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. The US withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and ensuing “maximum pressure” campaign against Iran has led to a diplomatic clash with the European Union and a quorum of its member states who are striving to protect the nuclear deal. There is, however, one issue on which US and European officials seem to be in agreement: that the Iranian people should be spared from the hardships of economic sanctions. Senior officials in the Trump administration have consistently emphasized that US sanctions are targeted against Iran’s leadership and not its ordinary citizens. If genuine, such statements point to one potential area of cooperation between Europe and the United States: ensuring that humanitarian trade can persist even under stringent US sanctions on Iran.

The European Union’s recently announced special purpose vehicle (SPV) will offer 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.

The SPV could prove an unlikely venue for cooperation, if established with a focus on humanitarian trade. Europe should make humanitarian trade the foundation of its economic relations with Iran through the establishment of a humanitarian SPV (H-SPV), which the United States, along with other actors, could be invited to join.
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.

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. In such a model, the SPV would serve as a counterparty intermediating between exporters and importers in back-to-back trades.
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.

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.

To achieve these goals, the H-SPV should be established in accordance with these criteria:
• It should focus exclusively on humanitarian trade.
• The focus on humanitarian trade would enable a functional linkage of the H-SPV to European banks, including European central banks. In this role it could serve as a kind of trading house, able to serve as an intermediary on behalf of European and Iranian companies.
• While an SPV focused on trade considered sanctionable by the US is unlikely to develop far beyond the netting service currently envisioned, the H-SPV could develop into a “gateway bank” which serves as an intermediary between the Iranian and European financial systems.
• While the H-SPV would be foremost intended to serve European companies, the mechanism could be opened to other trading partners, such as China and India. Europe should also invite the United States to participate in recognition of a shared commitment to ensure that the Iranian people are not unduly harmed by sanctions.

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