Four steps to support Europe-Iran trade under a revived JCPOA

Even if the JCPOA is restored, European companies will hesitate to trade in Iran. European and American officials should work together to give companies the comfort they need

An ancient bazaar in Iran
Image by indigoprime

It appears likely that the United States will soon re-enter the Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear deal. Negotiations in Vienna have been progressing, albeit slowly, and have now completed their sixth round. For Iran, the talks offer the promise of sanctions relief and an end to three years of sharp economic contraction. But that promise hangs in large part on the willingness of companies, particularly European firms, which are among Iran’s key technology suppliers, to take advantage of the end of US secondary sanctions and actually resume or expand trade ties.

It is time for European governments to look beyond the Vienna talks. If a diplomatic agreement is found there, its success will ultimately depend on whether businesses feel confident enough to re-engage Iran, giving the country the economic boost it needs.

The current signs are not promising. Executives at European multinational companies already expect much lower levels of economic engagement than observed in 2016, when Iran originally benefited from sanctions relief following the implementation of the JCPOA. These executives are currently doing less preparation to re-enter the Iranian market than they were in 2014 and 2015. This is because they remain concerned about the durability of any political breakthrough, the recent memory of financial losses following the reimposition of sanctions in 2018, and the high cost of carrying out due diligence, as well as expected overcompliance by banks with regard to US sanctions.

While there is a possibility of securing quick wins in the humanitarian and oil sectors, sanctions relief will therefore not result in a new economic flourishing. This presents a challenge not just for European but also American national security, as the failure to restore economic implementation of the JCPOA at sufficient levels will mean the deal remains weak and unconsolidated. This is especially daunting following hardline candidate Ebrahim Raisi’s victory in the Iranian presidential election last week. For many companies already sensitive to the reputational risks that can come with trading with Iran or operating in the country, the Raisi government will complicate matters further.

European companies and banks will play the pivotal role in determining the success of sanctions relief

Against this backdrop, European companies and banks will play the pivotal role in determining the success of sanctions relief. Western policymakers have carried out some exploratory work on how to give these businesses the comfort and clarity they need to move back into Iran – after all, despite the complications posed by sanctions and the attendant political situation, the country remains a fundamentally attractive market of over 80 million consumers. Even so, much work needs to be done.

Despite ongoing US-Iranian tensions, the Biden administration will support European economic re-engagement with Iran as part of the process of securing the deal. However, that support will not extend to the kind of global outreach undertaken by John Kerry as Barack Obama’s secretary of state – the support will be technical in nature.

The recent US decision not to derail Nord Stream 2 also shows that US policymakers appreciate the need to consider European economic interests. Building on this consideration – and given that political actors need to send economic actors a signal that it is worthwhile to re-enter the Iranian market – European governments should take the following steps to facilitate effective and economically meaningful sanctions relief, pushing the US to provide technical solutions that were lacking when sanctions were first lifted in 2016.  

1. Demand greater clarity from the Office of Foreign Assets Control (the part of the US Treasury responsible for sanctions enforcement) on what transactions are allowed under US primary and secondary sanctions.

While this may require new FAQs and guidance to be issued, European governments should press OFAC to streamline its guidelines, removing redundant sections, and to ensure the use of plain language. The principle to follow here is that someone should not have to be a sanctions specialist to understand the guidance. In addition, European governments should press OFAC to eliminate the grey areas between whether licences and guidance enable the sale of a product or service or can be taken to also permit the financial transaction necessary to complete that sale.

2. Radically expand the use of comfort letters.

European governments should insist that US bodies accept that their jurisdictional authority in sanctions lifting extends at least as far as their authority in sanctions application. Currently, OFAC will grant specific licences (a kind of “all clear” for a planned transaction) only to those companies whose planned business with Iran has a “US nexus”– strictly interpreted to mean the presence of a US person, US products, or US dollar. This puts European firms at a disadvantage, as they are unable to get specific guidance from OFAC necessary to put stakeholders, particularly banks, at ease that their transaction is compliant with US secondary sanctions. A European company with American shareholders, American senior management, or significant business in the US – all of which constitute a kind of US nexus not presently recognised by OFAC – deserves comfort commensurate with its self-perceived exposure to US sanctions enforcement. If not specific licences, which are used to authorise transactions that would otherwise violate US sanctions, comfort letters can act as guidance for European companies that simply need authoritative confirmation that their planned transaction is compliant with US secondary sanctions. The use of comfort letters ought to be radically expanded. For European companies and banks seeking to work in Iran following sanctions relief, OFAC should create a workable process that enables these entities to disclose details of their planned transactions and receive written guidance that such transactions are in principle consistent with US sanctions regulations. A political agreement is necessary between the US and European governments to identify what kinds of transaction will be covered under the new provisions for comfort letters, but a broad approach could provide a significant boost to Europe-Iran trade and investment.

3. Work with the US authorities to find solutions to the problem of limited euro liquidity in correspondent banking with Iran.

European companies have difficulty getting paid for exported goods and services because Iranian financial institutions find it hard to get access to the euros needed to make those payments. This is a challenge even for European multinationals currently operating in Iran with multiple banks providing transactions support (in humanitarian trade). The lack of euros is the fundamental limitation on European economic engagement with Iran. As a first step, US and European authorities must ensure that Iran can resume oil and petrochemical exports to Europe – the only major means to ensure Iran can earn much-needed euros. Specific outreach to European oil traders and refiners should be made by American and European officials. As an interim step, oil companies and banks should be given the opportunity to transact via specific channels with US oversight, in a manner similar to the escrow/waiver system, but with fewer restrictions on the use of the accrued revenues. This is also important to ensure that Tier 1 European banks are not isolated.

4. Make better use of INSTEX, the government-backed trade mechanism established to support European trade with Iran.

The INSTEX mission should be understood to be the preservation of the Iran nuclear deal through economic means, a track that will require greater European political support to be meaningfully operationalised. This mission is not inconsistent with US policy interests. European governments should open a dialogue with American officials about the future of INSTEX. When they do so, they should support efforts by INSTEX’s management to secure a banking licence that would see the organisation become a state-owned, well-capitalised financial institution. This institution should receive a mandate to facilitate trade with Iran in a manner that gives commercial actors confidence about the compliance and reliability of necessary transactions. While the pursuit of a banking licence will take 1-2 years, further investment in INSTEX and some tacit consent from the US about the expansion of its remit should help give confidence to European companies, many of which have already been in touch with INSTEX, as well as to the European banking sector.

These four steps could help maximise economic engagement between Europe and Iran in the short term. They would principally support the rebound in bilateral trade. Further work will be needed to address the barriers to financing and complex transaction structuring that are an impediment to European investment in Iran. Here, meaningful American action to address investment barriers may only be feasible in the aftermath of a ‘more for more’ deal that builds on the JCPOA. But it is precisely because all JCPOA parties currently wish to create a foundation for further negotiations that the success of sanctions relief is so critical – Europe cannot be passive in its approach to these issues.

Of course, following Raisi’s victory, the question is whether a ‘more for more’ deal will even be possible. Not only may he prove reluctant to pursue anything beyond the limited diplomatic understanding with the US represented by the JCPOA – for which he has stated his support – but, given his personal involvement in egregious human rights violations, Raisi himself may prevent any further normalisation. Despite this, the strategic logic of the deal remains clear for Europeans, and facilitating a degree of meaningful sanctions relief is still critical to the fundamental and narrower goal of putting the Iran nuclear issue ‘back in the box.’ This was true regardless of whoever would prevail in the election, and so Europeans must remain proactive in working to secure this goal.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


ECFR Alumni · Visiting Fellow

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