Despite Iran’s compliance with the JCPOA, President Trump decertified the nuclear deal on the 13th of October, accusing Iran of violating “the spirit of the deal”. For President Trump, it appears as though the debate is no longer related to Iran’s nuclear activities and (potential) violation of the JCPOA, but its general behaviour and influence in the Middle East.

The real issue, for Trump, is to counter Iran’s regional influence, which is played out in its support of terrorism and militia groups as well as ongoing ballistic missiles tests. Recent political courtships also demonstrate that Saudi Arabia has the ear of senior U.S. officials such as Trump, Rex Tillerson, and Jared Kushner, which serves to pit the bloc against Iran.

To do so, the U.S. Treasury Department imposed further unilateral sanctions against individuals and entities owned, or partially owned, by the Islamic Revolutionary Guards Corps (IRGC). It designated the IRGC under Global Terrorism Executive order 13224.

Given the influence the IRGC exerts over Iran’s economy, Trump’s move will inevitably impact the Iranian economy. Depending on how this scenario plays out, it could also affect European investments in Iran.

However, it is not yet a fait accompli. Decertifying the deal and claiming Iran’s non-compliance does not abrogate it, but it has shifted responsibility to Congress, which is now in a 60 day review process.

The Options Open to Congress

  • Do nothing. However, Washington would be in violation of the agreement since the U.S. government has already reimposed sanctions. Although this may be the preferred option for Congress, no member will necessarily want to be overtly seen to support in Iran; and, it remains unlikely that Trump will lift sanctions by the January deadline.
  • Reimpose sanctions, unilaterally alter the JCPOA, and ultimately tear the deal apart. According to the US-Iran Chamber of Commerce, the estimated cost of sanctions for the U.S. is $203-272 billion in export revenues. Furthermore, American companies may lose large contracts: Boeing’s agreement with Iran Air and Aseman is valued at U.S. $20 billion.
  • Renegotiate the deal and integrate “trigger points” into domestic legislation. If Iran violates any trigger points, sanctions will be automatically reimposed. This unilateral U.S. decision to “fix” a multilateral agreement has been rejected by Iran, and many European countries. Yet, Trump strongly asserted that he will ultimately exit the deal if some conditions are not changed. This option, Trump’s preference, has the potential to shift the U.S. position on Iran from one of economic diplomacy to one of coercive diplomacy.
  • Reinforce the deal and amend domestic legislation enabling Trump to certify Iranian compliance every 90 days. This reduces unpredictability as European companies would only have to deal with any potential sanctions Trump can renew, not the certification deadline.

A climate of uncertainty prevails: Congress has 60 days to decide the next steps, but President Trump still has the last word if he remains unsatisfied.

The Practical Impact on European Investments
Even though investments into the Iranian market following the lifting of nuclear-related sanctions have not reached levels expected by Iran, European companies have significantly engaged with Iran on the back of the JCPOA.

Trade between Europe and Iran increased by 95% to €9.9 billion in the first half of 2017, from the same period in 2016; during this time, Iran imported €4.94 billion worth of commodities from the EU, recording a 38.5% rise. Iran’s exports to the EU’s 28 nations exceeded U.S. $5 billion, indicating a 227% rise year-on-year. Germany exported €1.39 billion worth of goods to Iran, Italy €849.6 million, and France €763.7 million. Petroleum, petroleum products and related materials, represent the majority of Iranian exports to the EU, with a total value of €4.4 billion (Eurostat).

The investments of European companies already engaged in Iran are on the rise. To name but a few: France’s Total signed a U.S. $5 billion deal to develop the South Pars gas field with China National Petroleum Corporation in July 2017 – and reasserted its commitment despite decertification; UK renewable investor Quercus agreed a deal in September 2017 worth over €500 million with Iran’s Ministry of Energy to build a giant solar power project over the next three years.

Given the extent of investments already made or planned in Iran, if the U.S. were to reimpose sanctions, the implications on European companies will be immediate. In the short term, at least for those who are still in negotiations to enter the Iranian market, a postponement of any major investment decision is likely.

In the longer term, sanctions reimposed on the IRGC – which holds interests throughout Iran’s economy through their holdings in construction, telecommunications, oil & gas, etc. – may prove to be the real ‘curve ball’. In addition to facing the threat of fines for Foreign Corrupt Practice Act (FCPA) non-compliance, European companies will inevitably have to choose between participating in the U.S. or Iranian market, as potential penalties are high.

In 2015 BNP Paribas had to pay U.S. $8.9 billion for having facilitated dollar transactions with Sudan, Iran and Cuba, subject to U.S. sanctions at the time. Moreover, the U.S. threat to bar foreign companies from U.S. markets has been powerful in the past – as evidenced through the 1996 Helms-Burton Act, which forced foreign companies to choose between trading with the U.S. or with Cuba, Iran and Libya.

Europe’s Frail Position
On a political level, one would expect European governments to support any of their companies who have secured interests in Iran on the back of the JCPOA. In a sense, the corporate world will look to their government to ensure that they are not penalised by the U.S. while undertaking legitimate business in Iran. However, their room for manoeuvre is politically limited.

The only other option is for a resolution to be explored on legal grounds, eventually implementing legal mechanisms that block, even penalise, the enforcement of U.S. extraterritorial and secondary sanctions. European countries are reconsidering a similar scenario that emerged in the 1990s, when Europe was penalised because of U.S sanctions against Iran, Libya and Cuba. Following the Helms-Burton Act, Europe introduced a Blocking Regulation and its member states established ring-fencing domestic legislation to shield their companies. According to the Helms-Burton Blocking Statute of the EU, EU companies are not to obey specific U.S. sanctions and must be compensated for any U.S. penalties.

Nevertheless, even this is met with practical limits:

  • European governments’ capacity to provide the private sector with required guarantees is limited: any companies operating in the U.S. must respect U.S. law.
  • In cases where fines run into the billions of dollars, compensation would be a financial drain on national economies – thus difficult to guarantee.
  • Financial systems and networks are much more integrated today. Companies operating globally are often inevitably connected to the U.S. market and dollar, thereby making them more exposed to U.S. regulations. To get around this reality, the National Iranian American Council suggested that the EU create offshore dollar-clearing facilities to reduce the threat of European banks being cut out of the U.S. financial system. Other analysts suggest that the Euro be used as a reserve currency, with an option for global payments a solution.

On the level of international conventions, the EU could claim that the U.S. is breaching its WTO commitments by threatening to expel European companies from its financial system. Sanctioning EU companies would be a violation of the deal, since those nations are now involved in legal and permissible trade with Iran.

On a corporate level, as the number of small and medium size firms with no U.S. presence continues to invest in Iran, others from Europe will be encouraged to follow. Further, multinational companies that find creative ways to avoid exposure to U.S. Treasury sanctions will open doors for others behind them. For instance, to finance its project and bypass U.S. sanctions, Total put in place project financing with Chinese banks, avoiding the use of the dollar. It could be the case that European entities increasingly turn towards prospective Chinese partners, who would no doubt be receptive to Iranian ventures under Xi Jingpin’s ‘One Belt One Road’ umbrella strategy.

Europe has asserted itself against the U.S. and has shown a willingness to block any pending U.S. sanctions. That said, the concern remains whether Europe truly has the financial capacity to implement its political will. Even if blocking regulation is effective, potential U.S. market loss in export is a real challenge. Although many of Europe’s companies are keen to capitalise on Iranian opportunities, it is doubtful that they would do so knowing the American market could be subsequently cut off to them.

Simply put, in a situation of ‘us or them’, it is difficult to see European investors shunning their American interests and partners to gamble in Iran.