EU, Russia and China join forces with a new mechanism to dodge Iran sanctions

In the latest sign of the growing divide between Washington and its allies, the European Union’s foreign policy chief announced Monday that the bloc was creating a new payment mechanism to allow countries to transact with Iran while avoiding U.S. sanctions.

Called the “special purpose vehicle” (SPV), this mechanism would aim to “assist and reassure economic operators pursuing legitimate business with Iran,” according to a joint statement released by the remaining members of the Iran nuclear deal — France, Britain, Germany, Russia and China.

“This will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world,” Federica Mogherini, the EU’s high representative for foreign affairs, told the UN General Assembly on Tuesday.

The technical details will be worked on by experts in future meetings, she said.

American sanctions have already been imposed on a number of Iran’s industries — including aviation, metals, automotives and its ability to trade gold and acquire dollars — as a result of President Donald Trump’s withdrawal from the 2015 nuclear deal. On November 4, a second round of penalties will fall on Iran’s massive oil sector, which accounts for 70 percent of the country’s exports. Iran is the world’s seventh-largest oil producer.

Oil sanctions loom

The Iran nuclear deal, known officially as the Joint Comprehensive Plan of Action, was spearheaded by the Obama administration and signed by the aforementioned five world powers, the U.S. and Iran, lifting economic sanctions on Tehran in exchange for curbs on its nuclear program. The Trump administration pulled out of the agreement in May, calling it the “worst deal ever,” despite U.S. allies and international agencies attesting to Iran’s compliance to the deal’s requirements.

Washington’s subsequent reimposition of sanctions now threaten to cut those who transact with Iran off from the U.S. financial system. This has forced numerous multinational companies and foreign investors out of the country, while the impending oil sanctions aim to push countries’ imports of Iranian crude down to zero.

The move angered U.S. allies and the deal’s signatories, who have since been searching for ways to enable their companies to continue doing business with the Islamic Republic. All of the deal’s remaining members engage in trade with Iran, particularly for its oil.

An act of defiance

The SVP will intend to serve as a “clearing house” of sorts for transactions with Iran in order to avoid involving central and commercial banks, who fear U.S. penalties on their operations. It’s a blatant show of defiance from foreign leaders who have expressed mounting frustration at Trump’s foreign policies, which have been characterized by trade war antics against allies and adversaries alike, as well as financial sanctions.

Just on Tuesday, China’s vice minister of commerce stated that Beijing and Moscow could combine their efforts to counter the negative impacts of Washington’s trade tariffs and sanctions on their economies.

Whether the sanctions-skirting plan will actually work is a different matter. Washington has the power to expand its sanctions in response, but the scale of retaliation may depend on how far each side is willing to push its aims.

EU entities doing business with Iran through the SPV could still be caught by the re-imposed U.S. secondary sanctions on Iran, according to Roger Matthews, Senior Director at Dechert LLP’s International Trade and EU Law practice.

“And even if they are not, the U.S. could adjust the scope of its sanctions to capture them — and potentially designate the SPV itself, although this would politically further up the ante,” he told CNBC in an email. “At present, it seems unlikely that EU entities will see this model as offering any meaningful protection from U.S. secondary sanctions exposure.”

Given the strength of the U.S. dollar and American dominance in the global financial system, it is “highly unlikely that this measure will work the way the EU envisions it,” said Behnam Ben Taleblu, an Iran-focused research fellow at conservative think tank the Foundation for Defense of Democracies in Washington, D.C.

“Much like an attempt to set up an independent messaging service, a special purpose vehicle to facilitate trade with the world’s foremost state sponsor of terrorism would be instantly stigmatized by the U.S.,” he said. Washington could pressure the entity using graduated designations, “much like it could any other entity attempting to conduct trade with Iran.”

Robert Pape, director of the University of Chicago’s Project on Security Threats, sees a potential U.S. retaliation against the EU’s move as only likely to do more harm.

“Sanctioning the Europeans so they keep sanctions tight on Iran is an option, but not likely to work,” he said. “Europeans have their own nationalists who could well push back, leading to a widening gulf between America and Europe that Iran — and other countries like Russia — can exploit.”

Source: CNBC