This means that we may see a return of the E.U. sanctions-busting trade that undermined the effectiveness of nonproliferation sanctions imposed by the United States against Iran during the 1990s and 2000s. This time, ironically, the E.U. could take this approach to persuade Iran not to abandon the nuclear deal.
U.N. and E.U. support helped create effective sanctions
During the Obama administration, the United States relied on U.N./E.U. support to create a successful multilateral sanctions coalition. In prior years, Iran could use trade with third-party states to circumvent U.S. sanctions — and mitigate the adverse effects the sanctions had on Iran’s economy.
Starting in 2010, European governments cooperated by imposing sanctions. E.U. states also allowed the United States to impose record-setting penalties against E.U. financial institutions that had violated U.S. sanctions. With E.U. backing, the sanctions against Iran began to bite.
What happens now, with the Trump administration announcement that the United States will withdraw from the JCPOA? U.S. officials are seeking to compel Iran to accept new, more stringent limitations on its nuclear program. Secretary of State Mike Pompeo wants to re-create the economic pressure that brought Iran to the negotiating table during the Obama administration — but gain even more leverage to strike a “better deal.”
But gaining E.U. cooperation in reimposing sanctions will prove difficult. Instead, E.U. states are working to persuade Iran to continue abiding by the JCPOA deal by offering it sanctions-busting support.
Three big questions could affect whether European countries follow through with defying U.S. sanctions in an effort to save the Iran nuclear deal:
1) Will the U.S. use diplomacy or coercion to gain E.U. cooperation?
During the mid-1990s, the U.S. government tried to compel other countries to comply with its sanctions against Cuba and Iran by penalizing foreign firms for violating U.S. sanctions. E.U. states actively resisted these efforts, which almost resulted in a transatlantic trade war. As part of their response, the E.U. adopted a blocking statute that forbade E.U. firms from complying with U.S. sanctions. The United States eventually backed off in return for minor E.U. concessions.
In contrast, E.U. members did not resist the Obama-era penalties imposed on European banks violating U.S. sanctions. Here’s why: President Barack Obama invested significant diplomatic capital to persuade European governments of the need to sanction Iran and built up a cooperative sanctioning coalition.
The Trump administration appears to be trying to push Europe to acquiesce via intimidation instead of cooperation. The E.U.’s adamant defiance of U.S. pressure during the 1990s suggests that this will not be an effective tactic. Already, E.U. policymakers have resurrected the blocking statute from 1996 to resist U.S. sanctions.
2) Does the U.S. have sufficient sanctions and coordination capabilities?
In fall 2017, Secretary of State Rex Tillerson nixed the State Department’s Coordinator for Sanctions Policy Office, which helped coordinate U.S. sanctions policies internally and with foreign governments. While other agencies can help coordinate sanctions policies, the U.S. government has also lost a significant number of experienced sanctions experts over the past year and a half.
Another key U.S. player, the Department of Treasury’s Office of Foreign Assets (OFAC), is under-resourced, given its wide responsibility for overseeing the enforcement of U.S. sanctions. OFAC’s responsibility for enforcing U.S. sanctions overseas has grown dramatically over the past decade.
During the Obama administration, OFAC pursued a smaller number of sanctions-related enforcement actions but imposed large penalties to create a deterrent effect. This strategy reflected that OFAC lacks the resources to conduct lots of enforcement actions against small and medium-sized enterprises in other countries. If the E.U. unleashes a wave of sanctions-busting on Iran’s behalf by its companies, it will overwhelm OFAC’s existing enforcement capabilities. The United States will not be able to address the problem without adopting broad-based policies that could risk a major trade war with the E.U.
3) Do European companies believe Trump will clamp down?
President Trump has made promoting U.S. trade and eliminating corporate regulations two of his administration’s top priorities. His reliance on economic sanctions is seemingly at odds with those pro-business prerogatives, since sanctions create significant regulatory burdens for firms and tend to be bad for U.S. businesses.
While the Trump administration has aggressively adopted new sanctions, less is known about the administration’s willingness to follow through on them. On average, OFAC administered penalties against about 20 corporate entities per year (ranging from a high of 28 penalties in 2013 to a low of nine in 2016) for sanctions violations during the Obama administration. In 2017, OFAC brought 16 cases — and has announced no new enforcement actions thus far in 2018. The potential U.S. reversal of the harsh penalties that blocked the Chinese company ZTE from accessing U.S. strategic technologies could undermine confidence in U.S. resolve to punish violations.
If European firms doubt they will be severely punished, they will be more likely to sanctions-bust on Iran’s behalf.
All of these points suggest that E.U. leaders think they can successfully undercut U.S. sanctions.
European financial entities and large multinational firms may not want to risk U.S. penalties, but many small and medium-sized entities could be incentivized to undercut U.S. sanctions. This could help keep the JCPOA deal in place in the short run.
Whether such a bargain is sufficiently beneficial for Iran in the long run is the more difficult question, especially if Iran’s leaders perceive renewed U.S. sanctions as a prelude to military action. E.U. policymakers may be willing to gamble that defying the United States is worth trying to save the nuclear deal.
Bryan R. Early is associate professor of political science at the University at Albany, SUNY and the director of the Center for Policy Research.