How Europe Could Blunt U.S. Iran Sanctions Without Washington Lifting A Finger

It has been nearly seven months since the United States withdrew from the Iran nuclear deal. As sanctions begin to bite, Iranian companies are laying off employees, and Iranian households are facing renewed hardships. Iran has exercised remarkable patience while it waits for Europe to devise its special purpose vehicle (SPV), a new entity intended to help Iran blunt the impact of U.S. secondary sanctions by making it possible for companies to trade with Iran, despite the fact that most international banks refuse to process payments to and from the country.

The SPV will do so by offering a “compensation” service. By overseeing a ledger of payments related to exports and imports between Europe and Iran, the SPV will be able to coordinate payments so that a European exporter of goods to Iran can get paid by a European importer of goods from Iran, eliminating the need for cross-border transactions. The SPV simply coordinates payments so that exporters can be paid from funds outside of Iran while importers can be paid by funds within Iran.

Compensation is a solution that companies have been using informally for years—the proposed mechanism is feasible. But time is running out to get the SPV up and running. Ali Akbar Salehi, the head of Iran’s atomic energy agency, recently warned that “the period of patience for our people is getting more limited.”

Europe’s SPV could be launched in the nick of time. France and Germany will likely formally establish the entity in January. But many critics believe the SPV will have a negligible impact on Iran’s economy, not least because it is unlikely that the mechanism will be used to facilitate European purchases of Iranian oil.

When European Union foreign-policy chief Federica Mogherini announced the European intention to establish an SPV in September, she specifically mentioned the aim of facilitating payments related to Iran’s oil exports. European officials privately concede this is unlikely to happen. Iranian foreign ministry spokesman Bahram Qassemi seemed to acknowledge this recently, when he described the SPV as intended to facilitate Iran’s “purchase of essential goods.”

That the SPV will likely facilitate trade in essential goods but not oil is not a sign of failure, however. While Europe should plan to create multiple SPVs and still endeavor to purchase Iranian oil, the creation of a specific humanitarian SPV is the ideal first step as Europe seeks to assert its economic sovereignty and salvage the nuclear deal. The humanitarian SPV will help achieve several goals.

First, despite the focus on the thwarted ambitions of energy firms like Total and industrial giants like Siemens, it is the companies active in food and pharmaceuticals that have the longest-standing and arguably most important presence in Iran. Companies like Nestle, Novo Nordisk, Sanofi, and Unilever—which sell the high-volume packaged foods, cleaning products, and medicines that households depend on—are at the heart of the most important commercial ecosystem in Iran, which includes Iran’s private sector and its vibrant consumer class.

Creating a humanitarian SPV would help stabilize the presence of such companies in the Iranian market. Despite the exemptions for trade in food, medicine, and many consumer products, Iran’s trade in these goods is restricted by the limited number of European banks willing to receive payments from Iranian importers. The SPV would serve to increase the volume of trade that can be conducted given the current state of banking ties by reducing the need for direct financial transactions between Europe and Iran.

Second, constraining the types of trade the SPV facilitates may actually help accelerate the development of the entity. A humanitarian focus will make it less likely that the U.S. Treasury would seek to actively interfere with the operation of the new mechanism. This will make it easier to push the humanitarian SPV beyond the compensation service currently envisioned.

Business leaders have suggested that the SPV could be modeled as an international trade intermediary, commonly known as a trading house. The most famous trading houses are the Japanese sogo shosha such as Itochu and Marubeni, which, acting like a “diplomatic arms of the state,” supercharged Japan’s exports beginning in the 1980s. In such a model, the SPV would serve as a counterparty intermediating between exporters and importers in back-to-back trades.

Additionally, European officials have entertained the possibility that the SPV could eventually be granted a banking license, allowing it to serve as a state-owned “gateway bank” between the European and Iranian financial systems. Whatever the model, a humanitarian focus will make it easier for European governments to provide the capital and resources necessary to give the humanitarian SPV more powers to facilitate a greater volume of trade and investment between Europe and Iran, even if only in sanctions exempt sectors.

Third, while the humanitarian SPV would not serve to improve the overall resilience of the Iranian economy in the face of U.S. sanctions, a humanitarian focus would help boost the resilience of Iranian households, helping to mitigate rising costs of food and minimize shortages of medicine. Arguably, reducing the hardships faced by Iranian families may be politically more important than any hoped-for impact on Iran’s topline economic growth.

For example, Iranian doctors have warned that new shortages in key medicines “will inevitably lead to a decrease in survival of children with cancer,” lending credence to the former U.S. negotiator Richard Nephew’s observation that “sanctions are a form of violence.” The humanitarian SPV would serve as the practical tool with which Europe will help to shield the Iranian public from the violence of the Trump administration’s sanctions policies.

Finally, the creation of the humanitarian SPV would enable Europe to more directly confront the Trump administration on the humanitarian implications of its reimposed sanctions. While Secretary of State Mike Pompeo has pledged that “[American] sanctions and our economic pressure are directed at the regime and its malign proxies, not at the Iranian people,” Special Representative for Iran Brian Hook has stated that “the burden is not on the United States to identify the safe channels” for humanitarian trade to occur. But if the SPV is humanitarian in focus, Washington will have to explain why the SPV is inconsistent with its own statements.

By casting the humanitarian SPV as an attempt to create such a “safe channel” for sanctions-exempt trade, Europe can constrain the Trump administration’s options for retaliation. Attempts to thwart the humanitarian SPV or companies using the mechanism would contradict long-standing exemptions for humanitarian trade in U.S. sanctions legislation. For example, the Countering America’s Adversaries Through Sanctions Act signed into law by Trump in August 2017 specifically exempts “conduct or facilitation of a transaction for the sale of agricultural commodities, food, medicine, or medical devices to Iran.”

Sanctions are still tools of law—and the U.S. Treasury can’t simply sanction the humanitarian SPV or the companies using it without a clear legal basis to do so. It is unlikely that the Trump administration will be able to invent a legal basis for sanctioning a European state-owned entity focused on humanitarian trade, especially if there are direct EU appeals to Congress on the exempt nature of the related activities.

Europe can even go one step further and invite the United States to be among the countries participating in the humanitarian SPV. Such an invitation would reflect the fact that U.S. companies such as Johnson & Johnson, Medtronic, General Electric, and Cargill face the same banking challenges as European peers when trying to conduct sanctions-exempt trade with Iran.

If the United States refuses to join, as it likely will, Europe will be further justified in pressuring the Trump administration for licenses and other measures that will provide comfort to its banks regarding engagement of the SPV. Importantly, the negotiations around the humanitarian SPV could serve as an opportunity to de-escalate the trans-Atlantic rift over Iran sanctions. The Trump administration could opt not to join the humanitarian SPV, yet still endorse the concept of the European mechanism on the basis that it does not inherently weaken the overall architecture of U.S. sanctions due to its humanitarian focus.

Addressing a meeting of parliament in October, Iranian President Hassan Rouhani pointed to Europe’s efforts to blunt U.S. sanctions and protect the nuclear deal as a “political victory.” But he also acknowledged that “people are suffering and under pressure” due to the sanctions.

Europe and Iran urgently need a practical victory. The humanitarian SPV can serve as a backstop to the Trump administration’s “maximum pressure” policy, not by ensuring that oil tankers travel freely or landmark investments are made, but first by preventing the despair that arises when supermarket and pharmacy shelves are bare.