Kartik Mittal considers the current state of affairs relating to Iran, the US, the EU and seemingly forever-increasing sanctions in WorldECR

February 13 2020

This article was originally published in WorldECR's Issue 86 and can be accessed here, behind a paywall.

Kartik Mittal

Iran – where can we go from here?

US-Iran relations once again dominate the headlines worldwide. In recent weeks, much of the discussion has focused on the possibility of further military escalation. Amidst the recent turmoil, it has often been forgotten that the US is continuing to escalate its sanctions regime against Iran. This important fact was obscured by the noisy speculation of war which followed the killing of Iran’s General Soleimani on 3 January 2019. Yet economic sanctions remain absolutely fundamental to the US-Iran dispute. Indeed, the imposition of American sanctions following the US withdrawal from the Iran nuclear deal in 2018 are widely seen as having driven US-Iranian relations to their current impasse.

In December 2019, the US announced that it would impose a further round of sanctions against key Iranian companies. The companies targeted were the Islamic Republic of Iran Shipping Lines (IRISL), and its Chinese subsidiary, E-Sail Shipping, together with Iranian airline Mahan Air. US Secretary of State Mike Pompeo said the sanctions were being imposed due to the Trump administration’s view that these companies were involved in the proliferation of weapons of mass destruction.

The US allowed a grace period of 180 days before the sanctions on IRISL and E-Sail would take effect. The delay was said to be to give exporters of humanitarian goods time to find alternative routes. However, the sanctions on Mahan Air, one of Iran’s most active airlines in Europe, took effect immediately.

The US had already in 2011 sanctioned Mahan Air for its alleged provision of support to Iran’s Islamic Revolutionary Guard. It is clear that the US intends to enforce its sanction regime. Indeed, in December 2019 US prosecutors charged an Indonesian man and three Indonesian companies for violating sanctions by selling American goods to Mahan Air.

US Treasury Secretary Steven Mnuchin further justified the new sanctions by saying that “The Iranian regime uses its aviation and shipping industries to supply its regional terrorist and militant groups with weapons, directly contributing to the devastating humanitarian crises in Syria and Yemen.” The Iranian government responded by saying that it would find ways to bypass the new sanctions.

These latest US sanctions impose additional pressures on Iran’s aviation and shipping industries. The new sanctions came at a time when US secondary sanctions were already significantly impacting the practical economic relief which Iran had hoped for under the terms of the Joint Comprehensive Plan of Action (JCPOA), known as the “Iran nuclear deal”, as agreed in Vienna on 14 July 2015.

The Iran nuclear deal saw the UK, US, France, Germany, Russia, China and the EU reach a comprehensive agreement with Iran on its nuclear programme. In simple terms, the deal was that economic sanctions against Iran would largely be lifted, in return for verifiable nuclear decommissioning.

However, in May 2018, the United States under President Trump unilaterally withdrew from the JCPOA and unilaterally reinstated sanctions - without the support of the other parties to the agreement. The US did not merely re-impose sanctions against Iran but also stated that any companies doing business with Iran or the US-designated entities would themselves be sanctioned by the US. However, the EU remained committed to the deal, and wanted to continue to trade with Iran.

In response, on 7 August 2018, the United Kingdom, France and Germany took legislative measures as members of the European Union in order to protect persons and companies of the member states of the European Union against the extra-territorial application of US sanctions on Iran. This was achieved through what is commonly known as the EU Blocking Statute.

The EU Blocking Statute remains the centrepiece of the EU effort to protect European companies trading with Iran. A blocking statute is a law created by one jurisdiction to block a law made by a foreign jurisdiction from applying there. The European Commission says that, “The Blocking Statute allows EU operators to recover damages arising from the extra-territorial sanctions within its scope from the persons causing them and nullifies the effect in the EU of any foreign court rulings based on them.”

Announcing the initiative, the foreign ministers of the UK, France, Germany and the EU issued a joint statement expressing their deep regret against the re-imposition of sanctions by the US. The statement went on to say, “The lifting of nuclear-related sanctions is an essential part of the deal … We are determined to protect European economic operators engaged in legitimate business with Iran."

Despite such measures, by 8 November 2018, the US had re-imposed all sanctions against Iran, and had blacklisted 700 designated entities linked to Iran. On 7 September 2018, the Financial Times reported a US official as putting the position created by the sanctions very succinctly, saying, “if you decide to do business with an enemy of the United States of America, you will not be doing business with the United States … You will not have access to the US financial system. You will not be able to use the US dollar.”  The stark choice which the US gave to EU businesses was therefore: you can either do business with Iran or the US - take your pick.

Although EU businesses were offered substantial protection under the Blocking Statute, the extent to which companies would avail of its protections would depend on how rigorously the US and the EU would enforce the measures. The risks posed by US sanctions were very real. For example, the UK bank Standard Chartered reportedly now faces a $1.5 billion fine for previous violations of US sanctions against Iran.

The Blocking Statute does not compel EU Operators to continue commercial activities in Iran. EU businesses remain free to choose whether or not the wish to do business with Iran. EU companies who wish to trade with Iran are however in a very difficult position. They are permitted to trade with Iran. Indeed, their own governments are in favour of trade with Iran. They see trade as the very incentive which is capable of peacefully persuading Iran to curb its nuclear ambitions. Yet if they choose to trade with Iran, they risk being sanctioned by the US. The overall effect has been that major international companies with significant US exposure simply could not justify the risk. The blocking statute does provide a certain level of comfort for small and medium size EU businesses, which have little presence or activity in the US. However, such trade could not realistically offset the effect of the US sanctions on major corporations.

The EU Blocking Statute therefore only had a limited effect in ameliorating US sanctions. Despite the EU’s efforts, major companies, such as TOTAL and Reuters, took commercial decisions to cease trading with Iran as a direct result of US sanctions. Airbus also cancelled an Iranian order for 100 aircraft.

Despite the above difficulties, the EU has continued to make significant additional efforts to keep the Iran nuclear deal alive by supporting trade with Iran. In January 2019, the EU established Instrument in Support of Trade Exchanges (INSTEX) as a transaction mechanism to facilitate enable trade with Iran while avoiding US sanctions. On 29 November 2019, six additional EU states - Belgium, Denmark, Netherlands, Norway, Finland and Sweden - declared that they would join France, the UK and Germany as shareholders of INSTEX.

US sanctions have nonetheless had a very significant adverse impact on Iran. In May 2018, before the re-imposition of US sanctions was announced, the International Monetary Fund (IMF) predicted Iranian economic growth of 4 percent for 2018 and 2019. Since then, the Iranian economy has fallen into a deep recession, its currency has crashed in value and inflation has taken hold, resulting in popular discontent.

Iranian oil exports have collapsed.  In early 2018, Iranian crude oil production was at 3.8 million barrels per day (bpd), according to Opec figures. Of this, Iran exported some 2.3 million bpd. After re-imposing sanctions, the US initially allowed waivers for certain countries to continue to buy Iranian oil. However, in April 2019 the US announced that these waivers would not be renewed.  By October 2019, Iranian crude oil production had fallen to an average of 2.1 million bpd with just 260,000 bpd being exported. The US sanctions thereby effectively deprived the Iranian government of its main source of revenue.

The attacks on tankers in the Gulf in summer 2019, and the attacks on Saudi Arabian refineries in September 2019, were seen by many regional analysts as driven by Iran in response to US sanctions. Many saw these actions as an attempt by Iran to say that if we cannot export oil, then we will be forced to prevent other Gulf states from doing so, including by disrupting shipping through the Straits of Hormuz.

By causing a collapse in the value of the Iranian currency, US sanctions also made the cost of importing goods into Iran much higher. This greatly increased prices for ordinary Iranians, even as their wages remained stagnant. By October 2019, the Statistical Centre of Iran reported a year-on-year rise in Iran’s household consumer price index of 42%. Food and beverage prices were said to have increased by 61% in just a year. An economic contraction of some 6% annually, together with a weaker currency, meant that the Iranian government had to find extra money from elsewhere - including by increasing the cost of fuel for its own citizens.

The economic hardship caused by US sanctions had already bitten ordinary Iranians hard by the time Iran’s government announced fuel price rises in late 2019. The fuel price rises sparked widespread protests in Iran, placing the Iranian government under significant domestic political pressure. Demonstrations became widespread and resulted in riots and damage to property in a number of places. Amnesty International has estimated that over 300 people were killed in the government crackdown on the protests.

There is little doubt but that the Iranian protests of late 2019 came about as a result of the pressures which US sanctions placed on the Iranian economy. Some Iranians were also reported to increasingly resent the fact that their government could find significant funds for military engagements across the Middle East, but not to help its own citizens to access essentials such as food and fuel.

However, President Trump’s decision to kill General Solomeni with a drone strike has not so much reshuffled the deck, in terms of US-Iranian relations, as thrown the cards in the air. For now, this highly significant action appears to have unified the Iranian people and it also has resulted in Iraqi government threats to expel US forces from Iraq. At the time of writing, Iran has attacked US bases in Iraq with cruise missiles. The ultimate consequences for US-Iranian relations are impossible to predict.

Before the killing of General Soleimani on 3 January 2020, the US had responded to even to Iran shooting down a US military drone not militarily, but with additional sanctions as its weapon of choice. This was done with the express aim of forcing Iran to return to the negotiating table to renegotiate the Iran nuclear deal. It remains to be seen whether the US will revert to its former reliance on sanctions alone to achieve its aims.

Given the serious pressures which sanctions have placed on Iran, sanctions could either bring Iran to the negotiating table or give it reason to take further steps to further dismantle the Iran nuclear deal - or even to abandon it altogether. In the wake of the killing of General Soleimani, Iran announced that it would no longer adhere to the deal’s restrictions as regards the type of centrifuges it may operate, the number of centrifuges permitted, or the level of enrichment of uranium that is allowed. However, Iran was careful to make clear that it was willing to return to compliance with the deal if sanctions were lifted.

A return to the negotiating table seems unlikely for now, in light of the markedly increased tensions caused by recent events. Whatever the scale of any future military engagements between the US and Iran, it now appears probable that the US sanctions regime against Iran will remain in place for the foreseeable future.

It is however possible that the US Presidential election in November 2020 may result in a very different and more conciliatory US administration. Yet again, it is possible that events will have moved on significantly by that stage. The only real certainty for now is continued uncertainty. Recent weeks have demonstrated the unpredictability of events when it comes to US-Iranian relations. Those interested in Iranian trade therefore have little choice but to wait and see what happens next.

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