US policies drive Iran's trade partner Europe to ditch dollar to maintain economic ties

ELIF BINICI ERŞEN @elifbiniciersen
Published 18.05.2018 00:00
President Trump signs a presidential memorandum on the Iran nuclear deal in the diplomatic reception room of the White House, Tuesday, May 8.
President Trump signs a presidential memorandum on the Iran nuclear deal in the diplomatic reception room of the White House, Tuesday, May 8.

The U.S.'s withdrawal from the Iran nuclear accord has created disenchantment among its European allies and created a stimulus for them to seek alternative financing structures that aim to sidestep the U.S. dollar dominated financial system

With the withdrawal from the Iran nuclear deal, also known as Joint Comprehensive Plan of Action (JCPOA), the U.S. has created disenchantment among its allies across the Atlantic and has compelled them to look for ways to keep the accord alive. European countries such as Germany, France and the U.K. have expressed determination to continue economic ties with Iran and their investment projects in the country. In order to do that, Europe is looking for alternative financial structures for its trade with Iran and with no exposure to the U.S. dominated financial system, including euro-denominated loans and euro-based payment systems.

The nuclear deal was seen as a great step toward ensuring peace and stability in the Middle East when the P5+1 countries – the U.S., the U.K., France, China, Russia, and Germany – along with the European Union (EU) agreed to relieve sanctions imposed on Iran on the condition that the country curb its nuclear capacity in July 2015. After nearly three years, U.S. President Donald Trump announced last Tuesday that his country would withdraw from the agreement, which took effect during the term of his predecessor Barack Obama. The U.S.'s allies across the Atlantic – Germany, France and the U.K.– immediately criticized Trump's decision. European leaders expressed that they will ensure the continuity of the deal and protect their businesses in Iran because they are heavily invested in Iran's automotive, aerospace, transportation and energy industries.

A meeting between Iranian Foreign Minister Javad Zarif and his German, British, and French counterparts as well as EU foreign policy chief Federica Mogherini on May 15 also highlighted the joint determination to seek "practical solutions" for keeping the nuclear accord. "I cannot talk about legal or economic guarantees but I can talk about serious, determined, immediate work from the European side," Mogherini said.

The urgent question that pops up is how will the EU maintain commercial and economic ties, particularly energy imports from Iran, which totaled 9 billion euros in 2017. But the trade of petroleum products with Iran does not seem to be going on as the newly imposed sanctions prohibits petroleum-related transactions with, among others, the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), and National Iranian Tanker Company (NITC), including the purchase of petroleum, petroleum products, or petrochemical products from Iran.

The new U.S. sanctions provide 90-day and 180-day grace periods for European companies to withdraw from their contracts in Iran, including purchases of Iranian oil.

European countries have already issued euro-denominated loans in order to finance exports to Iran. For instance, France started offering euro-denominated loans to Iranian buyers of its goods later this year, to help trade flourish outside the reach of U.S. sanctions, state-owned investment bank Bpifrance announced at the beginning of this year.

Italy and Iran agreed on a framework credit agreement to fund investments in Iran worth up to 5 billion euros. Iran's government-owned Bank of Industry and Mine and Middle East Bank signed the accord and the investment arm of Italian state-owned holding Invitalia. Moreover, Austria's Oberbank and Denmark's Danske Bank inked framework agreements with a number of Iranian banks in September 2017, under which they will provide financing for Austrian and Danish companies exporting to Iran.

All European parties try to structure a financing model through vehicles without any U.S. link, whether to the currency or otherwise, the aim is to avoid the extraterritorial reach of U.S. legislation.

Moreover, recent reports also claimed Tehran has taken preliminary steps to establish a bank for transactions between Iran and the EU in euros. This was done to settle possible financial issues which might arise after Washington's decision to withdraw from the deal, Iranian Ambassador to Germany Ali Majedi was quoted saying.

French Finance Minister Bruno Le Maire put forward three main proposals starting with an EU-wide blocking statute similar to an EU regulation passed in 1996 designed to nullify any U.S. sanctions imposed on EU firms. The statute permitted European companies to ignore the U.S. sanctions and said that any decisions by foreign courts based on such sanctions would not be upheld in Europe.

The second proposal is looking at Europe's financial independence – what can be done to give Europe more financial tools allowing it to be independent of the U.S.? One proposal is to set up a purely European finance house to oversee euro-denominated transactions with Iran. The French minister also proposed a European agency capable of following the activities of foreign companies. With regard to the use of blocking statue, which has vague rules difficult to enforce, European Commission Vice President Valdis Dombrovskis told the European Parliament yesterday that "the EU blocking regulation could be of limited effectiveness there, given the international nature of banking system and especially the exposure of large systemic banks to U.S. financial system and U.S. dollar transactions."

Experts and businesspeople also stress that the recent outbreak of events will certainly unleash the financial creativity of European business people and leaders but the solutions might be limited and create no impact on the dominance of the U.S. dollar.

Highlighting that solutions will be limited and difficult to achieve, Esfandyar Batmanghelidj, founder of a business and media company focused on Iran, Bourse and Bazaar, stated that the situations requires a new political imagination and a new capacity for creative thinking.

"In the coming weeks, political signaling will help the most committed multinational companies to preserve their operations in Iran, in the coming months Europe will need to create new Euro-denominated banking channels to facilitate basic transactions and sales, and over the next year, Europe needs to find ways to provide equity or debt financing for Iran, by finding a way to sell bonds on the international market and by expanding the mandate of organizations such as the European Investment Bank to finance projects in Iran," he said. Yet, Batmanghelidj emphatically stated that none of these steps will significantly undermine the primary of the U.S. in the global financial system. But they can introduce a greater degree of European independence in economic statecraft and therefore the project is important for Europe in the long-term.

Patrice de Wergifosse, the head of a consulting practice in Iran, talked to Daily Sabah about the steps the EU could take to maintain business ties with the EU and how it would impact the place of the U.S. dollar.

"If a credible alternative to the trading in U.S. dollar was created, it may seduce companies for more than just business with Iran, as many institutions and companies around the world are growing frustrated of the increasing scrutiny and interference in their business from the U.S.," Wergifosse said.

"So there is a chance for euro to take a bigger role at international level, but certainly not to the point of replacing the greenback any time soon," he added. He recalled that the lift of the sanctions was supposed to trigger a reconnection of Iran to the international banking system.

However it didn't happen, as all the major European banks were still afraid of potential negative reactions from the U.S. Because of the ambivalent attitude of the U.S., he said, the Europeans did not feel compelled so far to develop an independent financial system completely isolated from the dollar and the U.S. banking system.

The withdrawal of the U.S. from the JCPOA and the re-introduction of sanctions, he concluded, might be the straws that break the camel's back and finally trigger the Europeans to start such a project.

The efforts to bypass U.S. dollar by using euro or local currencies in trade with Iran aims to protect the ongoing contracts of European companies and Europe's growing energy trade with the country as the continent looks for alternative markets to curb the dominance of Russia in its energy imports. After JCPOA starts implementation on January 2016, European giants increased business volumes with Iran and launched investments projects worth billions of dollars in the country. French energy giant Total and China's state-run China National Petroleum Corporation (CNPC) signed a $4.2 billion deal with the state-run National Iranian Oil Company in July 2017 to develop the South Pars offshore field, one of the world's largest natural gas fields. But the French energy company announced Wednesday that it will pull out of the investment plan if no sanctions waiver is received from the U.S.

In 2016, French carmaker PSA Group signed a framework deal with Iranian counterpart SAIPA to produce and sell Citroen vehicles in the country. The deal obliges the Paris-based carmaker to invest 300 million euros over the next five years for the development and production of three Citroen models, which will be sold throughout the country. PSA pulled out of Iran in 2011 under U.S. pressure.

Renault Group finalized a contract for a joint venture with Iranian carmakers. According to the terms of the contract, 60 percent of the shares of the company created will be held by Renault, the state company Industrial Development and Renovation Organization of Iran (IDRO) will hold 20 percent and 20 percent will go to Negin Khodro, the official dealer of imported Renault cars in Iran. The trade between EU and Iran has also followed a rising trend since 2013 when the bilateral trade volume was lowest since 2007 and calculated at 6.2 billion euros. With gradual increases over the years, the trade between EU and Iran reached 13.7 billion euros in 2016 and 20.9 billion euros in 2017 when Iran represented 0.6 percent of EU trade, with 10 billion euros worth of exports, mainly in machinery, transport equipment, chemistry and manufactured goods.

EU imports from Iran increased by 83.9 percent last year. The EU represented over 16 percent of Iran's trade, with petroleum products composing some 88 percent of Iran imports to the EU and totaling to 9 billion euros.

Iran's exports of petroleum products to EU have seen surge after the nuclear deal. In 2013, EU imported 74 million euros worth of petroleum products from Iran which later fell to 52 million euros in 2015. However, in 2016 EU's petroleum products imports from Iran totaled to 4.2 billion euros and 9 billion euros in 2017, demonstrating a striking rise in energy trade. EU imports of Iranian crude more than doubled last year, from 291,000 barrels a day in 2016 to around 620,000 barrels a day in 2017.

Against the backdrop of these economic engagements, Europe an Iran are working to maintain ties and safeguard investment plans. Although fully escaping U.S. sanctions may not be possible for EU and Iran because of U.S. dominance in financial markets and its political and military alliance with Europe, significant alternatives are being developed.

An international sanctions expert of Compliance and Capacity Skills International (CCSI) Enrico Carisch told Daily Sabah that trade financing with Iran may be integrated into Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET-2) a single, decentralized euro-based payment settlement system for its internal market as European partners advance rapidly for its implementation, drawing attention to the issuance of euro-denominated loans for exports to Iran. "Iran's economy will also benefit from very much increased bilateral trade agreements with China, Russia, India as well as the virtual certainty that Japan, one of its largest oil-buyer will continue to benefit from a waiver from the U.S., in order to secure its energy supply," Carisch said. China signed in February 2016 with Iran 17 agreements, boosting trade with Iran over the coming 10 years to $800 billion. "Further trade expansions are expected as Iran will feature as an important node in China's Belt and Road Initiative. These economic engagements will not be conducted in U.S. dollars, but most likely in the Chinese currency the renminbi," he added.

In fact, the renminbi's share in allocated reserves has already seen a rise with more central banks including yuan reserves. The yuan took a major step towards broader international adoption in 2016 when the International Monetary Fund (IMF) decided to include it in the basket of currencies that make up the Special Drawing Right, an alternative reserve asset to the dollar. In June 2017, the European Central Bank (ECB) has converted 500 million euros of its reserves into renminbi for the first time.

According to the IMF data, the share of renminbi reserves rose to 1.23 percent in the fourth quarter of 2017 from 1.1 percent in the third quarter of 2017. The renminbi's role is becoming more important particularly in energy trade after yuan-denominated oil futures were launched on Shanghai International Energy Stock Exchange which is primarily for delivery of medium-sulfur Middle Eastern crude, versus the Brent and WTI contracts, which are for delivery of low-sulfur, so-called light crude from the U.S. or North Sea. Therefore, yuan-denominated oil futures on Shanghai exchange are seen as an alternative financial method EU-Iran energy trade.

Barbara Slavin, the acting director of the Future of Iran Initiative at the Atlantic Council, also emphasized that the U.S. action is spurring new creativity in Europe to find ways to circumvent the U.S. dominance of the international financial system. "Europe is exploring mechanisms to update a 20 year old 'blocking' statute that could strengthen its hand in negotiations with the U.S. about safeguarding existing business with Iran," she said and highlighted some limited credit lines in euros are being extended to Iran.

"China, Iran's largest trading partner and biggest market for oil, is already doing business with Iran in yuan and is expanding its own oil futures market. Taken together, this will undercut the dollar and diminish the efficacy of sanctions going forward," Slavin concluded.

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