On September 24th, 2018, in New York, on the sidelines of the UN General Assembly session, EU Foreign Minister Federica Mogherini announced the European Commission’s decision to create a “special financial instrument” to support trade operations with Iran.
The purpose of this instrument is to reduce the pressure of US sanctions on Iran’s economy and to maintain agreements with Tehran concerning its refusal to further develop its own nuclear program. The European Commission’s decision to introduce a “special financial instrument” for Iran aims to demonstrate to all international partners the EU’s commitment to the agreements reached with Iran in 2015 and to provide companies that continue cooperation with Iran the legitimacy and legality of their activities under EU law.
The actions of the EU foreign minister were supported by China, the Russian Federation, France, the United Kingdom and Germany.
On September 25th, 2018, Wang Shouwen, Vice Minister of Commerce of China, announced that China and the Russian Federation would unite efforts to counter Washington’s negative impact on trade tariffs and sanctions imposed on their economic agents (companies) in connection with the situation around Iran.
In May 2018, since the United States announced its withdrawal from the treaty on Iran’s termination of its own nuclear program signed in 2015, the United States resumed sanctions against Iranian companies and their counterparties in the aviation, metallurgy, automotive sector and operations related to the trade of Iranian gold.
As of November 4th 2018 the US plans to extend a package of financial sanctions against Iran and oil and gas companies, which amounts to 70% of Iran’s total exports. At the end of August 2018 oil exports from Iran, compared with July, dropped by 150 thousand barrels per day and amounted to 3,584 million barrels per day. It is expected that with the onset of US sanctions against Iran in November and by the end of this year, Iranian oil exports will have dropped by about 1 million barrels per day on the whole.
The financial instrument proposed by the European Commission is intended to ensure the freedom of economic transactions for companies that, despite the threat of US sanctions, will continue their trade cooperation with Iran. The EU plan foresees the creation of a financial institution that will service financial transactions between European and Iranian energy companies. It is expected that trade operations by means of a “special financial instrument” will not be made in US dollars, but in other currencies (e.g. euro).
According to the expert of the Washington Foundation for Defense of Democracies, Behnam Ben Taleblu, taking into account the dominance of the American currency in the global financial system, the “special financial instrument” of the European Commission will be less effective than expected in Brussels. It will all depend on how far the US administration is going to increase pressure on Iran and its business partners and the intensification of political and economic relations with Brussels. Therefore, the question whether the European companies will trust the “special financial instrument” proposed by the European Commission and whether it will retain importers of Iranian oil from further US sanctions remains open.
Thus, the French “Total SA” did not test the US sanctions regime and has already shut down all operations related to the development of hydrocarbons in Iran, and European oil refineries have already significantly reduced the volume of oil imports from Iran, the French “Peugeot” and “Renault” as well as the German “Siemens” and “Daimler” also suspended all operations in Iran.
According to B. Ben Taleble, the risk of losing access to the market, estimated at 20 trillion USD, and isolation from the international SWIFT payment system is quite significant for the European companies to ignore it.
Jarrett Blanc, the former Obama administration representative, believes that the EU decision is more symbolic and its real functionality will depend on further actions by the PRC, India, Russia and Turkey on oil trade with Iran. At the same time, according to the expert, the payment mechanism that Brussels plans to create could be the starting point for the degradation of political and diplomatic dialogue between Washington and Brussels.
It should be noted that in August 2018 German Foreign Minister Heiko Maas made a statement on the need to create a new European payment system independent from the United States, which is currently controlling the global SWIFT payment system. The creation of such a system, according to German politician, should strengthen the autonomy of the EU economy from decisions taken by the United States without the consent of the EU. According to H. Maas, the EU should create its own independent Monetary Fund and its own payment system, where, euro is used as a payment instrument, instead of the dollar.
In the long run, the EU decision on the introduction of a “special financial instrument” could undermine the dollar’s position as an international payment instrument and significantly weaken the credibility of the stability of the reserve fund and the US dollar as a means of payment in international trade. As a result, this may lead to the formation of a “new global banking architecture”. Other countries, including China and Russia, will be able to use euro in the foreign trade by means of the “special financial instrument” of the EU, and such transactions will remain non-transparent (closed) for control by the US financial system.
Consequently, the European Commission decision to introduce a “special financial instrument” aims to protect Iran from withdrawal from the treaty on freezing its nuclear program and to keep Iran’s economy from complete collapse.
The European Commission can legitimize and enforce all transactions that Iranian and European companies use with the help of the tool. In addition, such a tool can be used to carry out financial transactions between Iran and third countries (China, Russia, India, Turkey, etc.).
In the long run, the introduction of the EU “special financial instrument” can create conditions for the formation of an alternative US-controlled SWIFT, the European trading system and reformatting the existing “global banking architecture”. This may weaken the US influence on the world economy and the dollar’s value as a reserve currency in the world.
Implementation of this scenario could lead to an aggravation of the geopolitical confrontation between Washington and Brussels.
