US President Donald Trump’s unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) has created an urgency for all other deal signatories to work toward saving the accord. As international companies face a new dynamic and risk profile, innovative steps will need to be taken to sustain the deal, especially in response to Iranian expectations.
After President Hassan Rouhani’s declaration May 8 that Iran will engage with European signatories to assess whether it is possible to continue implementing the deal without the United States, Supreme Leader Ayatollah Ali Khamenei on May 9 publicly summarized Iran’s priorities, “If you want to agree on anything, make sure there are practical guarantees in place. Otherwise, they will do what the US did to us. … Officials are facing a big test: Are they going to ensure that the nation's pride will be protected or not? The pride and interests of the nation must be truly secured."
In other words, the new JCPOA construct — based on agreements with the United Kingdom, France, Germany, Russia and China (defined as either the E3+2 or P4+1) — needs to consider Iran’s dignity and put in place guarantees that cannot be easily undone by political shifts in respective capitals. In an Al-Monitor article in March, a number of suggestions were made for measures that would address some Iranian concerns, especially if EU governments invest their own money into actual and future Iranian projects in strategic sectors. E3 stands for the three Western European nations; P4 for the UN Security Council members save for the United States.
The challenge faced by the EU is that it has to present guarantees to Iran while also protecting European businesses from US secondary sanctions. On this path, the EU will need a high level of cooperation with Tehran, particularly in the process of incentivizing European companies to continue their involvement in the Iranian market. Considering that large European enterprises have complex dependencies on the US market, banks and stock exchanges, it is safe to expect that the EU will mainly focus on small- and medium-sized enterprises (SMEs) to remain engaged in Iran. Some larger companies may seek licenses from the US Treasury, but the majority of companies that will continue business with Iran will either have little exposure to the US market or be prepared to accept European protections.
The Rouhani administration will look for an outcome to prove that its extensive diplomatic engagement with the West has not been a waste of time and resources. There will have to be clear gains for Iran in staying committed to the JCPOA, beyond the limited progress so far. Of particular symbolic value would be the delivery of Airbus planes, which are an integral part of the JCPOA. Given financing issues, only three out of 100 Airbus passenger jets have been delivered so far. While Airbus is European, it needs US licensing from the Office of Foreign Assets Control (OFAC) for sales to Iran since more than 10% of its components come from the United States. The Trump administration has revoked the Airbus license, giving Iran and European governments three months to find a solution.
Beyond symbolic expectations, Tehran will likely benchmark gains against the impact of the harshest sanctions years (2012-15). As such, it can be reasonably assumed that Iran will look for EU guarantees on the following topics:
- Financial transactions: So far banking relations have not been normalized, partly due to concern among first-tier banks about US sanctions and low compliance standards in the Iranian financial sector. The reimposition of US sanctions will further impede banking relations and by extension complicate the financing of projects in Iran. Here, the main mechanism will be the involvement of European governments and potentially central banks in the financing of projects, both to facilitate and also protect companies. The latter could entail the establishment of emergency credit lines, including via special purpose vehicles, and as some have argued, an agreement on the establishment of a European trading bank comprised of state-owned and lower-tier banks to facilitate European engagement with Iran. Other options for risk sharing include engagement with China to devise novel financing mechanisms for all international companies. The EU will additionally have to protect SWIFT against US sanctions, as the renewed blacklisting of the Islamic Republic from the payment messaging service would choke international banking relations with Iran. Another potential tool may be assisting European companies in securing the needed OFAC licenses for a continuation of their trade with Iran. At the same time, Iran has to continue the planned reforms in its financial sector and get rid of the other administrative and legal challenges that European companies face in Iran.
- Continuation of petroleum sector exports: In the time span since the implementation of the JCPOA in January 2016, Iran’s crude and condensate exports have grown from 1 million to 2.5 million barrels per day. Tehran will insist that this level be maintained and even increased commensurate with production. More than 80% of these exports go to Asia. The E3+2 will have limited influence determining whether buyers such as Japan and South Korea will continue their imports. However, what may be feasible is for the E3+2 to guarantee that they will make up for losses that may emerge as a result of reimposed US sanctions. The E3+2 may also opt to help buyers of Iranian oil and condensates to seek waivers from US authorities. Petrochemical exports have also been an important factor in Iran’s return to global markets, and Tehran will look for similar guarantees. In this vein, port access, shipping insurance and related services will additionally need to be protected from US secondary sanctions.
- Technology transfer and foreign investment: One of the key motivations for Iran to work toward sanctions relief had been to attract European investment and technology. Despite some limited progress so far, it is not a secret that Iran will continue to require foreign investments and technology to create needed jobs. Though Asian and Russian companies will continue their activities, Iran will insist on the latest European technologies. In this scenario, the EU will have no choice but to stand up to US pressure not just via blocking regulations, but also counter-sanctions and potential action at the World Trade Organization. How far such initiatives will succeed remains to be seen, but Tehran will certainly request guarantees that the EU will facilitate the flow of investment and technology. In this vein, the development banks of the E3 as well as the European Investment Bank have great capacity to promote investment either via loans or by virtue of acting as a lending bank.
The above initiatives may not cover all expectations in Iran. Presidential adviser Hamid Aboutalebi tweeted May 11 that “guarantees must include all of Iran’s political, economic and security related rights.” However, economic guarantees would go a long way to sustain the JCPOA.
If Iran and the E3+2 can define and implement a workable framework for protecting future investments, many companies, and especially European small- and medium-sized enterprises, would be in a better commercial position than before. It would surely be an irony if the US withdrawal actually benefited Iran on many levels. This in itself, namely the potential of isolating the United States in a multilateral accord, may become an incentive for Iran to make the new deal work.
However, if the parties fail to sustain the deal, there will be a new layer of distrust toward the West that will influence future Iranian decisions. However, in this era of geopolitical uncertainties, one thing is certain: In the absence of Western companies, the main beneficiaries of the situation will be Russia, whose companies are aggressively pursuing Iranian opportunities, and China, which has long overtaken Europe as Iran’s biggest trading partner.