June 2018

By Jeremiah J. Baronberg and Mathilde Defarges

On May 8, 2018, U.S. President Donald Trump announced that the United States would end its participation in the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA). The multi-nation agreement was reached in Vienna, Austria on July 14, 2015 between Iran and the P5+1 (the five permanent members of the United Nations Security Council—China, France, Russia, United Kingdom, United States—plus Germany) together with the European Union.

In the United States, reaction to President Trump’s decision to withdraw from the deal was mixed. Some Members of Congress said it was a mistake, while others praised the move. Senate Republican Majority Leader Mitch McConnell and Republican Speaker of the House Paul Ryan each called the deal “flawed from the beginning,” while House Democratic Leader Nancy Pelosi said “this rash decision isolates America, not Iran” and Democratic Senate Minority Leader Chuck Schumer, who had originally opposed the deal, said it was a mistake to withdraw. Other senior lawmakers who had also originally opposed the deal, such as House Foreign Affairs Republican Committee Chair Ed Royce and Democratic Ranking Member Eliot Engel also said it was a mistake to now back out on the deal—over concerns about the message the move sends to allies and foes such as North Korea and absent an alternative strategy for preventing Iran from restarting its nuclear weapons program.

In Europe, EU leaders reacted swiftly, announcing that it would continue to abide by the agreement “as long as Iran remains fully committed to it.” EU President Donald Tusk said “I would like our debate to reconfirm without any doubt that as long as Iran respects the provisions of the deal, the EU will also respect it,” while Federica Mogherini, the EU’s High Representative for Foreign Policy and Security and European Commission Vice President, said “We…regretted the withdrawal of the United States from the Iran nuclear deal and we recognized that the lifting of nuclear-related sanctions and the normalization of trade and economic relations with Iran constitute essential parts of the agreement.” In the aftermath of the U.S. withdrawal, Mogherini, together with European foreign ministers met with their Iranian counterparts in a bid to preserve the deal’s core functions.

The JCPOA’s lifting of economic sanctions

The JCPOA, which from the Western governments’ negotiating perspective was meant to contain Iran’s nuclear ambitions also provided for, in exchange, the lifting of certain nuclear-related “secondary sanctions.” Secondary sanctions are specific tools designed to penalize non-U.S. companies and persons who commercially transact with designated countries, in this case, Iran—even if those transactions do not involve the U.S.—by limiting their access to the U.S. financial system, thereby isolating Iran from the global economy.

As part of the JCPOA’s provisions, the lifting of secondary sanctions resulted in the re-establishment of commercial ties between such entities—European ones, in particular—who sought access to the Iranian market. Likewise, the JCPOA also provided exemptions to certain sanctions for U.S. companies—designed and enforced by the Obama administration to extract concessions from Iran—that allowed American entities with foreign subsidiaries to trade, finance, insure, and invest in Iran.

Taking advantage of the lifted sanctions since the deal was struck in 2015, a number of European companies—among them German, French, UK, Danish, and Italian firms such as Airbus, Eni, Danieli, Total, Peugeot Citroën (Groupe PSA), Renault, Volkswagen, Siemens, Bosch, Royal Dutch Shell, TORM, and Maersk—inked business deals with Iran based on the continent’s long-standing economic and diplomatic relations with the country. (Comparatively fewer Asian and American companies, including Boeing, Procter & Gamble, Honeywell, Dover, Chubb, and GE sought to enter Iran’s untapped market of 80 million people.) While still not yet considered a huge amount, nevertheless, the EU exported approximately $13 billion in goods to Iran in 2017, a 66 percent increase from 2015. Likewise, since the secondary sanctions were lifted, exports by Iran to the European Union grew tenfold.

U.S. moves to re-impose secondary sanctions: Where does that leave EU companies?

The Trump administration’s unilateral decision to withdraw from the JCPOA—despite sustained European efforts to the contrary—was accompanied by its stated commitment to re-impose pre-JCPOA era U.S. economic sanctions on Iran. These include primary sanctions, which apply to U.S. companies and persons as well as secondary sanctions. The re-imposed sanctions don’t take effect immediately however; the U.S. Treasury Department, through its Office of Foreign Assets Control (OFAC) has indicated that it will delay their implementation by providing a “wind-down” period of 90 and 180 days, depending on different categories of activity involving Iran—in order “to minimize the impact of sanctions on the legitimate activities of those parties undertaken prior to the imposition of sanctions.” This process is set to be completed by November 4, 2018.

In a follow-up speech by U.S. Secretary of State Mike Pompeo, the U.S. indicated that it would “send teams of specialists to countries around the world to further explain administration policy, to discuss the implications of sanctions we imposition, and to listen.”

As a result, global entities—U.S. and otherwise—with business ties to Iran are now actively assessing the risk, exposure, and impact of their continued operations in, and partnerships with, the country, including the need to cancel contracts and suspend joint ventures and subsidiary activities.

In a clear recognition of the threat posed by the reinstated U.S. secondary sanctions, the EU indicated that it was moving to shield its businesses from the sanctions, including activating a so-called “blocking” regulation designed to counteract U.S. sanctions and allow trade to continue, while softening the sanctions’ impact. European Commission President Jean-Claude Juncker said, “We have to protect our companies. We have to protect mainly those who – mainly small and medium-sized enterprises – did invest in Iran, and we cannot leave them alone.”

French President Emmanuel Macron added, “International companies with interests in many countries make their own choices according to their own interests. They should continue to have this freedom.” UK Foreign Secretary Boris Johnson said, “We will cooperate with the other parties to ensure that while Iran continues to restrict its nuclear program, then its people will benefit from sanctions relief in accordance with the central bargain of the deal.”

Other countries, such as India, have said that they will continue doing business with Iran, despite the threat of U.S. sanctions.

In the ensuing months before U.S. sanctions take effect, European companies are now actively taking steps to mitigate their risk and exposure to the reinstated secondary sanctions regime, including ensuring that their business compliance programs are fully up-to-date with U.S. protocols and that they are regularly screening any and all parties in Iran with whom they may have dealings.

In some cases, countries and companies are seeking to secure specific carve-outs from the renewed sanctions through direct lobbying and negotiations with the U.S. Treasury Department, although exactly which sectors or countries will qualify has not been confirmed. French Economy Minister Bruno Le Maire is reportedly in negotiations with U.S. Treasury Secretary Steven Mnuchin to obtain temporary or permanent exemptions for French companies doing business with Iran.

We will continue to monitor these developments and their impact on global business.