Prospects Dim for the Nuclear Deal As European Businesses Quit Iran

On August 7, new US sanctions against Iran came into force. The European Union declared its intention to block them in order to protect European companies working in Tehran. Can this policy be successful? What are the prospects of the US-EU and US-Iran confrontation and what does the future hold for the fragile Iranian “nuclear deal”?

In the context of the Trump administration’s policy towards Iran, any business operating in the country should decide whether it wants to stay on the market of the United States or Iran. It is almost impossible to combine two these options due to the terms of the US ultimatum. Many large European companies – for example, French oil and car giants, – announced their withdrawal from the Iranian market, since they have multibillion business in the US and do not intend to trade their place in the American market for the ability to work in Iran. The EU is highly unlikely to stop the process of withdrawal of European big businesses from the Iranian market. In present conditions, companies have to decide where they want to operate – and in most cases, they will not choose Tehran. However, the EU measures could help small and, possibly, medium-size companies, which do not have any projects in the US or could sacrifice them due to their insignificance.

The EU is clearly demonstrating its eagerness to shape its own policy towards Iran, which contradicts the US position – and Trump’s recent European trip hardly gave him new allies the in EU. However, the measures announced by the Europeans are not enough to keep big European businesses in Iran. To change the entire situation, radical measures and, in fact, the readiness to openly confront the US are required. This might include introducing retaliatory sanctions against American companies if sanctions against European companies are introduced. The EU is not ready for such drastic measures.

If history is any guide, it is counter-productive to threat Iran with sanctions and military force: this approach does not work. In recent weeks Washington and Tehran signalized that dialogue is possible, but it is unlikely to be successful. The statements Trump and his team are making towards Iran – including that of May 8 concerning the US withdrawal from the JCPOA – demonstrate that the core of the problem, how it is viewed in Washington today, lies not in the nuclear field, but in the Iranian regime itself, which is regarded by the US as non-acceptable. Following the signals sent by the Americans in recent months, one can hardly expect their position to be reconsidered, even if Iran is ready to negotiate on a wide range of issues, including nuclear and missile weapons and regional issues. In these conditions, the probability of escalation in the Middle East is much higher than the possibility of reaching a new US-Iran agreement.

Even before the JCPOA was adopted, Iran nuclear policy was broadly reactive, and the decisions made on the development of a number of projects in the nuclear fuel cycle field – for instance, on uranium enrichment exceeding the 5% limit – were based not on any real nuclear requirements of the country, but to a large degree on the necessity to react to Washington’s threats. Thus, it cannot be ruled out that in a few months Iran – mostly due to domestic, but partly to foreign policy reasons as well – may decide to respond to the US withdrawal from the JCPOA and begin to “test” other countries’ reaction to its exceeding some of the JCPOA limits. If nothing extraordinary happens in the next months, and exposure to possible secondary US sanctions continues to threaten doing business in Iran, many in Iran could conclude, even reluctantly, that the Islamic Republic has no more incentives to continue meeting its obligations under the JCPOA in full. Particularly, if the European countries and the key byers of Iranian oil in Asia – China, India, Japan, and South Korea – begin to reduce their volumes of purchases.

Looking through the prism of the economy, the EU’s interests in Iran are limited, considering the scale of the European economy in general. Iran accounts for approximately 0.5% of the whole EU trade. Therefore, for Brussels, the preservation of the JCPOA is a more complex issue than merely the interests of the European business in Iran. Further escalation of tensions around Tehran threatens to destabilize the situation not only in the Islamic Republic, but also in the whole region. And this is more serious, because the region is a major supplier of oil to the European market and the risks are considerably higher.

Finally, the Iran nuclear deal is a great success of multilateral diplomacy, which became possible due to the European Union’s active participation, so in terms of image the EU does not want to forfeit it. In the near future, the deal made upon the Iran nuclear program in July 2015 will continue to melt down. If no miracles happen, the JCPOA is likely to break up in 2021, in case of Trump’s re-election at the very latest. However, this may happen even earlier. In addition, in case if a Democratic candidate wins the next election, and the JCPOA survives in its current “JCPOA minus the US” form until 2021 – then there will be a chance to preserve and to relaunch it, although the degree of probability remains very low today.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.