This is 'Winning'? Ending the Iran Deal is Alienating European Allies & Strengthening the Yuan

Published May 14th, 2018 - 01:21 GMT
Europe only has bad options. But the two signatories to the JCPOA that Trump has had the most reservations about, Russia and China, are a different story. /AFP
Europe only has bad options. But the two signatories to the JCPOA that Trump has had the most reservations about, Russia and China, are a different story. /AFP

By Eleanor Beevor

Amidst the backlash against the appointment of John Bolton - the arch-conservative hawk who wrote in 2015 “To Stop Iran’s Bomb, Bomb Iran” – to the post of National Security Adviser, there were a few arguments defending him.

The most high-minded of these tended to say that calling Bolton a warmonger and a liability showed a lack of appreciation for his philosophical worldview.

Bolton, they said, was a realist in the most radical sense of the term – for him, the geopolitical world is an anarchic, survival-of-the-fittest playground, where each nation cannot be trusted to protect any interests but its own, and the US must play accordingly.

Trump-Bolton duo

That’s as may be. But if that argument is meant to defend Bolton from the charge of being a poor strategist, it fails. For the fact is that America has had reliable, consistent partners in Europe throughout much of the past century. These alliances have allowed American and European administrations to accomplish much that they would not have been able to achieve alone.

 

 

Yet Bolton and President Trump have consistently shown a preference for strong-arming short term victories over long term strategy, as well as a brazen disregard for their historical allies. And as a result, Bolton and Trump are likely going to see a situation unfold that is wildly different from what they expected.

It is no secret that both men, but Bolton in particular, have far less interest in negotiating a “better deal” with Iran than they do in regime change. And their first hope is to try and topple the Islamic Republic’s government by strangling it economically with fresh sanctions.

The problem with that rosy assumption is that they have focused most of their efforts on preventing Europe from dealing with Iran. In doing so, the Trump administration is not just overlooking how Russia and China can protect Iran. It is handing Moscow and Beijing an opportunity to shape the world in their favour.

Meanwhile, Europe is left in the worst possible position. It has given Iran its word that it will stick to the terms of the deal. As they know, and as Trump is likely to find out, there are costs to breaking agreements. This is not to say that Europe has no options through which to defend the JCPOA.

But it doesn’t have any promising ones – certainly none that are likely to substantially benefit business dealings with Iran. Tehran has made clear that it will have to be convinced to stay party to the JCPOA with some sort of guarantee that sticking to the terms of the deal will benefit its economic growth.

Secondary sanctions

French president Emmanuel Macron, left greets Iranian president Hassan Rouhani at the Millenium Hotel in New York on September, 2017 /AFP

But if Washington follows through on its threat, then it will apply “secondary sanctions” to any company or entity that does business with Iran, American or not. This will force companies to choose between access to the Iranian or the American market. Europe may have some legal tools to work with, but they come with risks. Dr Clara Portela, a Professor of Political Science and an expert in international sanctions at the University of Valencia, told Al Bawaba:

“Some twenty years ago, the EU passed legislation banning European companies from complying with US sanctions, whose extraterritoriality is not acknowledged by the EU. They called it the "blocking statute". Without being actually applied, it helped Brussels obtaining waivers from the US allowing European companies to continue trading with entities forbidden to US operators. Choosing this path risks accentuating transatlantic tensions, or even creating a rift.”

The blocking statute is not Europe’s only option. But the problem is that all legal responses to Trump’s secondary sanctions come with the profound risk of isolating themselves through a rupture in relations with Washington. Christopher Coker, Professor of International Relations at the London School of Economics, outlined this projection to Al Bawaba:

“Here is the worst case scenario. The Iranians don't cancel the deal but stick by it, as do the Europeans. The US imposes sanctions on European companies - this week, the newly appointed American ambassador to Germany told German companies to start pulling out of Iran. The Europeans take the US to the World Trade Organisation for being in violation of international trade law. Trump declares a trade war against Europe, and renews his criticism of NATO as an obsolete organisation.

Russia is already criticising the Americans for failing to live up to their own agreements. The West, divided and increasingly insecure, backs off from further confrontation with Russia. China is always plays the long game from the side lines. The Europeans must now ask themselves whether they can really work with an administration that has men like John Bolton in it. My main concern is that we have a president who simply does not understand the value of allies and alliances.”

Only bad options for Europe

Europe only has bad options. But the two signatories to the JCPOA that Trump has had the most reservations about, Russia and China, are a different story. (It is no coincidence that Mohammad Javad Zarif, the Iranian Foreign Minister, is visiting Beijing and Moscow before Brussels to discuss the deal’s future.) But not only are Russia and China in the best position to breathe new life into the JCPOA, they have now been handed an opportunity to shape the situation to their own advantage. And their involvement makes the collapse of the Iranian regime through economic erosion far less likely than Trump and Bolton seem to be hoping.

Russian and Chinese companies dealing with Iran would likewise be liable for secondary sanctions. But such sanctions do not affect all countries equally. Dr Clara Portela continued:

“In theory, only transactions in US dollars will be affected once Washington enacts sanctions again. However, most foreign banks need to retain the ability to make transactions in US dollars. This makes financial institutions reluctant to conduct transactions with persons and entities blacklisted by Washington, since they are afraid to lose their licence to operate in the US market. Only banks that do not need to make transactions in dollar can afford to ignore that risk, and this certainly does not apply to the big European banks.”

More dollar-independence for China

Hassan Rouhani and Xi Xinping, Jan 2016 /AFP

An eastern economic power like China has a great deal more independence from the dollar if it chooses to. And it has recently created unprecedented new financial infrastructure that will allow it to exclude American financial systems, and ultimately erode the dollar’s hegemony over the international market.

Late last year, China announced plans to begin pricing and trading oil contracts in Chinese yuan rather than in dollars. Whether it was anticipating buying Iranian oil when it did this is unclear, but it is going to make a world of difference to Iran’s oil industry. Dr Kamiar Mohaddes, a senior lecturer in economics at Cambridge University told Al Bawaba:

“By re-imposing sanctions President Trump aims to reduce Iran's oil export revenue sharply so as to directly affect government revenue. However, it looks like China and India will not cut back on their imports from Iran following the U.S. unilateral sanctions (and it is in fact possible that Iran directs more of its crude to oil-hungry Asia). In order to avoid the U.S. financial system, the payments could be in, for instance, other currencies.”

 

And China has grander plans for Iran than just importing its oil. Iran has a central, and geographically indispensable place in China’s “New Silk Road”, or One Belt One Road infrastructure project.

One Belt One Road is the largest infrastructure building project in history, and China is not about to let Trump’s whims get in the way of plans that will involve a $900 billion investment. If Beijing has not already established the financial infrastructure it needs to deal unimpeded by sanctions with Tehran, (which is little more than a bank that avoids the American market), it soon will.

Russia joins fray

The S-300 missile defense system was visible during the Army Day parades in Tehran, in April 2015. /AFP

In a further sign that China is working to cut American restrictions out of some of its dealings, it signed a payment versus payment system with Russia late last year, which will allow direct simultaneous ruble-yuan transactions. Again, this is in anticipation of increased trade links with Eurasia as a result of the One Belt One Road’s development. And much like China, Russia has no desire to see the end of the Islamic Republic.

Russia and Iran are military allies in Syria, and Iran has been critical in defending their mutual friend and strategic ally Bashar Al-Assad. And though Moscow will likely face consequences for economic cooperation with Iran, the indications are that Russia is ready to weather the cost. Samuel Ramani, a specialist in Russia-Middle East relations at the University of Oxford, told Al Bawaba:

“Russia's policy towards Iran is unlikely to change in response to the resumption of US nuclear sanctions against Iran. Russia has attempted to make Iran an observer in the Eurasian Economic Union, and might use the sanctions as an opportunity to push Iran into its customs union as a full member. Russia will support Iranian business interests, but will likely face sanctions for doing this too.

But I think Russian sanctions violations in the military sphere from the US perspective will gain more punishment than in the civilian sphere (Russia supplied Iran with trade and Iraq before that with Lukoil in early 2000s without major punishments). The US imposed sanctions on Russian arms production giant Rosoboronexport on the same day that Trump withdrew from the JCPOA. This is clearly aimed as a deterrent for Russia to sell S-400 missile defense systems and other technology to Iran, and to deter other countries from purchasing Russian weapons.”

 

Despite the potential cost to some of its business, Russia is highly unlikely to leave Iran alone at this time. Even as it was becoming clear that Trump would most likely withdraw from the JCPOA, Putin told Ayatollah Ali Khamenei “I will not betray you."

More to the point, this is a development that thoroughly suits Putin’s existing strategy of fragmenting Euro-American institutions and alliances. At this game, Putin has proven exceptionally adept. But even in his best efforts, he certainly couldn’t have damaged transatlantic relations to anything like the degree that Trump has in the past few days.

Trump and Bolton have just made an extremely dangerous foreign policy gamble.

They are betting that the Iranian regime will either be panicked into accepting new concessions, or will crumble under the weight of new sanctions. But with Iran’s new economic partners in the east who have the infrastructure to sidestep unilateral sanctions from Washington, it is hard to see why it will be different this time.

The Islamic Republic has survived numerous waves of multilateral sanctions, and they still managed to begin developing a nuclear program. But now the principal obstacle to Iranian nuclear development has been kicked over, and Trump has alienated his strongest allies for no discernable gains – at least not for America.

For Russia and China, on the other hand, there is now everything to deal for.

 

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