European powers plan back-channel to circumvent Iran sanctions

Germany and France have drawn up mechanism to avoid re-imposed US sanctions

Iran's Foreign Minister Mohammad Javad Zarif Khonsari (C) looks on during a meeting with the EU's High Representative for Foreign Affairs and Security Policy. EPA/JOHN THYS / POOL

France and Germany have teamed up behind an initiative to ring-fence parts of Europe’s trade with Iran from the sanctions re-imposed on Tehran by the US.

Senior diplomats said that the countries would undertake shared responsibility for a so-called special purpose vehicle (SPV) to provide to mechanism which would enable European companies to obtain payment for exports to Iran.

US President Donald Trump announced in May of this year that Washington would pull out of the 2015 nuclear deal and roll back American penalties on Iran’s oil trade and banking activity.

Under the arrangement Paris and Berlin have agreed that a new corporation would be based in one state, while its leadership would be drawn from the other. The SPV would be owned directly by European governments in an effort to dissuade US officials from attempting to sanction participating companies.

British officials are said to be weighing up UK involvement in the mechanism. The EU were reportedly trying to enable participation by a further dozen countries. Architects of the plan have even explored the potential for involvement of other countries, such as China in the future.

They hope the vehicle may eventually obtain a bank license and become a formalised EU institution, though reports said officials acknowledged that the SPV would only protect a small percentage of pre-sanction trade between Europe and Iran.

Austria and Luxembourg were both approached to host the mechanism, but both declined to as a result of US pressure. Both countries had previously served as banking back channels for trade with Iran.

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However, US Ambassador to Germany Richard Grenell, warned the SPV and the show of defiance against US sanctions would “not be a smart move”.

“The U.S. will consider sanctions on those entities participating in these tactics,” he added.

The SPV was prompted by European desires to continue doing business with Iran, despite the US unilaterally withdrawing from the 2015 nuclear deal, known as the Joint Comprehensive Plan of Action(JCPOA). Iran, and the other European signatories insisted they intended to keep the deal alive without the US, though the US has repeatedly threatened countries that continue to do business with Tehran with sanctions.

Washington announced it was pulling out of the deal in May, claiming Tehran had violated restrictions on its development of nuclear weapons, but both Iran and the European signatories denied that was the case, and insisted they would endeavour to keep the deal alive.

Andreas Schweitzer, managing director of Arjan Capital Ltd, a corporate and trade advisory firm for business looking to enter the Central Asian market said that it is to be expected that some European firms and governments would view the US sanctions as unilateral measure that do not affect third country trading with Tehran.

“It’s not about circumventing sanctions, the sanctions apply to a certain group, like US passport holders, USD denominated trades and certain product groups. If they don’t apply or a company has little or no US exposure they legally can do business with Iran.

He added, “At the end of the day it’s US law with a long reach, but it’s still economic leverage”.

“It’s not about circumventing; it’s about knowing how to live with them, some European firms can do that.

“In this sense this vehicle is very important, it allows the government to compensate the trade – they [the companies] are now dealing with their own government, not Iran anymore.”

The EU also reiterated its desire to preserve the JCPOA following a series of high-level meetings between EU and Iranian officials on Tuesday. However, during a meeting with Iranian Vice-President Ali Akbar Salehi, Federica Mogherini, the EU's High Representative for Foreign Affairs also stressed European concern over "Iran's role in the region."

Iran’s Foreign Minister Mohammad Javad Zarif visited Italy last week, reportedly discussing the mechancism, and the wider fallout from the US’ withdrawal of the JCPOA with his European counterparts. He has previously urged other companies to step in and fill the void left in trade by President Donald Trump’s decision.