European companies will struggle to defy America on Iran

WHATEVER YOU do if you are a European company pulling out of Iran, do not mention the sanctions. On November 5th America re-imposed an embargo on Iran, aimed at blocking its supposed nuclear ambitions. Its restrictions to trade do not apply directly to European companies but bosses fear being banned from the American market if they keep doing business in Iran. Yet obeying America’s sanctions is itself illegal under rules devised by Europe, whose leaders want to keep Iran in the global trade fold.

Firms opting to bow to America have thus devised a ruse: blame unspecified issues of “commercial viability” for their decision to leave Iran. This is what British Airways and Air France both did when they recently stopped flying to Tehran. Most big firms have announced that they are leaving, including Total, a French energy group, and Siemens, a German engineering giant. (American firms were banned even before, though with occasional exemptions, such as Boeing selling Iran aircraft.)

The exodus is perhaps inevitable. “Anyone doing business with Iran will NOT be doing business with the United States,” President Donald Trump blasted on Twitter when the sanctions were further ratcheted up in August. Few think America will act on the threat of imposing “secondary sanctions” on defiant firms, but even fewer care to find out whether Mr Trump is bluffing. BNP Paribas, a French bank, was fined nearly $9bn in 2015 for doing business with embargoed countries, including Iran.

European policymakers think this unfair. They have alighted on two potential solutions. The first is to threaten European firms with being liable for any costs incurred by other companies as a result of their compliance with the sanctions. But this seems, by all accounts, to be a political statement, not a genuine policy: in practice no firm pulling out of Iran is going to get punished, officials admit.

The second is a mechanism that would act as a state-owned buffer between Iranian firms and European ones. The finance ministries of Britain, France and Germany—the European parties to the Iran nuclear trade deal that America is pulling out of—want to set up a “special purpose vehicle” (SPV) to intermediate trade. The idea is that European companies buying from and selling to Iranian counterparts would not have to send or receive money from Iran, but would pay each other instead.

Under the mechanism an Italian importer of Iranian pistachios, for example, would settle the tab of an Iranian firm buying German machinery through a ledger organised by European governments (these payments would be mirrored in Iran). No money would enter or leave Iran, many of whose banks are being cut off from the international financial system (on November 5th SWIFT, the Brussels-based international financial messaging system, said it would comply with American sanctions and suspend some Iranian banks’ access). Firms from third countries might be able to participate in the SPV, too.

As a plan it has two big flaws. One is that, despite America announcing sanctions six months ago, the SPV is still on the drawing board. No country has volunteered to host it. Officials vaguely recall a similar system of formalised barter allowing access to the Soviet Union, but can offer no firmer blueprint for now.

The second defect is that the proposed SPV only resolves the issue of payments. Companies trading with Iran could still be designated as societas non grata by America. “At the end of the day, you are still engaging in trade with Iran,” points out Maya Lester, a sanctions expert at Brick Court Chambers in London, and so still potentially liable for secondary sanctions.

Michael Tockuss, head of the German-Iranian Chamber of Commerce, says that some smaller German firms will continue exporting to Iran if they have no business in America. Workarounds of sanctions devised for an embargo imposed by Europe and the United Nations in 2012-2015 are still fresh in the minds of compliance departments. Some big firms might find ways of keeping a presence there, he suggests, but in a far more discreet manner.

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