Iran’s Resistance to US Sanctions

Donald Trump’s decision to withdraw from the July 2015 Vienna agreement on the Iranian nuclear industry and to impose heavy sanctions on companies continuing to work with Tehran was a challenge to the European Union (EU). Whereas 16 months after the implementation of the agreement, their trade with Iran had increased by 79%, European companies and particularly French ones are now in danger of being supplanted by their Russian and Chinese competitors. Hence, the EU, in its efforts to prevent Iran’s withdrawal from the agreement, has set in motion several initiatives designed to protect its trade relations with Iran, among which is a Special Purpose Vehicle (SPV), consisting of an exchange platform designed to spare its companies secondary sanctions and protect them from US extraterritorial laws. The SPV functions as a clearing house in euros allowing Iran to deal with European companies: it’s a barter system which operates outside of the world financial system, dominated by the USA.

Registered in France and headed by a German, the Instrument in Support of Trade Exchanges (Instex) was formalised and registered on 31 January 2019. Its conception was an arduous task, taking months of negotiations and technical discussions which tried the Iranians’ patience. They were still conforming to the agreement and were waiting for a quid pro quo. Set up by France, Germany and England, the three European countries that had signed the Joint Comprehensive Plan of Action (JCPOA)—the official title of the Vienna agreement — will be managed and financed by these three countries who are seeking broader support among the 28 EU members in order to turn Europe’s expressed commitment into effective action. The three founding countries have provided an initial capital of €3,000 soon to become 100,000 and later a million. In the end, however, Instex will be confined to “licit” trade, concentrating on commodities which are not under sanction, humanitarian products such as medicaments and foodstuffs.

Contrary to what was originally planned, it is not expected to enable Iran to export hydrocarbons to Europe.

A short-term respite?

Moreover, this mechanism is meant for small and medium-sized firms so that the volume of trade will be likely to remain limited. Even if it provides a shot in the arm for the Iranian economy, it will be quite inadequate and will not fundamentally modify the overall situation. Nor should it anger Washington, since it concerns commodities exempted from sanction. “The aim is not to defy Washington or to bypass Trump’s sanctions, but to keep alive an international agreement which the USA are alone in having denounced,” said an official French source.

It is unlikely that Instex will appear convincing to big companies focused on the export trade and relying on the US market¹. In its reaction, the Iranian government showed restraint. The vice-minister of Foreign Affairs interpreted it primarily as an effort by Europe to keep its word, considering that it was “the first step in fulfilling Europe’s commitments” and expressing the hope it would not be implemented “in part only”. And finally he stated that in the long run Instex was destined to cover “the commodities under sanction.” Iran does feel that this mini-mechanism was set up belatedly, as the Iranian ambassador to Russia, Mehdi Sanai, phrased it, while nonetheless describing it as a step towards dialogue and stability.

Avoiding the collapse of the JCPOA

Another step taken by Europe was to reactivate and update a protective annexe of the “blockage rule” adopted in 1996 to bypass US sanctions against Cuba. It forbids European companies from complying with the extraterritorial effects of those sanctions and grants them compensation in case of prejudice. However, the effectiveness of these measures has never been verified. In the present case, the objective is to reassure Tehran so that it will not withdraw from the JCPOA. But the balance of forces is not in favour of EU countries, as the French Finance Minister Bruno Le Maire observed on 19 June 2018: “Most French firms won’t be able to stay. They need to be paid and that won’t be possible because there are no sovereign and autonomous financial institutions in Europe.”²

Besides which, some European leaders are not fundamentally opposed to Donald Trump’s proposal to renegotiate the agreement so as to include Iran’s nuclear program after 2025 as well as the country’s regional role.³ On the other hand, they differ sharply with Washington on the way to go about this. On 25 January, the chief of French diplomacy declared that Paris was ready to apply sanctions “if the talks with Iran concerning its ballistic activities and regional influence were not conclusive”. This kind of talk harks back to Washington’s effort to have Iran condemned by the Security Council in December 2018 following another missile test and just prior to the adoption of a third series of sanctions on 4 February and to the Warsaw summit dealing with Iran’s interference in the affairs of Arab countries.

“Zero oil exports”, an unrealistic goal

In order to avoid a shortage of crude oil and take into account the energy needs of its allies, Washington cannot totally block the world’s access to Iranian oil. The US has had to grant six-month “waivers” (exemptions) to eight countries: China, Turkey, and Italy, as well as Japan, South Korea, Taiwan, India, and Greece, on condition they gradually wind down their purchases of Iranian oil. Land-bound Afghanistan still relies on the port of Chabahar, a regional maritime hub on the South-coast of Iran, as does India, which signed a concessionary agreement with Tehran in February 2018. It provides New Delhi with a direct sea route to Iran, bypassing China’s new “Silk Road”. Chabahar’s harbour opens onto the Indian Ocean via the Gulf of Oman; when it is fully developed, it will provide access to the sea for the Central Asian continent. The Chabahar Agreement, signed by Iran, Afghanistan and India in May 2016, was already intended to speed up shipping between these three countries.

So we are still a far cry from the very unrealistic goal of zero exports which the USA claim to pursue. Moreover, South Korea and Japan are examining the possibility of resuming their oil purchases, suspended in expectation of the sanctions, while Turkey has flatly refused to comply with Washington’s dictates.

China, India, Russia. . .

Besides which, Iran has developed quite an art of getting around the sanctions. Tehran is counting on the JCPOA’s other signatories as well as India to maintain its current level of oil sales, 1,5 million barrels per diem. The attitudes of Indian and China will be decisive. As early as 16 August 2018 China came out against “any sanctions not imposed by the Security Council” in the words of its Minister of Foreign Affairs. World’s largest purchaser of Iranian crude oil, China also intends to preserve all its trade and strategic relations with Iran. Its “waiver” allows it buy up to 360,000 barrels a day, but Iran is not China’s main provider and it can continue to diversify its sources of supply. Thus Beijing can set conditions for Iran, such as economic concessions (access to fishing areas abandoned by the EU, for example) even though it is a “partnership by default” according to Thierry Kellner, lecturer at the Université Libre de Bruxelles.

As for India, it seeks to establish a lasting relationship with Iran. On 5 November, its diplomatic spokesperson announced that his country was examining the possibility of continuing its purchases of Iranian oil. Such are India’s needs that it must import 9,125 million barrels per month. For its part, Iran is going to double its investments in the Indian petrochemical industry and contribute to the extension of a refinery managed by Chennai Petroleum Corporation Ltd. On 2 November, an agreement was reached between the two countries providing for the oil to be paid in rupees; 50% of the allocated funds will be devoted to goods exported to Iran.

As for Russia, The Wall Street Journal claims it will be the major beneficiary of the sanctions: its companies are allegedly prepared to satisfy the needs of the purchasers of Iranian oil. According to a document from the Israeli Foreign Ministry cited in The Times of Israel on 14 October, Russia and Iran had come to an agreement in September meant to bypass the sanctions. It would allow Iran to export its crude oil via the Caspian Sea to Russia where it would be refined and sold worldwide. In return, Moscow would provide Iran with “unspecified trade and service benefits.” And while helping Iran by bartering its oil and refining it for domestic consumption, Russia could earn profits by selling its own crude oil to Europe. Similarly, twelve days after the renewal of the sanctions, the Kremlin proposed a free trade agreement between the Eurasian Economic Union and Iran. It is an opportunity for Russia to safeguard its hydrocarbon exports and develop its other exports as well.

As for Iraq, it constitutes an essential outlet for Iran. The trade between these two countries could amount to as much as 20 billion dollars (15.1 billion pounds sterling) per annum as opposed to 12 billion (9) today. On 12 November the State-owned Iranian Railways disclosed the details of a project to build a line between the border crossing at Shalamcheh and the port of Bassora and on to the Syrian port of Latakia. Iranian exports to Iraq rose by 45% from mid-March to mid-October 2018 and may well be about to surpass those to China.

An uncertain geopolitical impact

“The variations in Iran’s wealth and economic performances have had only a minor impact on its regional policy orientations.” Such is the verdict of a study produced by The International Crisis Group (ICG) on the correlation between the Iranian economy under sanction and the country’s regional behaviour over a period of forty years. Of course Iran’s financial and military potential cannot be compared with those of its military rivals in the region, its defence budget is smaller than either those of Riyadh or Tel Aviv. It’s weaponry is out of date and less sophisticated. Its offensive and defensive capacities rest mainly on its arsenal of ballistic missiles. However, the period 2011–2015 corresponds to Iran’s most significant regional expansion despite the sanctions and its international isolation: it has transferred more arms to its regional allies than ever before. The lifting of sanctions did not modify in any way its regional activities, which belies the assumption that they would be bolstered by the nuclear agreement. From Lebanon to Iraq and to Yemen, Iran was able to increase its influence, take advantage of its adversaries’ mistakes and fill security vacuums created by these failing states.

The lack of any dialogue and of any alternative plan B might lead to a stalemate and fresh escalation in the region. In such a context, Iran would be more likely to activate its regional relays and exacerbate tensions than return to the negotiating table. Thus there is little probability that this strategy of the stick without the carrot can produce any results. In fact there is a strong likelihood that it will backfire on the US, which ought to realise they have cause for worry, now that other governments are giving thought to ways of replacing the dominance of the dollar, especially for oil transactions. In the long run, we might then witness an erosion of the effectiveness of sanctions as a diplomatic weapon and the emergence of rival economic areas capable of operating independently of American pressures.