The US-EU Impasse Over Iran Sanctions

The United States and the European Union have officially reached an impasse on how to deal with Iran. The first batch of U.S. sanctions reimposed after the U.S. withdrawal from the Iran nuclear deal will kick in at 12:01 a.m. on Tuesday. The European Union – united on this rare occasion – has opposed the move from the beginning. When the U.S. sanctions resume, a revised version of an obscure 1996 EU law referred to as a “blocking statute” will come into effect to shield European firms doing business in Iran from the effects of the sanctions. But the EU’s efforts to protect its companies and to prop up the Joint Comprehensive Plan of Action will be ineffective. The divergence in strategic thinking between Brussels and Washington, meanwhile, will only deepen with time.

The U.S. and the EU had their fair share of disagreements long before the current U.S. administration came to power. The blocking statute, after all, was originally passed in response to U.S. sanctions against Cuba in the 1990s as well as much less consequential sanctions against Libya and, coincidentally, Iran. The statute blocks European companies from pulling out of Iran due to pressure from sanctions without the expressed approval of the European Commission. It also enables EU operators to sue for damages against the entity that imposed the sanctions (in this case, the U.S. government) and prevents any foreign court ruling from applying to EU companies.

At first blush, this seems like an impressive show of unity from the EU, led by France, Germany and even the United Kingdom. (The U.K.’s foreign secretary signed a joint statement committing the U.K. to help ensure European companies doing business in Iran will be protected, so at least on this issue, London will be in lockstep with Brussels even after Brexit is official.) But the statute suffers from two fatal flaws. Before it can be applied, it must be proved that a company is withdrawing from Iran specifically because of U.S. sanctions. But Iran is a hard place to do business even without the sanctions in place, and any company, in the interest of avoiding U.S. repercussions, can make a compelling case that it is leaving for reasons unrelated to sanctions.

In addition, and perhaps more paralyzing, the European Commission has no way to enforce the statute, so enforcement falls to individual member states. That means that if, for example, an Italian energy firm or a Danish shipping company withdraws from Iran because of U.S. sanctions, the Italian or Danish government itself must then punish the company. European companies are more concerned with profits than policy, so enforcing the penalties prescribed by the statute would be an unpopular move. For many of the EU companies involved in Iran, facing sanctions from the U.S. and losing access to the U.S. market is a non-starter, even if they can recoup some of the damages later.

The U.S. and EU see this issue so differently mainly because of energy. The EU imported 37 percent of its natural gas and 30 percent of its petroleum oil from Russia last year. A 2014 European Parliament report concluded that Iran is “a credible alternative to Russia” for both natural gas and oil, and the EU has been pursuing that alternative with gusto ever since the JCPOA was signed. Iran has the second-largest natural gas reserves and the fourth-largest oil reserves in the world – and unlike Russia, which frequently uses its energy supplies as leverage, Iran has no objectives or ambitions in Europe except to make money.

The U.S., on the other hand, isn’t dependent on Russia or Iran for its energy supply. It can, therefore, pursue more abstract goals, namely reshaping the balance of power in the Middle East. The U.S. has been mired in wars in the Muslim world for 17 years and counting, and to withdraw completely without seeing another Islamic State emerge, it can’t leave behind a power vacuum or a regional hegemon in the making. The U.S. thinks Iran might be the latter, and the U.S. administration has come down hard on Iran because it doesn’t believe the JCPOA, as currently designed, will deter Iran’s regional aims or its pursuit of nuclear weapons.

This is an interest-based clash between two entities with very different perspectives on the world. It is also a sign of things to come. The U.S. pushed for European unity during the Cold War because a unified Europe, at least west of the Iron Curtain, could block Soviet power. Russia, though still powerful, is not the behemoth its predecessor was, and the U.S. thinks it can hold the line against Russia in Eastern Europe without being on the same page with Brussels on significant issues. It’s betting it can still inflict significant harm on Iran even with a recalcitrant EU. This is true, but having the full weight of EU member states on the United States’ side would certainly accelerate the process. (The U.S. may offer limited exemptions to key companies if it determines these will not hurt the overall goal of the sanctions, which might soften EU member states’ frustration.) There are also limits to how many times the U.S. can “go it alone” in the Middle East and get results – as history has shown.

For now, though, those limits won’t stop the U.S. from putting pressure on Iran by making it more difficult for European companies to do business there, nor will they solve the serious economic issues in Iran – which bring new signs of political instability with each day. In addition, the EU will have to wait to wean itself off Russia’s oil and gas. In effect, the U.S. has, at least for now, prioritized Iran over Russia. The EU disagrees, and although it can’t do much more than make a big show of its disapproval, it hopes that this will be enough to make the U.S. prioritize its needs once the Iran issue is brought to Washington’s desired conclusion, whenever that may be.