JCPO-eh? Iran, the EU, and the US

Andrea Berger 0:06

You're listening to the Arms Control Wong podcast, the leading podcast on arms control, disarmament, and nonproliferation. My name's Andrea Berger, and I'm a senior research associate at the Middlebury Institute of International Studies at Monterey. And this morning, we're taking a little bit of a break from DPRK. I had a holiday from Our monthly episode also in August.

And instead, we're going to talk about Iran and particularly the European reaction to US changes in its policy to the Iran nuclear deal. And to do that, I'm joined by Justine Walker, who's the Director of Sanctions at UK Finance and For those of you who don't know it, UK Finance is the trade association for banking and finance here in the UK that has a focus on financial crime.

And Justine over the years has basically been the source of much of what I know on sanctions, so I'm really delighted to have her. Justine, welcome to the podcast. Great, thank you. It's a real pleasure to join you. Maybe let's start with just a brief background on what the Iran deal is, formally called the Joint Comprehensive Plan of Action, or JCPOA, and what the sort of basic bargain underlying that deal is and why it's now really up in the air as a result of changes to U.S. policy.

Justine Walker 1:27

Sure, of course. Well, I mean, the Iran deal was negotiated over many, many years. And You know, we had a maximum impact campaign against Iran, the Europeans and the US and indeed many other international bodies and countries had joined together to put pressure on Iran. And that resulted in everybody coming to the table and, you know, a deal being reached.

It was negotiated over a very long period of time. It was highly technical. There was a lot of factors to consider. And the deal focuses on Iran's nuclear program. So it doesn't focus on terrorism. It doesn't focus on human rights. It's around the nuclear program. And a commitment from Iran to have a very robust verification system with inspectors going in, that they gave certain commitments that they would not pursue a weapons program.

It would be for... Civil use. And in response, the players to the deal, so Russia, China, the US, the UK, France, and the EU, who were also very much part of that and did a lot of facilitation of the discussions, agreed to ease sanctions so that Iran would have the benefit of re-engaging Economically with the world and being to look to reposition themselves as actors on the global stage by way of finance, etc.

So the deal itself is very, very complex. I think what's important to say is that actually the reporting at the time when the deal was reached was that sanctions have been lifted. And actually there's still a lot of sanctions even under the nuclear deal. There was always a lot of sanctions still in place We had the Revolutionary Guard still sanctioned here in the EU.

There were certain human rights sanctions still there. So there were still a number of EU sanctions, but a large majority of them had been rolled back. So once the deal came into life. But on the U.S. side, the U.S., what we call primary sanctions, so those sanctions on U.S., Entities, persons, they remained in place. They were never lifted anyway.

The big benefit on the US participation was that they were moved to the secondary sanctions. So, for example, if you're an EU entity and you were Engaging with Iran. Previously, you could be subject to secondary sanctions by the U.S., what a lot of people call extraterritorial. That changed with the deal, and there were a wide range of areas where Entities had been previously designated but they were then moved to a special list which was created so they had a slightly different status so they were still sanctioned by the US but they were in a different environment and that just reflected the complexity of rolling back sanctions on somewhere like Iran and trying to, I mean people can quite often coordinate to put sanctions on But trying to coordinate to take sanctions off is phenomenally difficult.

It is.

Andrea 4:47

Just to summarize, I guess you could sort of explain it by saying that In terms of what the P5 plus one were giving Iran, it was lifting of sanctions that had been specifically imposed on Iran for its activity in the nuclear space primarily, though there were some slight kind of exceptions to that. But it wasn't, we weren't lifting as part of the deal, things that had been introduced under authorities related to terrorism or human rights, it was

Justine 5:17

The basket of sanctions that were imposed because of concerns that Iran was moving towards a greater nuclear capability. Absolutely, and that, that's, that's a good way to describe it. What I would also add is a lot of the legislative vehicles which imposed sanctions and combined those, those factors: terrorism, nuclear, human rights. So it became quite difficult to unpack.

What was the nuclear element and what wasn't the nuclear element. So yes, politically, that is absolutely right. This was all about nuclear. It wasn't about terrorism. It wasn't about human rights. From a legal point of view, it does become more complex because of the legislative vehicles.

Andrea 5:59

And, of course, because of the risk decisions that companies often make when looking at whether or not they want to engage with a certain market. And this was one of the really interesting dynamics that you saw after the JCPOA was implemented, where you had, you know, you're part of. I think the Iranian expectation was that European companies would come back to the Iranian market fairly quickly.

I think they maybe had loftier expectations than they should have, but they were expecting that there was going to be this wave of business coming back to Iran by virtue of the JCPOA having been agreed. And there was definitely a lag or less engagement than they imagined was going to come. And so you had actually under the Obama administration, you had that big delegation.

I think John Kerry was leading it, if I'm not mistaken, along with some treasury officials who came around to Europe and sort of went to the banks and went, you can do business with Iran now, please go do.

Justine 7:00

Absolutely. I mean, that summer of... That summer of 2016 was very busy, that whole beginning of 2016 when, you know, because we obviously had, there was different phases to the nuclear deal. There was adoption day and then implementation day. And implementation day came a bit quicker than we had expected because Iran had to give certain commitments and demonstrated that and they proceeded quite quickly there.

And so suddenly we had implementation day and the headline press was sanctions lifted on Iran. Iran is the new market. And we had our foreign secretary here in the UK talking about the tantalizing opportunities of doing business with Iran. This was the most important new market to enter the globe, the world since the fall of the Soviet Union type of scenario.

I mean, you know, it was a huge campaign there to to do business with Iran. So, so yes, and you're right. We had because I was, I had to bring together all the banks for these meetings, so we had Secretary Kerry. We had our Foreign Secretary, who was Philip Hammond at the time. They jointly held meetings. They brought together the, they were trying to bring together the CEOs of the major international banks here in the UK. And you know, but what was interesting was It becomes apparent that people don't really even understand the complexity of going back into an area such as Iran.

For a start, a number of banks invited to those meetings were under deferred prosecutions with the U.S., which meant that actually they couldn't do any business with Iran anyway. They had given a commitment not to do business with Iran. That's right. So, you know, you were bringing banks to the table, which as part of a criminal proceeding has said, we're not going to do anything with Iran for however many years.

A number of other banks have, you know, given pressure to the US not to do business. And I think what became quite apparent to Secretary Kerry was it was going to be very difficult to turn around these banks back to the table and to bring them back and do business with Iran. The other issue... You know, a lot of these banks, they employ U.S. persons.

They have a U.S. presence. Quite a lot of their key officials, whether it's their CEOs or chief legal officers, are U.S. persons. And it really meant that those people still couldn't do anything with Iran. So when we tried to encourage people to come back to the table or when we tried to sort of look at what the opportunities are and whether they could do that, It really very quickly transpired that there were so many issues anyway.

So those banks weren't keen, but actually they just weren't able to. They couldn't separate out their U.S. people, their U.S. presence. They have U.S. reporting obligations. And obviously Iran was still on the Financial Action Task Force blacklisting. There was still much wider transparency concerns. The banks were very, very cautious and wanted to see a wider set of reforms with Iran around transparency and financial crime before they would think about going back in.

Andrea 10:23

In general.

Justine 10:23

In general.

Andrea 10:24

I remember a... Member of senior management in HSBC wrote an op-ed in one of the big U.S. papers at the time after this U.S. delegation had come through town here to say, you know, you're trying to encourage us to go to Iran, but for any, you know, sensible risk-based decision, the answer is going to be no. And so you can't expect us to do this.

And I thought that was Quite interesting because, and especially, you know, given some of the uncertainty around the political situation still with Iran, As we're now seeing, you know, I'm certain some of those financial institutions feel they absolutely made the right decision not to engage.

Justine 11:06

So, I mean, what I should say is, you know, international banks are always exposed to Iran one way or another, even if you choose not to. The fact that the international market is exposed to Iran and they're such a big oil producer. At some level, you're always going to have that exposure. So, but... You're right. I mean, a number of banks came out very publicly and said that they were not going back into Iran.

A number of other banks took a slightly different position and they said, well, actually, so, you know, they may be, for example, here in the UK, we have a large proportion of our members are actually banks who have their headquarters overseas. So we had very clear, you know, agreements, trade agreements between certain Asian countries and Iran. And their banks were expected to facilitate some of those business.

So even though the banks were maybe themselves not wanting particularly to go back in and manage the risks, they were actually being pushed that way down because of the political desire to do that. But also the banks were very that they really wanted to know that this was a permanent deal. And this was definitely going to last.

So we did a lot of focus around snapback. The focus was very much on if Iran did not keep its commitment, what would happen? How would that work? We looked at the U.S. side, but the message very clearly from the U.S. was We've committed to this deal, we're in this, this will stay, this is important. And I think that actually raises a lot of questions now for looking at risk management in the future.

And again, how you roll back sanctions, because if it's under an executive order type of provision rather than the actual legislation being rolled back, it now becomes very clear that That the message you received today could be different tomorrow.

Andrea 13:06

Yeah, you're certainly right. It was noteworthy that in so many discussions I had with officials from P5 plus one countries, the assumption that the risk to the deal came primarily from Iranian cheating was You know, was pretty pervasive. That was really one of the key talking points, at least in the non-proliferation community was, well, the Iranians have, you know, this pattern of pushing the boundaries to see how far they can get.

And, you know, they might try to salami slice back their compliance. And that's something we need to be vigilant for. And no doubt, the Iranians have pushed some boundaries a little bit in their implementation. But overwhelmingly, The International Atomic Energy Agency has assessed them to be in compliance with the JCPOA. It doesn't seem like we thought that much about the potential that one of the P5 plus one would just wholesale withdraw their participation from the agreement and kind of leave the remaining parties in the state of purgatory that we're in today.

So maybe let's talk about that statement. Yeah, so I think nobody thought that was going to be the case.

Justine 14:15

I mean, to be honest, I mean, obviously, President Trump announced the withdrawal in May. And right up until that announcement, I think the European governments expected it would be some type of partial withdrawal or that they would say, we're going to renew the waivers and And the U.S. side. And but it will be the last time we have to see some further action because under under the U.S. system, because the U.S. sanctions framework is so complex, the way the U.S. could commit themselves to the international deal was.

Was to put in place a series of waivers which would have to be agreed on a periodical basis. Now, you know, everybody just thought that that would just continue. But again, that didn't. And again, this shows the difficulty of international negotiations on sanctions. It's really doing sanctions rollback has become one of the biggest challenges. And the Europeans were shocked.

I mean, there's just no two ways. They just didn't believe that they would have gone through so many years of very, very detailed technical negotiations with Both the P5 plus one and the Iranian side to then have to have one of the key partners just decide like we're walking away. I just that just didn't occur to people.

Andrea 15:49

You know, they think you still have those 11th hour trips by Macron to try to, you know, pull this back from.

Justine 15:57

So we had the UK foreign secretary on Fox News. He went on Fox News to do that. We had Macron with President Trump and, you know, it was all the kisses and cuddles type of thing. We had Angela Merkel, less kisses and cuddles, but still doing the reach out. So basically the whole EU side was banded together.

But I think what was really interesting is no one knew. At all what was going to happen. So the governments thought that they'd maybe done enough, but they were obviously liaising with the president, but then there's also the president's team within the White House, and then there's the officials within the other government departments. And I think the impression we had was that That nobody quite knew where this was going to end up.

I did a series of Congress meetings a couple of weeks before the announcement and I kept asking everybody, what do you think will happen? And everybody was just like, we have no idea. And this made it very difficult for the Europeans to respond and manage that. So when the deal was announced, they responded very angrily that this was an international deal.

It wasn't a bilateral deal between the U.S. and Iran. That the deal remained in place.

Andrea 17:19

To interject, one of the really important pieces of this is that the deal was put into international law in the form of a UN Security Council resolution. So technically, if you're measuring U.S. compliance with international law at the moment, they're in violation of a UN Security Council resolution. I don't know if there's a different legal interpretation to that, but it seems to me that that is the case.

You know, that's maybe... Politically irrelevant, but this was also, in addition to being a piece of paper signed by various parties, was also something introduced in the Security Council Chamber in New York.

Justine 17:56

So that's right. That's right. And again, it just reflects the complexity of this deal and how long it took. And it was not a perfect deal. And I don't think anybody thought it was perfect. And in many ways, it's very imperfect. But it's imperfect because of just how difficult it is to have an international deal on and dealing with different legal structures.

And different political positions on this. So you kind of have the best of what you could pull together. And that was obviously the best of what they could pull together. So I mean, within days of the president announcing his withdrawal, we then started to see a very strong counter message from the EU saying we're committed to the deal.

We actually want to expand trade with Iran. We want to ensure they have the benefits of the nuclear deal. We're going to reintroduce the blocking regulation, which I'll come on to and explain, which basically is a very old piece of legislation, which Essentially, to put it in a very basic way, prohibits people from complying with US sanctions.

I mean, I'll go into more detail about what does that really mean. But you saw all of this messaging. So there was a huge frustration, disappointment, disbelief, I would say, across the EU side, and then thinking, well, what happens next? What does this mean for oil waivers? What does it mean for international trade? How is this going to work?

Because the sanctions prior to the nuclear deal, again, had been negotiated over a very long period of time. And the way the sanctions have been built up is that they've been built up on the basis that there was international agreement and international cooperation. So what we saw in the withdrawal was we saw two timelines. Around withdrawal, we saw the and that there was different, there was different dates to for wind down periods. There was a 90 and 180 day time frames, and there were different obligations that companies had to do depending on which time frame they came into. But you know, if, if you were still doing prohibited business after that, then you would be subject to significant sanctions.

Andrea 20:24

Maybe I can just kind of give a sense of what is coming back from US Treasury in the way of sanctions in the 90-day versus 180-day period. So the 90-day period came up at the beginning of August, pardon me, I think it was the 6th of August. And that covered and reintroduced sanctions on things like Iranian trade in gold and precious metals, on the purchase or sale of Iranian rials, on issuance of Iranian sovereign debt.

And probably, I guess, the most significant one in this batch was related to the automotive sector, because that is one where you had some European companies who did engage in the Iranian market. In particularly the automotive sector. And you can correct me if I'm wrong on this, but automotive sector is one of these funny ones where it's defined in a particular way in U.S. sanctions legislation, which is that it's mostly about the manufacture of automotive products.

Vehicles in Iran rather than the sale of completed vehicles to Iran from somewhere else. So it's covering kind of manufacturing lines that Daimler and others had been setting up in Iran in the post-JCPOA period. So that's the batch of sanctions that came back on August 6th from the U.S., It seems like the Trump administration is pretty content with what's happened as a result of that, with, you know, real significant shock to Iranian currency valuation and a number of other factors.

But we've got more coming down yet in early November in the form of. U.S. sanctions on Iranian petroleum related products in particular, and in dealings with individuals or entities on the SDN list, basically the sanctions list. So those are coming back and will be Quite significant potentially as well. There's also things like insurance and underwriting that's covered in the next batch.

So just that's what we're talking about when we're talking about the treasury sanctions that are returning. And particularly as it relates to the EU, there's a few sectors there that are key. Some of the energy market and automotive sectors and financial ones might be bigger.

Justine 22:51

Yes, and I think the November sort of date is going to pose some real logistical issues because you're going to have a number of European entities which will then become essentially blacklisted. They'll become designated again in early November. And that's, you know, you've got banks here in Europe which have Iranian ownership or control. You have individuals, you know, that there's a whole there's a whole breadth, you know, so it is going to be it is going to be very challenging at the European level to to to understand how that will move forwards.

Andrea 23:28

Yeah, so tell us about the blocking regulation because that's what I'm sure that mystifies some people. Tell us about the background, where it came from in the 1990s and what it's designed to do.

Justine 23:40

So the blocking regulation is a very old, dusty piece of legislation. It has been around for two decades. It was developed in a very very different era and it was primarily developed around in response to cuba i mean it also covered iran and libya but in a much lesser way to u.s sanctions yes to u.s sanctions on cuba and again it's because the eu had a different position in their dealings with cuba than the than the u.s so the u.s brought in their sanctions And the EU decided that they didn't want to see those sanctions in Europe.

So what they did was they brought in this blocking regulation, which legally as a tool is very unclear to understand a lot of the definitions today. But essentially, it prohibited people from not doing business with Cuba purely on the grounds of US sanctions. But I think what's really important to understand is that whilst there was a very clear policy difference between the EU and the US on Cuba, there was mutual respect for each other.

So there was an agreement reached that the US banks could reject Cuban payments rather than freeze those payments. So if they came across a payment to a Cuban entity which would have been sanctioned, then they could just send the payment back and refuse to process it instead of the strict obligation where they would actually have to freeze that money.

Now, it seems, and that sort of enabled, you know, everybody to just... You know, kind of move forwards and just accept that there was difference. And also the EU exposure and investment in Cuba was significantly less. So there was also, it wasn't politically, it was in a very different environment, very different situation. But obviously, the Europeans were looking at, well, what can we do?

What's in our toolbox? And, you know, somebody decided the blocking regulation. So on the 18th of May, the Commission launched the formal process to reactivate what is, you know, which is basically a trade defense law in response to the U.S. withdrawal from the nuclear deal. The actual legislation itself is very, very broad. It covers anybody who's based in the EU, anybody who's delivering professional services in the EU, EU nationals wherever they live, EU companies wherever they live.

So we have a lot of US persons here in the EU which are covered by the blocking regulations. US banks are covered by the blocking regulation. You know, EU persons who are operating in US banks, whether it's here in the EU or in the US, are covered by the blocking regulation. And essentially what that does, it does prohibit them from not doing business with Iran purely on the grounds of US sanctions.

The primary force for the blocking regulation was to try and protect those companies that had gone back into Iran in good faith and who were politically very strongly encouraged to go back into Iran. And there is a clause within the blocking regulation which basically says that if sanctions are imposed against an EU entity, so if some type of financial penalty is imposed against an EU entity, Entity for violation of another jurisdiction sanction. So the US sanctions, then that will not be recognized. They will not have to pay. It will not be recognized, type of thing. It is a trade defense law, you know that. And trade defense laws are inherently full of gaps, you know. They're not, they're not really defense laws as such. They don't really protect you.

But politically, it was very, very symbolic. And that went through a very quick implementation process. What's important to remember is the way that this process could proceed so quickly at the EU level was they were just updating the annex to the regulation. So if they were actually trying to change the language of the regulation itself, it would have had to have gone through a longer political agreement process.

But because they were only updating the annex to basically virtually include all US extraterritorial sort of secondary sanctions on Iran, that could be done very quickly. So the blocking regulation, It's always been there. Nobody's really paid too much attention to it. Everybody found a way. It came out of the Cuba situation. People found a way of just making it sort of work.

The situation we're in at the moment is very different. You know, we see it now being spoken about in a different way. We see the governments being much more, the European governments being much more energised and frustrated about the impact that US policy is having on EU decision-making around their economic and foreign policy decision. And they want to look at trying to protect their own decision making.

So the blocking statute is one of those measures.

Andrea 29:14

So if you're a European company and you're looking at this blocking statute, I guess there's a risk stemming from two different types of penalties you could face or costs you could face if You end up complying with US sanctions and ignoring the blocking regulation. And the first is that the blocking statute seems to give member states, EU member states, the opportunity to bring their own penalties under their national law against companies that comply with US sanctions on Iran.

But then there's also this piece about damages, where basically if You're a company that's been doing business in Iran and one of the facilitators of your business in the EU ceases to engage with the Iranian market and that therefore results in you incurring costs to your own business, that you can bring claims for damages against that business partner.

So there's that civil sort of suit dimension to this as well. How do you think companies are looking at those things? Are they more worried about the civil side than the criminal penalties, which would be a pretty big political deal if member states started to aggressively pursue those?

Justine 30:28

Sure. It's really important to distinguish. The blocking regulation itself comes in automatically across all the EU members. But EU members have to initiate their own enforcement. And those enforcement provisions across the EU vary significantly. They vary from very small fines, administrative fines, to right up to unlimited fines, and in some cases, criminal liability and prison sentences. So across the EU, you have at a member state level, a very, very broad range of responses to this.

Now, what I would say is the challenge for people is they're saying, well, OK, this has been brought in. Now, does that mean we just ignore it? And if so, what does that mean for legal frameworks and due process? You know, do we just pick and choose what law we implement and what law we don't implement? And how does that work for if we're putting individual members of staff at personal risk?

Because they can be personally held liable. You know, so I think that there is there's a very fundamental principle here. So everybody has been sort of saying, well, you know, the blocking regulation has never had any teeth. It won't have any teeth. I think there is some truth in that. But I think the fear factor and the environment we're in at the moment, you can't assume that to be the case.

You know, I think there are some very frustrated governments that, you know, they would not They would not deliberately go, I think, apply sanctions against a bank for not doing business with Iran. But if there was a particular sensitive deal and the bank was just refusing to process that payment, then I think the threat may be held over individual entities and individuals of this.

But that is the enforcement framework from member states. I chaired a meeting prior to the blocking regulation coming in where we had the European Commission and a number of member state representatives there. And one of the things we were really saying and trying to stress was the need for a clearly defined enforcement policy across the EU to explain how this would be enforced.

But It's quite difficult to do that when you're talking about such a political tool. Very few people are going to do that. There is then the civil risk that you've spoken about. And I think that this is the area that we feel is we're going to have to wait and see. And so if you had, as you say, if you had a company here with an EU footprint and were able to bring forwards a civil action under the blocking regulation, Then it's really untested at the moment.

So we would have to see how that plays out. But that is certainly where industry are particularly managing, trying to manage the risk. And we view that as more of a real risk. We do view that there are businesses... Which will be impacted, or there are Iranian companies, owned companies here in the EU, which would wish to continue doing business, and they will wish to still have access to banking, they'll wish to make payments, all of those things.

That side is very complex. Now, there is a provision under the blocking regulation where you can apply for a waiver. So you can apply to the European Commission to comply with US sanctions. Now, this provision has, you know, nobody really knew it existed before because, as I say, the blocking regulation was, you know, was this dusty piece of legislation.

We all knew it was there, but we just kind of worked our way around it. Nobody focused on it, really. But now everybody is focusing on the detail. And there is this waiver application. So you have to apply in writing to the commission. You have to set out how you would be impacted. Or how the EU's impacted, right?

That's one or the other. And how not applying with US sanctions would harm the EU, what would be the impact for the EU. What would be the impact for the company. And it has to show impact on both levels, both to the EU and the company. Now, we've been speaking very detailed across all the banks about do we apply for waivers?

How do we deal with this? And each individual business will make their own decision. But I think this is one of the situations, whatever you do, you're wrong. You know, you cannot win here. So there has to be a real risk decision on are you opening up a bigger can of worms by applying for a waiver or are you best to just sit and see what the messaging is?

And the problem we have is if you apply for a waiver to comply with U.S. sanctions, what are the EU going to say? Also, you can't be in...

Andrea 35:36

Violation of the blocking regulation while you apply for that waiver, right? You have to be in compliance with it while that request is on the table.

Justine 35:45

So nobody wants to be the test case here. I mean, the commission, nobody knows how to deal with this. It is a political tool, but... How this will play out, I think we will have a good sense at some point over the next three to six months. I think at the moment it's too soon. The US have said, well, we're not paying any attention to the blocking regulation. We think it's, you know, it's a worthless tool in many ways. if there's a real impact, then let us know. I mean, a lot of the US banks, you know, have approached OFAC to speak with them about the challenges that they put in place between You know, there's very different challenges between how do you comply with US sanctions and EU sanctions and for them as well as with the EU entities.

You know, whatever you do, you're breaking someone's law. So, but I mean, OFAC, I think, have been quite clear in their responses until somebody can demonstrate a real threat. So until people start to get sued or fines are being imposed, OFAC's just going to stay where we're at. So we're at a sort of deadlock at the moment, which is rather reflective of where we're at with the discussions around Iran and the nuclear deal.

As a whole, yes, indeed. So this is a political tool. But the problem is, it's a political tool which is part of the legal framework. And it does make it very difficult for business to say which legal framework. Who's more important, the EU sanctions or the US sanctions?

Andrea 37:16

And part of that calculation must involve looking at who tends to impose the bigger fines in the sanction space, right? Because the US has become notorious for levying these enormous fines on firms in the EU that have run afoul of US legislation. Whereas by contrast, the EU has been Comparably modest in imposing those sorts of penalties. And so one of the things I will be interested to wait and see is actually after November, especially, how aggressively does the US try to enforce any sort of business in the Iranian market that did not get wound down in the 90 or 180 day periods and are therefore now in breach of the US side of the law?

That will, I think, be really interesting to see as well.

Justine 38:14

And I think that's going to become particularly apparent on oil trading and aspects around insurance related to trade. You have oil tankers or you have shipping containers, which on routes may go into an Iranian port. Previously, if they'd visited an Iranian port before, then that was really problematic from a sanctions point of view. There was a lot of ports they couldn't go into.

The insurance of those tankers couldn't be provided. So, you know, as I say, we have gone back to sanctions which had been built up over many, many years with a strong degree of international consensus. We've gone back to those U.S. sanctions, but the problem is we don't have the international consensus. And this is now just the economic actors are caught in the middle here.

And they are going to be really struggling. Because there are many governments which will continue to import oil from Iran. They have to. You know, we have parallel... I mean, I think you also have to look at the world at the moment. We have, you know, sanctions against Syria and Russia. There's... And, you know... You know, a lot of sort of key global players and energy players are now in that sanctioned sphere.

And so the ability for people just to say, we're actually going to switch our purchasing because who do they switch to? So for a lot of countries, for their own stability, They actually need to continue purchasing Iranian oil because they have to meet the needs of their own population. And if they don't meet the needs of their own population, then they're going to have civil unrest potentially.

You know, that's the argument. That is not quite so easy that you can just switch your purchasing. And that's why the oil waivers previously were negotiated in a very complex way. Bilaterally. Bilaterally. And clearly those bilateral dialogues are now having to happen again. But whether people, whether countries will be willing to have that same level of bilateral dialogue and whether they will agree to do that is really yet to be seen.

Andrea 40:29

South Korea, I think, is the one I saw a few days ago that announced that it's going to totally cut off Iranian oil. Which is interesting, but I imagine also a very political decision to not have that be the hill that the South Korean-US relationship dies on, especially at a time where there's quite a lot of friction between the two countries over North Korea-related issues.

So I imagine there's, you know, And been a decision to have that be a good conversation between the two countries from the U.S. perspective.

Justine 41:01

These decisions never sit in isolation. So for someone like South Korea, the North Korea dimension is going to be very, very important. And that U.S. element, you know, you have other countries, you know, countries which were trading partners and remain trading partners with Iran, you know, India, Turkey, you know, a whole range of countries. They, China, you know, that they will, you know, it will it will just be fascinating to see what they what they decide, but also what they decide then impacts on what Iranian related finance goes through the international system.

And then that's the challenge for global banks that you can't insulate yourself really from this. You can try and say you're not going to do a round business, but you've always got some exposure somewhere, hiding somewhere.

Andrea 41:50

For those European companies that have engaged in the Iranian market and are now deeply unsettled by where things are going and want out, but don't want to directly announce that they're doing this because of US sanctions and therefore violate the blocking regulation, is there a middle pathway that involves articulating just more of a risk-based assessment? So saying, we have continuing concerns over Angela McLean, The situation in the Iranian economy and also the lack of transparency and progress on transparency that the Iranians promise they would make, but yet have not fully delivered on and.

Angela McLean, And sort of laying out this broader risk assessment and i'm have particularly in my mind, I was reading the press release from Daimler the other day. About their decision to suspend certain activities in Iran and especially new projects that they had planned for the automotive sector in the country. And they very carefully worded it as a much broader assessment.

So they said, you know, we haven't seen the improvement in the Iranian economy that we thought would occur and described it as something that was not specifically about U.S. sanctions, though all of the media coverage I saw Pinned that to Sean.

Justine 43:08

So you had, I mean, very similar ones. You had the BA Air France announcements on suspending their direct flight paths to, you know. So yes, we've seen a range of companies and we have seen the statements, particularly recently, being much broader. And it's more about whether the business is economically viable. From a banking sector, it's often around the wider financial crime risk.

And that risk has always been there, and a lot of them have said that. So I think we do see that. We're seeing businesses be much more careful in their articulation on why they may be withdrawing from Iran. Now, in some of those cases, that's also probably true. Of course. Because, you know, Iran was held up as being this great new opportunity.

But my experience with any post-conflict, sorry, post-sanctioned environment is that those opportunities are actually very slow to materialize. We saw this with Myanmar. I was going to say, Myanmar is an excellent case for sanctions rollback.

Andrea 44:19

Yes.

Justine 44:19

Yeah, so that, you know, the rollback happened fairly slowly. It was in a phased process. People were really pushing to go in and do business there. But actually, it just takes a long time for companies to go back in. You know, you'll see a rush of some go in. But the environment on the ground has to support the ability for international companies to go back in.

The operating environment, the registration process, the access to banking. Now, with Myanmar, it was somewhat different than... I mean, completely different from Iran in many ways. But the principle of actually the time it takes to go back in was very evident there. And that was something we always highlighted in the Iran conversation, is it takes a long time for a lot of companies to go in and really...

Do all the credit ratings, establish the relationships, understand who their partners are. Now, of course, there will be some companies which are better placed to do that and they will go back in quick. And some companies never really left Iran. They maintained some type of footprint for some future point when the situation changed. Because again, you've got to remember...

Iran, within the region, is a hugely important country. Globally, from an energy perspective, it's hugely important. So there's a lot of reasons why companies would be monitoring and able to go back in quickly. But the Iranian economy is not as strong as people had hoped it would be. That will impact economic decisions. Now, you can say, is the Iranian economy not as strong due to U.S. sanctions because they've not benefited from the sanctions relief or because of internal issues?

And obviously, that is a debate that Iranian experts can have. But either way, the economy isn't as strong as people would have hoped. So some of those decisions about withdrawal on economic grounds are probably accurate. And in other scenarios... They're probably fairly carefully crafted decisions on, you know, people trying to find a way forwards of complying with US sanctions, but also being very mindful of EU blocking regulation requirements and the political dynamics around that.

So just being very careful not to get themselves caught in the middle of a EU-US spat.

Andrea 46:47

So just before we wrap up, I wanted to Ask you to gaze into the future a little bit. I know we're in kind of a wait and see mode where there's a bit of a staring contest going on between the EU and the US over this issue. But if it were to escalate, how do you think that would happen and what would that look like for the sanctions issue, including on the European side of things?

Justine 47:11

So I always used to pride myself that I could have a bit of a feel for what may happen. I have to say I am finding the world we're currently living in very, very difficult to predict. And I genuinely don't know. And I think this is part of the problem for everyone. You know, from a risk management point of view, just trying to map out the different scenarios.

I mean, I suspect on Iran, it may actually not be Iranian issues that influence how this moves forward. You know, I think we see wider tensions at the moment between the EU and the US around trade, around NATO, around security debates, around international organizations. And, you know, and whilst I think Politically, governments often are very good at isolating other factors and focusing on the issue at hand.

From what I am seeing, I think it's going to become increasingly difficult to do that. Now, there are obviously a couple of scenarios here. There is a scenario that actually Iran just does breach the agreement and then the EU will feel compelled to then look at some type of sanctions.

Andrea 48:25

I was going to throw that in as a variable, especially because we've had in the past week or two senior Iranian officials articulating this option that if the US has ripped out part of the benefit of the deal for the Iranians, the Iranians might have the option to rip out part of the benefit for Iranians. The remaining parties as well by violating, I guess, one portion of the deal while remaining in compliance with a larger part or doing something that's kind of on the fringe That removes the benefit of some nuclear restraint that the Europeans, the Russians, and the Chinese perceive.

Justine 49:05

So that is a very, very real scenario. Now, the consequences there is that the EU would then feel compelled to put sanctions back on. But But then the EU are not going to be very happy about that because that then just does accept that the deal is lost and all that effort over however many years is lost.

But if they need to do that, they probably will do that. But I think where they're most likely to try and put some effort is keeping Iran in the deal in some way or other by trying to provide some alternative banking systems. To backfill, so to speak. The problem which they have is that they were hoping that the private sector would continue that engagement.

Now, I think the realization is there that the private sector have to make decisions based on their global exposure. And the reality is, is that they will move. You know, a lot of them will move out of Iran. Some may see this as an opportunity and actually go back in, particularly some of the SMEs and some of the smaller entities.

We've seen reporting recently about certain banks actually being given permission to or being requested by the European governments to continue relationships with Iran and be a vehicle. So we may start to see the growth of special purpose vehicles with Iran. And to me, that is the only way I can really see the Europeans can honor their agreement with Iran to provide access to financial markets.

So in a bizarre way. There is potential that this could be better for Iran in a strange way from access to banking. Because they were finding it very difficult to move funds anyway. They were finding the international banks were not at the table. They weren't coming back in the way that they had envisaged. And that probably would have remained the case anyway.

But now what we're seeing is, you know, what we were seeing during the JCPOA days is that the European governments were still very much trying to encourage the international banks to come, the European banks to come back to the table. I think what they're now recognizing is those banks won't come back to the table, so they need to backfill.

So Iran may, potentially, I mean, who knows, but they may potentially have some new avenues created for them because the European government's And indeed, a number of the other international governments have to find a way of managing their own foreign policy decisions, which are separate to the US. So, you know, that's an option, you know, or scenario potentially.

Whether that comes forwards or not, I don't know. I know there is a lot of thinking being given within European capitals on is there any viable way that you could do that? What type of sectors would be particularly important? The pharmaceutical sector is a prime one. That's a very, very big sector in Iran. And there's a lot of EU markets.

Iranian pharmaceutical trade now some of that would be carved out under humanitarian type of provisions but you still need to pay find payment gateways for that you know it's still complex even if there are some provisions so So that is a scenario. So you have to basically, you have the scenario that Iran does something and the deal falls away because of Iran's behavior. So the EU have to reimpose, very reluctantly, sanctions. You have the scenario where the the Iranians somehow keep into the deal and the EU try and find some payment corridors. You, you then have a scenario where you know The international community and other international governments do not play ball with the U.S., and then the U.S. starts sanctioning those companies, etc.

And we are starting to see the growth of counter-sanctions here. Someone out there should do a dissertation on counter-sanctions.

Andrea 53:16

Because I think that's an area that's going to become so much bigger in the future.

Justine 53:21

Yeah, well, I mean, we're seeing that now. We're seeing a lot of governments think about, you know, how do they protect themselves? You know, and the blocking regulation is a type of counter-sanction. It's just whether that would get used. So... You know, there are so many variables in this. The security in the region, I think Syria will impact what happens around Iran as well.

I think the Russia-Iranian-Syria dynamic is another factor at play. You know, I think also it depends very practically what happens with North Korea as well, because governments only have so much bandwidth to sanction and do things there. So if you get distracted by another major crisis, then you move on to that one. Again, with Russia, it depends what happens there.

So I think from a geopolitical sort of stance, you can't look at Iran in isolation and try and predict what will happen with Iran solely as that's how it will move forward. I think there will just be too many other factors at play here, which is what is making it so difficult for everyone.

Andrea 54:26

Justine, thank you so much for joining me. And thank you for listening. Scott's going to tell you a little bit more about how you can get involved in our Slack channel or donate to the podcast through Patreon.

Jeffrey Lewis 54:39

If you enjoy the Arms Control Wonk podcast, you can support the podcast and our research over at patreon.com slash acwpodcast. Again, that's patreon.com slash acwpodcast, where for $5 a month or $3 a month if you're a student with a .edu or equivalent email address, you can You can get access to our Slack channel and, as we're now rolling out, a new mini-podcast called Brilliant Pebbles, which is for small, arms-control-wonk-related news stories that don't quite have enough data for a full, long episode yet, but are something we're still tracking.

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