President Donald Trump’s unilateral withdrawal from the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), has generated a new dynamic in the relationship between Iran and the European Union. There are strong forces on both sides who wish to sustain the deal, but they also know that many obstacles will have to be overcome to meet the expectations of the other side.
Tehran now finds itself in a unique position whereby if it remains committed to the deal it can genuinely isolate the United States as the only noncomplying party to the JCPOA. Meanwhile, there are signs that Secretary of State Mike Pompeo’s May 21 anti-Iran narrative compelled the top leadership in Iran to work more seriously toward sustaining the deal. Indeed, the first indication of a new domestic political atmosphere in Tehran came during the May 23 policy speech by Supreme Leader Ayatollah Ali Khamenei where the inclusion of all factions —including former President Mahmoud Ahmadinejad and former Reformist political prisoner Mohammad Ali Abtahi — and even the seating arrangements were a presentation of regime unity.
In his policy speech, Khamenei urged all forces to have “realistic” expectations about the potential continuation of the nuclear accord and said the Iranian economy could not just rely on what he termed a “European JCPOA.” To this end, he outlined a number of political and economic demands for Europe. Some of the political expectations, including the request that EU powers pass a UN Security Council Resolution to condemn the United States’ violation of Security Council Resolution 2231, which endorsed the JCPOA, may not be feasible, especially as Washington could veto any such resolution. Nonetheless, one needs to view Khamenei’s rhetoric as part of Iran’s negotiation strategy similar to the preconditions he laid out out in October 2015 for the planned implementation of the JCPOA.
In this light, while Tehran continues to comply with the nuclear deal, it is more appropriate to focus on the feasibility of those aspects of the speech that may be Iran’s “red lines.” These are:
- “European powers should protect Iranian oil sales from the US sanctions and continue buying Iranian crude.” This will be a central request from Tehran, and the EU alongside Russia and China need to devise mechanisms that can guarantee the sale of Iranian crude, condensate and petroleum products. Assuming that some of the large European refinery owners will stop purchasing Iranian crude, the EU will need to shore up international buyers who are not exposed to US sanctions and incentivize and protect them to be able to guarantee the continuation of Iran’s petroleum exports. These buyers will also have to be prepared to enter nondollar denominated contracts to avoid the banking bottlenecks due to US sanctions. What Iran expects is a continuation of its petroleum exports and the generation of needed hard currency. The key role in this process may fall to Russia, as Tehran and Moscow already have trade patterns that rely on the export of Iranian oil in return for Russian imports. Interestingly, Khamenei also left a door open for some flexibility by demanding that Europe guarantees the sale of Iranian crude to the level that “our strategy determines,” as Tehran may decide to reduce its exports for strategic reasons.
- “European banks should safeguard trade with Iran.” This is an expectation that the EU has been working on. The recent announcement by six credit unions (Volksbanken) in southern Germany that they will continue their financial transactions with Iran for the time being will be music to Tehran’s ears. This outcome is not just the result of the credit unions’ strategic decision, but also the consequence of detailed work by the Bundesbank (Germany’s central bank) to safeguard transactions between Iran and the credit unions. Such mechanisms can be devised through other European central banks, and Tehran will insist on multiple financial channels to remove one of the key obstacles to bilateral trade and investment.
- “The UK, France and Germany should pledge not to seek negotiations on Iran's ballistic missile program and regional activities.” This is an important “red line” for the country’s conservative factions, especially as Iran’s regional security strategy is closely tied to its regional policies. As such, European leaders have to be very careful in their rhetoric toward Iran; though at a later stage, it is conceivable that they could address some of the regional issues through genuine multilateral talks addressing the security concerns of all regional parties — including Iran.
While finding workable solutions to these demands will keep European institutions busy in the next few weeks, Iran needs to understand that what Khamenei termed as “European JCPOA” will mean that most of the Iran-EU trade will be shifting toward European small and medium sized enterprises (SMEs). This will have two important consequences.
First, Iran will be deprived of the top-tier technologies that only large multinational companies can offer. The question is whether the technological solutions offered by European countries would offer the needed remedies for Iran’s ambitious plans in key sectors, such as the petroleum sector. The fact is that while large multinationals offer viable packages including technology, financing and markets, they are less suitable or prepared to enter into joint ventures with Iranian partners. Therefore, European SMEs may be a better fit for the Iranian demand to localize technologies through partnerships. However, experience has shown that European SMEs will mainly be interested in partnering with the genuine private sector firms to have a more balanced relationship with the Iranian party. Consequently, the needed solutions can only emerge in various joint ventures between European SMEs and Iran’s private sector.
Second, in order to pave the way for an efficient presence of European SMEs in the Iranian market, the country’s authorities need to improve the overall business climate and remove the current legal, structural and operational obstacles to a successful establishment of needed joint ventures. For example, private sector companies will need to have better access to financial resources and also better protection in the country’s complex competitive environment. The first sign that Iranian authorities appreciate the need for reforms emerged when Khamenei ordered the formation of a Consensus-Building Economic Council that included the heads of three branches of power as well as other key senior decision-makers with different political orientations. If this council fulfills its tasks effectively, there should be important reforms to the investment climate with a focus on an efficient presence of European SMEs engaging the genuine private sector as opposed to government or quasi-state organizations.
After a May 25 meeting of the JCPOA Joint Commission in Vienna, senior Iranian negotiator Abbas Araghchi said there was a good deal of political will to keep the deal alive. He reported that the EU had indicated it is planning to have intensive talks with Tehran on issues such as oil, banking, investment, trade and insurance to find practical solutions. Where this new dynamic will take Iran-EU ties, especially with reference to bilateral trade and investment relations, remains to be seen. For now, what is important is that the Iranian side appreciates that it will be a two-way effort and that Iran cannot remain complacent if it genuinely wishes to attract European SMEs.
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