Collateral Damage: President Trump’s Decision on Iran and Its Impact on Europe

US President Donald Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA) – as the 2015 nuclear agreement with Iran is officially known – will result in the reimposition of all the US sanctions that were imposed on Iran before and up to the signing of the deal, and which were lifted after the conclusion of the JCPOA. While European states – particularly the UK, France and Germany which are signatories and parties to the deal – reaffirmed their commitment to continue implementing the agreement without Washington’s participation, President Trump’s decision will hit European governments and their businesses hardest. In the months ahead, the future of the JCPOA will not be determined by Trump in Washington or Iranian President Hassan Rouhani in Tehran; rather, the survival of the agreement will depend on what Europe does next.

US (Secondary) Sanctions Reinstated

When the JCPOA was agreed in July 2015, the US did not lift its primary trade embargo on Iran, which has been in place and has expanded continually since 1979; US persons and companies have generally not been allowed to transact with Iranian counterparts for decades. However, the US agreed to issue time-limited waivers to cease the implementation of secondary sanctions that were meant to prevent non-US companies from conducting business with Iran. 

By no longer issuing such waivers, President Trump will regain the authority to impose sanctions against non-US companies that transact with Iran. A so-called ‘wind down period’ announced by the US Treasury yesterday will now begin to provide businesses with the opportunity to cease their activities with Iran: after 90 days, sanctions relating to the purchase and sale of metals and Iran’s automotive sector will be reimposed in full, while other sanctions including restrictions on Iran’s shipping and petroleum industry, financial institutions and the provision of insurance to Iran are to be reinstated in 180 days. By 4 November, it is expected that all US sanctions that were previously lifted as part of the JCPOA will be fully reinstated. 

For European businesses, this carries potentially grave consequences: while their own governments remain committed to the JCPOA and will not sanction them for engaging with Iran in these areas, the US government will now be able to do so. Many European businesses will be motivated primarily to comply with US sanctions requirements for fear of losing access to US markets or receiving heavy fines from US sanctions enforcement agencies. Banks in particular have vivid memories of billion-dollar fines for transgressing US sanctions in the past, and if banks are not willing to engage with Iran, transactions or conducting business with other sectors of the economy will not be possible. 

While the direction of re-activated sanctions is up to President Trump himself, there will likely be impetus within the US Congress to push the administration to pursue harsh enforcement. In fact, as a former negotiator of the JCPOA has pointed out, Congress will likely ‘revert to its previous posture of endorsing virtually any Iran-related sanctions’ and seek to expand the scope of existing regimes. 

Reaction from Europe

In return for restricting its nuclear programme, Iran anticipated its own return to the global economic stage and, in particular, a re-start of its trading relationship with Europe. Since the JCPOA was concluded, the value of trade between the EU and Iran has grown from $9.2 billion in 2015 to $25 billion in 2017. 

If those economic benefits are no longer forthcoming, Iran could reconsider the cost-benefit analysis of staying in the deal. On Tuesday, Iranian Foreign Minister Mohammad Javad Zarif stated that Iran would ‘examine whether remaining JCPOA participants can ensure its full benefits for Iran’, and in the months ahead European officials will seek to convince Iran that those benefits still exist. However, Tehran will want guarantees that Europe is willing to protect its businesses against US secondary sanctions, and will continue implementation of the agreement as before, which may be easier said than done. With US sanctions back in full force, Europe has limited options: it can enact blocking regulations, a legal instrument that protects European companies from the extraterritorial reach of US sanctions, or hope that the Trump administration is willing to negotiate specific exemptions for European interests.

Throughout the lifetime of the JCPOA, European companies have been wary of engaging with Iran due to the risk of the US leaving the agreement. While some landmark agreements have been concluded – most notably with European energy giants Royal Dutch Shell and Total, the automobile industry and Airbus – many of these agreements required lengthy approval processes and involved top-level diplomats on both sides of the Atlantic to come into fruition. Meanwhile, other deals have been slower to materialise, and larger financial institutions have so far refused to re-enter the Iranian market. Many also have concerns about the poor state of the Iranian financial system, and concerns about money laundering and poor corporate governance in Iran. Therefore, irrespective of sanctions, ‘no credible financial institution would choose to deal with a country with such a record’. There has also been a high degree of uncertainty over the financial dealings of Iran’s Islamic Revolutionary Guard Corps, which were subjected to additional sanctions by the Trump administration last October; that too deterred European engagement. 

If European leaders want to secure the continued implementation of the JCPOA without the US, they therefore not only need to protect businesses against possible US enforcement action, but must also overcome the lingering doubts that European businesses have about re-engaging with Iran. 

The US withdrawal from the JCPOA also carries consequences beyond the implementation of sanctions commitments, for it also adds to the growing rift between Brussels and Washington on sanctions policy. US sanctions against Iran were successful in bringing Tehran to the negotiating table because they had support from European allies; as a recent RUSI study concluded, a coordinated sanctions agenda between the US and Europe will generate additional pressure against target states. However, when such alignment is lacking, it will be difficult to achieve this policy aim. 

President Trump’s decision may therefore only succeed in throttling trade with Iran, rather than eliminating it. And, conversely, the Europeans may only succeed in merely shielding the JCPOA from immediate collapse, rather than actually saving the deal in the long run.

The views expressed in this Commentary are the author’s, and do not necessarily reflect those of RUSI or any other institution.

A minor revision to this Commentary was made on 10 May 2018.