Iran's Economy Can't be Shielded from U.S. Sanctions

COMMENTARY Middle East

Iran's Economy Can't be Shielded from U.S. Sanctions

Aug 21st, 2018 3 min read
COMMENTARY BY
James Phillips

Senior Research Fellow, The Heritage Foundation

James Phillips is a senior research fellow for Middle Eastern affairs at The Heritage Foundation.
EU efforts to protect Iran from U.S. sanctions are doomed to fail, but could help undermine the effectiveness of sanctions. farid_ep/Getty Images

Key Takeaways

The EU is trying to salvage the Iran nuclear deal by assembling a package of economic incentives to induce Iran to remain in the nuclear agreement.

Tehran also may be counting on China, Iran’s leading oil customer and trading partner, to protect it from U.S. sanctions.

The bottom line is that the EU and China can mitigate the impact of U.S. sanctions, but they cannot offer Tehran immunity from the sanctions.

EU efforts to protect Iran from U.S. sanctions are doomed to fail, but could help undermine the effectiveness of sanctions.

The EU is trying to salvage the Iran nuclear deal by assembling a package of economic incentives to induce Iran to remain in the nuclear agreement. On June 6, the European Commission updated its Blocking Statute to prohibit EU firms from complying with American sanctions and protect European companies trading with Iran from secondary sanctions imposed by Washington.

The updated Blocking Statute, which entered into force on August 7, allows EU companies to recover damages arising from U.S. extraterritorial sanctions from the persons causing them and nullifies the effect in the EU of any foreign court rulings based on them. It also forbids EU persons from complying with those sanctions, unless authorized to do so by the European Commission

But individual companies are more likely to avoid doing business with Iran than invoke this protective measure. U.S. sanctions will force them to choose between conducting business with the United States, the world’s largest market, or with the much smaller Iranian market. Total, Maersk, Siemens and other major European companies already have signaled that they will pull back from Iran.

In addition, the EU would abort its pushback against U.S. sanctions if Iran decides to withdraw from the 2015 nuclear agreement. Such a decision would lead European states to re-impose their own Iran sanctions.

On May 23 Iran’s Supreme Leader, Ayatollah Ali Khamenei, gave Iranian President Hassan Rouhani permission to negotiate with the EU to gain protection from U.S. sanctions. But he set several onerous conditions for staying in the nuclear agreement.

Khamenei insisted that the EU: compensate Tehran for oil revenue lost due to U.S. sanctions; guarantee that European banks will continue financing bilateral trade with Iran, and not raise the issue of Iran’s ballistic missiles or it regional interventions. He even stipulated that the Europeans must vote for a UN Security Council resolution criticizing Washington for withdrawing from the JCPOA.

It is hard to believe that European leaders, who resent being told what to do by the United States, will swallow these conditions laid down by a theocratic dictator.

Even worse, Iran was caught red-handed last month in a foiled plot to bomb an opposition rally staged by Iranian exiles near Paris, France. Belgian authorities announced on July 2 that an Iranian diplomat was one of the four suspects arrested for the foiled bomb plot.

Iran has orchestrated a long list of political assassinations and terrorist attacks in Europe. At Iran’s direction, Hezbollah also mounted terrorist attacks in Europe in the 1980s to punish countries perceived to be supporting Iraq in the 1980–88 Iran-Iraq war. More recently, Hezbollah carried out a suicide bombing of a bus carrying Israeli tourists in Burgas, Bulgaria. The 2012 attack killed six people.

In addition to Iran’s terrorist activities, the regime’s repression, human-rights violations and arrests of European/Iranian dual citizens on trumped up charges will continue to undermine and raise questions about misguided European efforts to protect Iran from U.S. sanctions.

The Trump administration should reach out to European allies, disgruntled over the U.S. withdrawal from the nuclear agreement, and seek to minimize rifts that Tehran could exploit. It should explain how the withdrawal and restoration of sanctions advances a broader strategy for rolling back Iran’s baleful influence and containing its threats.

European allies played a key role in ratcheting up sanctions pressure in 2012–13, and they remain an important vector for restoring sanctions pressure now. European cooperation will be important for reducing Iran’s oil exports, particularly because China and Turkey, two of Iran’s biggest oil and gas customers, have announced that they will not comply with U.S. sanctions against Iran.

Tehran also may be counting on China, Iran’s leading oil customer and trading partner, to protect it from U.S. sanctions.

Beijing complied with the 2010 UN sanctions and reduced its oil imports from Iran by up to one quarter. But U.S. officials expect China to actually increase its imports of Iranian oil this year to take advantage of discounted prices. Beijing will channel its payments through a Chinese bank that has a limited exposure to the global financial system, thereby evading U.S. secondary sanctions.

China, however, cannot rescue Iran from the damaging impact of U.S. sanctions. Many Chinese companies that do business in the United States or conduct business in dollars will be just as deterred from trading with Iran as European companies are. Not only is China unlikely to make up for the loss of Western investment and trade, but Beijing cannot match the sophisticated technologies offered by western companies, particularly for Iran’s crucial oil industry.

The bottom line is that the EU and China can mitigate the impact of U.S. sanctions, but they cannot offer Tehran immunity from the sanctions. Ultimately, they also are unlikely to offer enough inducements to keep Iran from withdrawing from the nuclear agreement.

This piece originally appeared in The National Interest