Germany and the EU's attempts to protect European companies from US sanctions on Iran are not working. And they can't stop the Iranian economy from becoming isolated as more sanctions are imposed.

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German and European resistance to US sanctions on Iran appears to be failing, in an apparent victory for Donald Trump’s foreign policy. In documents seen by Handelsblatt, Germany’s economics ministry admitted the almost total ineffectiveness of European countermeasures to date.

A new tranche of US sanctions goes into effect on Iran this Monday, taking particular aim at the country’s banking system and financial ties to the rest of the world. Secretary of State Mike Pompeo said that as of this week, “maximum pressure on Iran will be fully in place.”

The new sanctions threaten any company or individual, American or not, who buys Iranian oil, invests in its energy sector, or uses Iranian banks or shipping lines. They specifically pressure financial payments systems, like the Belgian-based SWIFT network to cut Iran from international transactions.

When Trump announced a first round of sanctions in May, the German government and the European Union promised they would shield German and European companies from the effect of the measures. Both Berlin and Brussels regard US Iran policy as an unfair imposition on international trade, and a slap in the face to European diplomacy. Together with the Obama administration in 2015, European allies helped negotiate an accord with Iran that lifted sanctions in return for the Islamic nation giving up its nuclear arms program. Trump, however, said it was a "terrible deal," canceled it, and re-imposed sanctions in May.

Germany and the EU have tried to circumvent the embargoes, but Berlin conceded its measures have done little to protect continued trade with Iran. In a written response to the opposition Free Democratic Party, the economic affairs ministry acknowledged that the European Union’s Blocking Statute – a legal countermeasure to sanctions, passed in June – was mostly a “political symbol.”

Powerless against the US

Over the weekend, European diplomats continued to discuss another measure, the Special-Purpose Vehicle (SPV). The SPV will be a European-owned, Luxemburg-based financial clearinghouse, that enables payments to and from Iran while bypassing US-connected companies. But in its response, the German ministry confirmed that despite months of work, the functions and scope of the SPV are quite unclear.

Furthermore, the Americans are unimpressed with these efforts. In a telephone briefing this week, US Treasury Secretary Steven Mnuchin said he expected no “significant transactions” through the SPV. If there were any, the US would “aggressively pursue our remedies,” he said.

Standing idly by

This situation offers little immediate hope for German companies looking to trade with Iran. As a result, many large international companies, including Daimler, Siemens, Bayer, Henkel and Wintershall, left Iran earlier this year. They are fearful of legal action against their American businesses.

A number of smaller industrial companies, with less exposure to the US, intended on continuing their lucrative trade with Iran. However, German and European banks are spooked by American threats, and nearly all remaining German banks cut ties with Tehran. Some German companies are already unable to access funds paid by their Iranian clients.

As far as this problem is concerned, the economics ministry was also pessimistic in its answer. They wrote the government has “no powers to force commercial banks” to do business with Iran.

Still, German Foreign Minister Heiko Maas phoned with his Iranian counterpart last week and assured him that the European Union continued to “make intensive efforts” to keep economic channels open.

Already in the last six months, Iranian oil exports fell from 2.5 million to 1.6 million barrels a day, putting the shaky economy under more pressure. The United States granted only eight unnamed countries temporary waivers to continue buying oil from Iran.

Mathias Brüggmann is an international correspondent for Handelsblatt, focusing on Eastern Europe, Iran and the Arab world. Elisabeth Atzler is a banking correspondent for Handelsblatt. To contact the authors: [email protected], [email protected].