Washington's Strict New Policy on Iran Could Test Ties With Allies

U.S. President Donald Trump’s reinstatement of sanctions on Iran last week may lead to Washington strong-arming European allies to abide by a sanctions regime they disagree with.

U.S. President Donald Trump’s reinstatement of sanctions on Iran last week may lead to Washington strong-arming European allies to abide by a sanctions regime they disagree with.


Photo:

Chip Somodevilla/Getty Images

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WASHINGTON—The Trump administration’s decision last week to pull out of the nuclear deal with Iran will create an economic policy challenge for the U.S.: How does it enforce sanctions that the rest of the world no longer backs?

The White House last week announced a plan to reimpose economywide sanctions on Iran in two stages over six months, banning any financial or business dealings with blacklisted entities. Any non-Iranian bank, firm or person who violates that ban risks penalties themselves, including the possibility of losing access to U.S. markets and the ability to use the U.S. dollar in trade and finance.

Few U.S. firms had re-entered the Iranian market after the 2015 nuclear accord gave Tehran sanctions relief across most of the economy in exchange for halting its nuclear development. But the rest of the world ramped up buying Iranian crude and restarted trade relations, pulling the Middle Eastern economy out of recession.

Economic Warfare

Iranian oil exports surged as sanctions eased…

$3.0 trillion

Other

France

2.5

Italy

Japan

2.0

South Korea

India

China

1.5

1.0

0.5

0

’18

’15

’14

’17

’16

2013

…but bank lending from rich countries dried up…

$2.5 billion

France

Germany

2.0

Italy

South Korea

1.5

U.K.

Spain

1.0

0.5

0

2012

’14

’15

’16

’13

’17

…while the country battles double-digit inflation and unemployment

%

40

30

Inflation

20

10

Unemployment

0

2000

’10

Source: Kpler (oil exports); Bank for International Settlements (loan data); International Monetary Fund (unemployment and inflation)

The world largely supported the sanctions regime used during the Obama administration, including America’s Western allies and China, a major purchaser of crude from oil-rich Iran. Still, it took years of high-level jawboning, shuttle diplomacy and punitive action to cut Iran off from world markets and the global financial system.

Now, all of the other parties to the 2015 agreement that President

Donald Trump

pulled the U.S. out of last week say they are committed to sticking with the accord. That, according to the leaders of Germany, France and the U.K., includes “ensuring the continuing economic benefits to the Iranian people that are linked to the agreement.” Read: They will make sure Iran still has access to global markets.

Treasury Secretary

Steven Mnuchin,

on the other hand, said last week that if other countries don’t comply with U.S. sanctions, the U.S. is prepared to use its authorities to penalize offenders, including by blocking their access to U.S. markets. “We will enforce compliance,” he said.

John Bolton,

the White House national security adviser, said in televised appearances Sunday that European countries could face U.S. sanctions if they continue to do business with Iran.

That means the U.S. may end up strong-arming European allies to abide by a sanctions regime they disagree with and challenging other world powers, such as China, that have proven reluctant to implement sanctions they say are unilateral and extraterritorial.

Western allies alone account for more than 30% of Iran’s oil exports. Adding China and India brings that total to 80%.

Some of Europe’s largest companies, including France’s

Total
SA

and

Airbus SE
,

have billion-dollar projects on the line with Iran. France’s financial system had $163 million in cross-border claims on Iranian banks in the last quarter of the year, according to the Bank for International Settlements.

Lending to Iran by advanced economies tumbled under the old sanctions regime and never recovered even after sanctions relief, in part because banks were still wary of facing U.S. action. But there were signs it could pick up. According to the Iran Labour News Agency, the country’s Bank of Sepah collectively secured $10 billion in credit lines from three banks in South Korea, Austria and Denmark.

All those transactions, from oil to shipping to finance, will be banned by the U.S. sanctions by early November.

Treasury has some flexibility in whether to penalize countries and their firms. If a country has made “significant reductions” in oil purchases of crude over the next several months, the U.S. can issue an exemption from penalties. But issuing waivers and exemptions, or failing to penalize noncompliance, undermines the intent of the strategy: to pressure Iran to the negotiating table. Those actions also encourage others to flout U.S. sanctions, undermining Washington’s credibility.

“The U.S. cannot prevaricate,” said Behnam Ben Taleblu, an Iran expert at the Foundation for Defense of Democracies, a think tank that has been critical of the nuclear accord. If the U.S. falters, failing to penalize noncompliant European companies or banks, the U.S. casts doubt over its competence and capability to enforce sanctions.

The risk of Washington punishing its allies over Iran threatens to deepen a growing diplomatic rift and complicate U.S. efforts to secure other foreign policy goals. “It’s a difficult moment,” said a senior European diplomat. “I hope the solidity of the relationship will see us through.”

Even if Europe largely complies, other countries with foreign-policy aims often at odds with the U.S. may see an opportunity. Total, for example, is considering transferring its stake in a joint venture with the National Iranian Oil Co. to China National Petroleum Corp.

The best-case scenario is that the Europeans and Americans are able to craft a new deal that addresses U.S. concerns over Iran’s nuclear development, missile program and support for regional proxies, said Jonas Parello-Plesner, a former Danish diplomat who is a senior fellow at the conservative Hudson Institute.

“Worst-case, we have a spat around whether European governments try to protect their companies, do counterlegislation, or challenge it at the WTO,” he said, referring to the European Union’s use of the World Trade Organization’s to defy the U.S. embargo against Cuba in 1996.

Despite a decadeslong U.S. embargo on Cuba, the world’s rejection of the U.S. position, including Europe, meant Washington wasn’t able to dislodge the Communist Castro government’s grip on the nation.

Write to Ian Talley at ian.talley@wsj.com

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