Trump Should Calm Tensions With Europe Over Iran Sanctions

The Trump administration and the European Union are coming perilously close to a major escalation in their already substantial diplomatic and economic rift over Iran. European officials in September announced plans to establish a “special purpose vehicle” to enable financial transactions with Iran to continue after the United States fully restores its sanctions regime in early November. U.S. officials promptly responded by threatening to blacklist European companies and institutions that participate in the vehicle in violation of U.S. sanctions.

Trans-Atlantic tensions are already building over trade policy, climate, and other issues, and the looming fight over Iran sanctions threatens to further reduce potential cooperation on even shared interests. For example, the more energy Washington and Brussels spend quarreling over Iran sanctions, the less likely it is that the two sides will be able to agree on imposing additional sanctions on Russia’s malign activities targeting both Europe and the United States. The fight on Iran also could mean short-term economic pains in the United States and Europe and long-term adverse consequences for America’s economic power.

I met with hundreds of foreign companies when I worked on sanctions as a U.S. State Department official from 2012 to 2014, and those discussions led me to agree with the Trump administration’s assessment that, in the near-term, a European special purpose vehicle is likely to be limited in scope. Europe is designing the vehicle to be a financial conduit that will let Iran move money to pay European companies that are selling European products, and to let European companies pay for their imports of Iranian goods. Europe’s goal is to replace the role that large global banks ordinarily play in handling payments for international trade, given that most major banks will refuse to handle Iran-related transactions after sanctions are fully restored on Nov. 5. Europe has also suggested that the tool might be used by other countries, such as China, to handle financial transactions related to their trade with Iran. However, most large European companies, including oil companies and industrial giants, have far larger business interests in the United States than in Iran and as a result will likely refuse to use the special purpose vehicle to continue trading with Iran, at least initially, out of fear of drawing Washington’s ire.

But European companies and governments have a long-held interest in setting up payment channels insulated from Washington’s financial pressure. The initial steps needed to establish such channels are complex, and setting them up will require significant investments by interested governments. But if the EU takes the proposed vehicle as a chance to begin investing sufficient political and economic capital over the long term, Europe, as well as a coalition of other countries opposed to U.S. economic dominance, notably China and Russia, will likely succeed in developing channels that can largely circumvent U.S. financial sanctions. While these channels would not likely be as cheap as the traditional U.S.-centered global banking system and are unlikely to replace America’s overall dominance in global finance, they would likely be effective enough to let countries targeted by U.S. financial sanctions continue most of their trade. This will be detrimental to U.S. global coercive economic power.

Tensions over Iran sanctions are also already having adverse economic effects in both the United States and Europe. In particular, reductions in global purchases of Iranian oil over the past several months, combined with the threat of even sharper reductions in sales after U.S. sanctions come back into full force next month, have driven global oil prices to a four-year high. Given that crude oil makes up at least half the cost of gasoline that drivers pay at the pump in the United States, every dollar increase in global oil prices ultimately means that consumers will end up paying more.

Fortunately, there are steps that both Washington and Brussels can take to reduce tensions, limit the impact of U.S. sanctions on global oil prices, and give both sides a face-saving path forward.

As a first step toward de-escalating the Washington-Brussels fight over Iran sanctions, both sides need to realize that the concept of a special purpose vehicle is nothing new. Indeed, the concept is explicitly authorized under U.S. sanctions and similar methods were used during the prior period of peak U.S. sanctions on Iran, from 2012 to 2015. In that period, several countries, including Japan, South Korea, and Turkey, reduced but did not eliminate their purchases of Iranian oil. By reducing their oil imports, the countries qualified for a so-called significant reduction exception that offered an exemption from certain U.S. sanctions in exchange for the reductions in the volumes of Iranian oil purchases. The countries buying Iranian oil then deposited the payments they made for the oil into special purpose accounts at banks in each country. Iran and the oil-importing countries then used those special purpose accounts to pay for Iranian purchases of food, medicine, basic consumer goods, and other products not prohibited by U.S. sanctions.

The United States and the EU should quietly cooperate to structure the EU’s proposed special purpose vehicle in ways that would keep it broadly compliant with U.S. Iran sanctions, much as Japan, South Korea, and other Iranian oil-importing countries did earlier this decade. Like any diplomatic compromise, this would not give either side everything that it seeks. Europeans would have to tacitly acknowledge the reality of U.S. sanctions and accept that the vehicle could not be used to sell Iran goods that are directly prohibited by U.S. sanctions, such as oil drilling equipment. The United States will have to tacitly acknowledge that the European Union will continue importing Iranian oil, albeit at reduced levels, and that European companies will continue selling Iran goods, such as food, medicine, and consumer products, that are not prohibited by U.S. sanctions. Both sides would likely want to avoid publicly discussing the vehicle in detail in order to avoid drawing attention to these compromises.

But while this approach would require both sides to compromise, it also would avoid a worst-case scenario for the United States: Europe getting serious about an alternative that would enable companies and countries to avoid the U.S.-dominated global financial system, and the United States beginning to sanction companies that operate in Europe. It would also advance Europe’s biggest near-term interest toward Iran: encouraging it to remain within the 2015 nuclear deal and to adhere to its nuclear limits despite the Trump’s administration’s rejection of the deal.

As a second step, Washington should at least temporarily refocus U.S. sanctions on the price that Iran gets for its oil, rather than the raw volume of oil exported. Under existing U.S. sanctions law, countries that want to qualify for the significant reduction exception must reduce the volumes of Iranian crude that they import—which has driven up prices, given that global supply is currently tight. A better strategy would be for Congress and the Trump administration to authorize a significant reduction for counties that reduce either the volume or the value of crude oil purchases. Changing the focus to would let countries in Europe and elsewhere keep importing similar volumes of Iranian crude as long as they receive dramatic discounts below global prices from the Iranians. This would reduce tensions with Europe by potentially moderating global oil prices: Iran could keep selling significant volumes of oil to Europe, putting downward pressure on prices, while the sanctions would still reduce the real target of U.S. oil sanctions on Iran—the revenue that Iran receives from its oil sales. Iran’s oil revenue would also be kept locked up in special accounts, as it was from 2012 to 2015, mitigating the risk that Iran could use the revenue for nefarious purposes.

Finally, Brussels should begin imposing a set of targeted sanctions on specific malign actors in Iran. Over the past year, European leaders have said that they share the U.S. goal of countering Iran’s support for Syrian President Bashar al-Assad and Iran’s other malign activities in the Middle East. But the EU has been wary of imposing even targeted sanctions against Iranians engaged in these activities, for fear of further jeopardizing the nuclear deal with Iran. If Washington is quietly prepared to endorse a limited special purpose vehicle for certain aspects of Europe’s trade with Iran, Brussels should reciprocate by imposing a tranche of sanctions on Iranian officials and entities directly involved in Iran’s meddling in the Middle East.

Of course, strained trans-Atlantic relations combined with both sides’ posturing on Iran will make it extremely difficult for Washington and Brussels to actually reach agreement and de-escalate the looming fight. Realistically, Europe is likely to press forward with establishing its special purpose vehicle entirely outside of U.S. authority. And the Trump administration will likely respond by beginning to sanction the institutions and European officials involved in setting it up. But this path is not necessary: Washington and Brussels should take a few steps to tacitly de-escalate tensions, rather than adding more fuel to the fire.