“Companies planning on trading with Iran are damned if they do and damned if they don’t,” said Chris Bryant, a partner specialising in antitrust and competition law, at international law firm Bryan, Cave, Leighton, Paisner. “The blocking regulation is a strange tool. It’s politically charged.

“It sends a message to Iran that we are with you and to America that we don’t agree with you.”

Faced with an exodus of global operators, European trade officials are set to concentrate on support for small and medium-sized businesses that don’t fear the loss of access to the US banking system.

An analysis from the Council on Foreign Relations said the American moves had already inflicted damaging blows to the Iranian economy despite European, Russian and Chinese pledges to stick with the agreement. “The US moves have already contributed to a run on the rial and triple-digit inflation as Iranians scramble for the safety of US dollars and gold,” CFR said. “They also come amid months-long protests in Iran over deteriorating economic conditions and charges of corruption and mismanagement.

“Some estimates say Iran’s oil exports, valued at $36 billion in 2016, could drop by up to two-thirds this year with the reinstatement of sanctions. That could have ripples beyond Iran as global oil markets cope with supply strains.”