What’s a Special Purpose Vehicle, and Can Europe Save Iran With It?

Published September 27th, 2018 - 12:43 GMT
Iranian Foreign Minister Mohammad Javad Zarif speaks next to European Union High Representative for Foreign Affairs and Security Policy Federica Mogherini during a plenary session at the United Nations building in Vienna, Austria on July 14, 2015 (AFP)
Iranian Foreign Minister Mohammad Javad Zarif speaks next to European Union High Representative for Foreign Affairs and Security Policy Federica Mogherini during a plenary session at the United Nations building in Vienna, Austria on July 14, 2015 (AFP)

By Eleanor Beevor

It’s been nearly five months since American President Donald Trump withdrew from the Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA).

The JCOPA, led by the Obama administration and supported by all major powers on the UN Security Council, (Europe, Russia and China) gave Iran relief from crippling economic sanctions, in exchange for Iran curbing its nuclear activities. But Trump pulled America out of it in May, calling it the “worst deal ever”.

But he is not only rescinding American participation in the JCPOA. He’s trying to cripple Iran economically any way he can, even if it means attacking traditional American allies with sanctions too. Washington has deployed extraterritorial or “secondary” sanctions, which would hit any company that deals in Iran.

This has forced major international corporations to choose between accessing the Iranian or the American market. And unsurprisingly, no major firm has yet opted for the former. Total, Maersk and Peugeot are just a few of the international giants that have left the country for fear of Trump’s wrath.

Still, there has been pushback. The European Union, Russia, China and other nations who have been angered by Trump’s relentless use of sanctions are now talking openly about a revolt against the dollar.

Most international transactions are made in dollars, given its powerful status as the world’s reserve currency. The dollar’s stability once made it an attractive dominator of the global financial system - a company receiving a payment wants to be sure that money will not lose its value overnight.

However, any transaction that is made in dollars, or that passes through American banks is subject to American sanctions. That was acceptable back when major powers weren’t having their foreign policies outright threatened. But now that Trump is demanding that the rest of the world follow his lead or suffer the consequences, there is a growing scramble to create systems that can evade the dollar’s power. 

 

Time is ticking for the JCPOA’s remaining signatories to persuade Iran to stay in the deal, and keep its nuclear systems in check. On November 4th, the waiver against American sanctions on Iranian oil will expire, and Iran will lose its most important economic lifeline. Oil makes up 70% of Iranian exports, and taking this away would be a chokehold on an already struggling economy. If Iran can’t trade oil, it will have to start making threats, which will inevitably lead back to nuclear enrichment.

The EU’s Foreign Policy Chief Federica Mogherini has therefore announced a new measure to keep trade with Iran open. China and Russia have agreed to lend their support, and the three European signatories to the JCPOA (the UK, France and Germany, known as the E3) have agreed to put it into practice. Their proposal is to create a “Special Purpose Vehicle” (SPV) - effectively a third-party institution that would handle transactions between Iran and companies trading with it. The SPV would, in theory, exist outside of the existing international banking system. 

What exactly that SPV going to look like isn’t clear at this stage. Though Mogherini was pictured smiling next to Iranian Foreign Minister Javad Zarif after the announcement, one might wonder whether Iranians will be reassured by a plan whose technical details are yet to be worked out.

Nevertheless, this will buy time for the pro-JCPOA Iranian officials, and help them persuade both hardliners and ordinary people that the agreement is worth sticking to. Axel Hellman, a Policy Fellow at the European Leadership Network who has closely examines US sanctions policy told Al Bawaba:

I think it’s important to note that the statement issued on Monday and the endorsement of a Special Purpose Vehicle is politically significant. It is significant for Iranian officials, who now have something concrete to point to that justifies their continued participation in the JCPOA. Additionally, it is certainly significant for the other remaining participants in the agreement, particularly the Europeans, who can now point to some progress in their uphill battle to maintain economic exchange with Iran in order to sustain the nuclear deal.”

There have since been a few educated guesses about how the SPV might work. One model that has been widely discussed as a possibility is that of a “barter system”, similar to the one used by the Soviet Union during the Cold War.

 

 

In such a system, the SPV would not handle money, but keep records of “credits”. As an example from the Atlantic Council goes as follows: if Iran exports crude oil to a French company, said French company would register an agreed amount of “credit” with the SPV. Iran could then arrange to import goods from an Italian company, and that company could claim back the credit from the SPV as payment. This does technically mean that no dollars change hands with Iranian companies.

But that doesn’t necessarily mean that the firms involved in the transactions are safe from US sanctions. Professor Richard Nephew, Senior Research Scholar at Columbia University’s Center on Global Energy Policy told Al Bawaba:

I think the SPV is a potentially imaginative way to solve one problem -- how to move money around with banks refusing to do so out of fear for US sanctions -- but it doesn't solve the others, mainly how to get companies that can also be sanctioned for business with Iran to be prepared to take that risk.  U.S. sanctions do not just target financial moves, which the SPV would address to some degree, but also goods and their movements.  The SPV simply doesn't address that need and, consequently, it is likely going to be insufficient to funnel major investment or business to and from Iran.” 

These barter systems have further problems, for the simple reason that they are highly impractical. Iran has tried making barter-style deals to keep its trade afloat under sanctions before. It used a hawala system, and sometimes brokered special arrangements with individual foreign entities. It’s not impossible, but in terms of the overall value of Iranian industries, the losses are catastrophic. In 2012, Iran was placed under multilateral sanctions, and was also thus forced to try and do without the SWIFT financial transaction network, the universal credit tracker for international business. In 2011, Iran’s oil exports brought the country $92.5 billion in revenue. But in 2012, after SWIFT transactions were blocked, its oil export revenue fell to $52 billion. 

An Iranian Oil Terminal on Khark Island (AFP)

In that instance, admittedly, the EU had sanctioned Iran as well, whereas on this occasion it is trying to save it. Not is the barter system the only option for an SPV. A bolder version could involve non-dollar transactions going between central banks. But whether this works or not depends entirely on how far the Trump administration is willing to go to see its threats through. Neil Bhatiya, a Research Associate in Energy, Economics and Security at the Center for a New American Security told Al Bawaba:

“I can see a scenario in which one or more European Central Banks (either the European Central Bank itself, or the Bundesbank or Banqe de France) are working with the Central Bank of Iran to channel payments in euros, either bilaterally or in some three-way exchange with China.  

However, even this approach has severe limitations. U.S. sanctions would apply to any bank or firm operating in that mechanism. While it would be potentially destabilizing for the U.S. to sanction a European Central Bank, it is not outside of the realm of possibility, especially given how forthright the administration has been in taking a zero tolerance approach to doing business with Iran, especially in the oil sector.” 

The SPV’s limitations will not keep all business out of Iran. Rather under sanctions, size matters. It is actually larger firms that are more vulnerable to penalties, since they can less easily evade the American market, and they cannot risk damaging their access to it either. The SPV is thus not a matter of restoring normal trading relations, but of seeing whether a different kind of company can pick up the slack. Axel Hellman continued: 

It is unlikely that the SPV could make the difference for large companies with significant exposure to the U.S. market – and thereby to U.S. sanctions. The exodus of multinational corporations from Iran that we have witnessed in the last few months is unlikely to be reversed by this initiative. However, the SPV could make a real difference to companies who are willing to take on the risk: small and medium sized enterprises (SMEs) without a U.S. nexus or significant exposure to the United States. Going forward, the focus will increasingly move to this group of companies, and a key question for European officials will be if they can devise an architecture which adequately supports and incentivizes SMEs who are interested in trading with Iran to do so.”

SMEs may be able to save some of Iran’s industry, although whether they can take over oil trading from major international firms will be the most important determinant of whether the JCPOA can still work.

Trump will fight this all the way, no matter the cost. He has been willing to make a high-stakes gamble on international security to constrain Iran, and has unflinchingly damaged historical western alliances in the process. It would be unwise to assume he will be stopped by a risk to international economic stability. But for the sake of winning this battle, he may risk losing a bigger war, that of the dollar’s hegemony.

Europe has been open about its desire to strengthen the euro’s role in international trading, and would be more than happy to explore options that undermine the dollar as the world’s reserve currency. Keeping their word on the Iran deal will galvanise that effort, an effort that Russia and China are only too happy to support.

They may not succeed in creating a viable new alternative in time to save Iran. But every time Trump overplays his hand, he weakens American currency.


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