(Bloomberg) -- U.S. President Donald Trump’s decision to pull out of the 2015 nuclear deal with Iran has left Europe’s leaders torn between Washington and Tehran, forced to choose whether to confront their most important economic and security partner, or let a signature agreement die.
They’ve given few details of how they’ll proceed, beyond a commitment to save an accord which Trump attacked as “rotten” but which they see as critical to avoiding further turmoil in the Middle East. Some European politicians are already ceding defeat.
“Of course there’s uncertainty over the next steps, but most probably Trump will get his way,” Norbert Roettgen, chairman of the German Bundestag’s foreign affairs committee, told Der Spiegel magazine. “We have nothing to offer Iran in return.”
To save the deal, the Europeans will need to ensure that Iran still gets enough economic benefit to stick with it. That, however, would mean securing protection from U.S. sanctions for European companies wanting to invest in the Islamic Republic, and it isn’t yet clear how that can be done.
There’s little time to find a solution. The U.S. Treasury Department has said companies with existing contracts will have between 90 and 180 days to extract themselves from their Iran dealings before becoming subject to penalties. And Iran has said it will only put aside several weeks to consult with European and other partners before restarting the uranium enrichment program that the 2015 nuclear agreement was designed to severely limit.
‘Desperate’
“The Europeans clearly are desperate to keep the deal alive,” said Steven Hurst, author of an upcoming book on U.S. efforts to contain Iran’s nuclear program, and a reader in politics at the U.K.’s Manchester University. “But they really are stuck in the middle here.”
Companies are worried they could lose U.S. business by trading with Iran, according to the German-Iranian Chamber of Commerce, or DIHK.
European governments have been quietly discussing for months how to protect firms -- without a clear breakthrough.
One possibility, floated by a senior EU official in February, would be to resuscitate a so-called blocking regulation that the bloc adopted in 1996 giving European companies legal protection from extra-territorial sanctions imposed by third countries. The regulation was in response to U.S. sanctions on Cuba, Iran and Libya.
However, the Office of Foreign Assets Control has since started going after companies and banks in breach of sanctions based on their U.S. status. Blocking regulations wouldn’t protect companies against the multibillion-dollar fines paid by both HSBC Holdings Plc (LON:HSBA) and BNP Bank Paribas SA over their Iran dealings in 2012 and 2015 respectively.
Euro Solution
European central banks have also discussed whether to establish a clearing system to allow Iranian oil trades in euros, according to two European central bank and finance ministry officials familiar with the issue. That could ensure transactions never touch U.S. soil as they wouldn’t be converted to and from dollars.
Preserving Europe’s oil imports from Iran could be critical in persuading the country to stick to the nuclear deal. The joint U.S.-European sanctions that brought Iran to the negotiating table reduced Iranian exports by up to 1.5 million barrels per day -- a severe economic blow. While industry estimates suggest the impact would be limited to about 300,000 barrels a day this time, the loss would still be significant with the Iranian economy facing headwinds.
The idea of a euro clearing system was met with varying degrees of enthusiasm, the officials said, in part because such a mechanism wouldn’t protect European companies with business interests in the U.S. from being penalized. Germany’s Bundesbank, for one, remained on the fence, they said.
U.K. Foreign Secretary Boris Johnson sounded more bullish in Parliament on Wednesday. “We have seen deals that can be done without conflicting with the extra-territorial aspects of U.S. sanctions, and we will be announcing further steps in due course,” he said.
Still, such a system might not be sufficient for European banks to avoid punishment. Any financial institution that has a major financial transaction with Iran’s central bank, regardless of the currency, could face secondary sanctions from the U.S., according to David Mortlock, a former director of international economic affairs on President Barack Obama’s National Security Council.
‘Still Subject to Sanctions’
“If they are in dollars they are prohibited, but even if they are not in dollars they are still subject to sanctions,” said Mortlock, now a partner at Willkie Farr & Gallagher in Washington.
Another idea is for an investment fund to finance European projects in Iran that large commercial banks are unwilling to touch due to their fear of U.S. penalties. Proposals put to the European Investment Bank appear not to have been taken up, though there are at least three such funds in development in the private sector, according to DIHK Managing Director Michael Tockuss.
The plan is for the funds to solve several problems at once, he said. Investors wary of committing funds in Iran could spread their risk in a portfolio of projects that would be regulated in Europe. A second benefit would be to provide finance for projects that are too large -- 25 million euros and up -- for the small banks without U.S. exposure that have been willing to handle Iranian transactions since sanctions were formally lifted in 2015.
‘Political Influence’
“Our idea here is to establish something as far as possible from any political influence,” Tockuss said, noting that European business with Iran had continued in the sanctions era, albeit at reduced levels.
Even if the funds come online, however, they won’t be able to resolve the problems of companies such as France’s Total SA (PA:TOTF), which last year took a 50.1 percent share in a block of Iran’s South Pars gas field. It risks losing the stake to China National Petroleum Corp. if it has to withdraw from Iran.
With few options immediately available, European officials may have to rely on seeking case-by-case exemptions from Washington as the most realistic path to save the biggest investments in Iran -- if not the nuclear deal itself.
“The extra-territoriality of U.S. sanctions makes the U.S. the economic policeman of the planet, and that is not acceptable,” French Finance Minister Bruno Le Maire said on France Culture radio on Wednesday. He said he would talk to U.S. Treasury Secretary Steven Mnuchin this week to ask how European companies can be shielded.
“There could be exemptions, there could be grandfather clauses,” he said.
(Updates with European banks facing secondary sanctions in 15th paragraph.)