'Clearing houses' to bypass US sanctions on Iran

A unique clearing house will be set up for European companies that trade with Iran to help bypass the newly imposed US sanctions on Iran.

The clearing house is likely to be set up within months possibly in France or Germany.

Background

In July 2015, the Joint Comprehensive Plan of Action was signed by the P5+1 and the European Union to prevent nuclear arms development in Iran in exchange for the removal of economic sanctions.

In May 2018, US President Donald Trump withdrew from the JCPOA. Soon after, the United States enforced trade sanctions on Iran and threatened to impose sanctions on companies or other countries that did business with Iran.

The sanctions were promised in May when President Trump announced that the United States was withdrawing from a 2015 deal with world powers to limit Iran’s nuclear program. Many countries, such as India, still rely heavily on Iranian oil imports which has reduced oil imports from Iran by over 30 per cent in the past few months. However, the United States on 2 November affirmed its threats of further sanctions on Iran and on companies and countries that did business with Iran. It granted waivers to eight countries, to include India, South Korea, Japan and China. The waivers will exclude members of the European Union.

Analysis

France and Germany could be the probable hosts of the special ‘clearing house’ that would help the EU continue to trade with Iran by bypassing the freshly imposed US sanctions on the country. The clearing house, known as the Special Purpose Vehicle (SPV) is an initiative to facilitate payments between countries that desire to trade with Iran. The SPV would serve as a barter exchange; it would neither be connected to the international financial system nor would it require monetary transfers between EU countries and Iran. Therefore, for instance, an Iranian firm selling into Europe would accumulate credits that could be used to buy a product from a different European firm.

The European Union foreign affairs chief Federica Mogherini earlier in September had announced that the remaining signatories are committed to Iran and will create special payment channels to do business with the country despite the US sanctions.

Britain, China, France, Germany, Russia, Iran and the EU in a joint ministerial statement said that they are mindful of the urgency and the need for tangible results.  The participants welcomed practical proposals to maintain and develop payment channels, notably the initiative to establish a special purpose vehicle to facilitate payments related to Iran's exports, including oil. However, the US has been mostly dismissive of this tool. The US special representative on Iran, Brian Hook, said: “We have not seen much, if any, demand for the SPV. We do not anticipate any significant corporation using a SPV.”

Despite joint statements by the governments of Britain, Germany and France (the three main European signatories of the 2015 deal), many European firms are privately admitting to buckle under the pressure of the sanctions.

Besides, far from improving trade with Iran, many big European companies have left Iran to avoid penalties. For example, France's Total energy giant, Danish shipper Maersk, and German insurer Allianz are some companies that decided to leave Iran.

Counterpoint

A possible challenge to the effective functioning of the  SPV’s is that the  EU has so far failed to establish a host to engage in this special mechanism. Western sources have indicated that candidates France and Germany have come forward and details including the structure of its board and shareholdings are being discussed.  The bulk of the technical negotiations with Washington have been led by France.

Brian Hook, Washington’s special representative for Iran, highlighted the risks for European companies and also warned that any EU country hosting the SPV could potentially be sanctioned. The Iranian deputy foreign minister, Kazem Sajjadpou, also expressed his frustration at the pace with which the SPV is being set up, saying: “What is lacking is both speed and efficiency.”

A failure to set up the SPV would be a humiliation for broader advocates of greater European economic independence from the dollar such as the French finance minister, Bruno Le Maire.

Assessment

Our assessment is that the reimposition of the sanctions has effectively crippled Iran’s exports. We also feel that the EU’s protection of interests in Iran is imperative for the JCPOA to progress. We believe that the threat of further sanctions even against allies demonstrates clearly the willingness of the US to weaponize its economic might in pursuit of its foreign policy objectives.