Europe faces a choice: fight US sanctions and continue buying oil from Iran, or cave to US pressure? Early signs are the EU will fight. The European Commission has reopened the 1996 Blocking Statute that prohibits EU companies from observing US extraterritorial sanctions and is considering paying Iran for its crude oil in euros. On the face of it, the Blocking Statute has teeth – yet implementing it would be messy. It will do little to blunt the impact of US sanctions, but as a negotiating tool it could help Europe extract concessions from President Trump.
Between a US rock and an EU hard place
The European Union has few good options for fighting the sanctions. As a first countermeasure, the EU has launched the process of adding US sanctions on Iran to the so-called Blocking Statute, which the EU first adopted to blunt the impact of
US sanctions on European companies doing business with Cuba. Formally expanding the statute’s coverage area is relatively simple; actually implementing it would be messy.
First, it has never been done. When the statute was adopted in 1996, it was largely as a political gesture against the overreach of US extraterritorial sanctions on Cuba, Libya, and Iran. The statute 1) prohibited EU businesses from complying with the foreign laws specified in an annex, 2) prohibited the recognition of these foreign laws in the EU, and 3) authorized compensatory damages for any EU entities affected. But the enforcement of “effective, proportional and dissuasive” sanctions was left to the member states, and no member states acted. The threat was apparently enough for US President Bill Clinton to give some ground, waiving provisions of the Cuba sanctions and allowing some business with Iran.
The Blocking Statute would be painful and counterproductive for the EU to enforce today. It effectively creates a parallel sanctions regime that could penalize EU businesses for complying with US sanctions, making things even harder for European firms. Because the statute leaves enforcement up to member states, it risks balkanizing Europe’s commercial rules with respect to Iran. Germany and France are unlikely to accept asymmetric trade policies within the EU. It is therefore unclear how far the Europeans would go to enforce this challenge to US law, and to what extent President Trump would cede ground.
Another option reportedly under consideration is for the EU to impose retaliatory tariffs on US exports to Europe, or to freeze US assets in Europe or restrict visas for US business travelers, as the EU threatened to do in 1996. The EU is also considering paying Iran for its oil in euros rather than dollars so that crude sales, at least, remain beyond the long reach of US law. The compensation of damages recently invoked by the European Investment Bank, meanwhile, could shield firms from some US penalties. Still, an escalating trade war with a key ally is precisely the outcome European leaders have wanted to avoid, and it would hurt more to lose America’s business than Iran’s.
From the perspective of European business, none of the EU’s proposed countermeasures compensates for potential exclusion from the US market. French major Total intends to pull out of Iran’s South Pars gas project because it would lose access to dollar financing from US banks, lose its US shareholders, and lose the right to continue its US operations. The global financial system has become ever more dependent on the US dollar since the 1990s. For Europe’s biggest firms, no measure currently in the EU’s arsenal could compensate for its loss.
Of course, sabre rattling has always been part of President Trump’s negotiating strategy. China has shown in its ongoingtrade negotiations with the US that fighting fire with fire wins some concessions from this president. An aggressive posture
from the EU combined with a readiness to fix some of the omissions Trump identified in the Iran deal could persuade him to waive pieces of the new sanctions regime. Even if he doesn’t, it will be hard for the US bureaucracy to enforce the regime’s full reach. The responsible US Office of Foreign Assets Control was reportedly understaffed and overstretched even before the Iran announcement this month.
Cautiously optimistic in Iraq
Meanwhile in Iraq, next door to Iran, last week’s national elections could have an ameliorating effect on the US/EU row. Although the elections were deeply flawed, the victory of Moqtada al-Sadr’s Saairoon party (translated literally as “Forward”)in the Baghdad parliament should have a slight stabilizing effect in the region. President Haider al-Abadi appears likely to stay on as the head of Iraq’s new coalition government, in which Saairoon candidates campaigned on reducing outside influence on Iraqi politics, particularly from Iran and the US. Removing Tehran from the equation in Baghdad would take one more piece off the regional chess board for Iran. Still, this process will take years, not months, and its effect on US/EU positions on Iran is only indirect.