EU Sanctions on Iran: The European Political Context

Prior to 2010, the role of the European Union in sanctions on Iran was largely limited to enforcing targeted sanctions imposed by the United Nations from 2006 onwards. Beyond this, the EU took measures such as "adding a few names to the lists of individuals and firms subject to [UN] sanctions,"¹ but did not impose major sanctions of its own. In 2009, France, backed by the United Kingdom, for the first time openly proposed significant economic sanctions, in the form of a ban on investment in the oil industry.² In Trita Parsi's words, this "reopened divisions within the EU," and the sanctions push failed.

Since 2010, however, the bloc has imposed three rounds of increasingly comprehensive autonomous economic sanctions that go well beyond UN requirements. They have brought the EU increasingly close to a full or near-full trade embargo on Iran, a measure that recent reports suggest the bloc is also considering.

The first such round was announced in the Council Decision of July 26, 2010, which followed shortly after the passage of UN Security Council Resolution 1929 on June 9, 2010 (the fourth and, to date, final round of UNSC sanctions against Iran).³ The headline element of these sanctions was the prohibition of European investment in the Iranian oil and gas sector and the provision of "key" equipment, technology, financing and assistance for use in refining, liquefied natural gas (LNG), exploration and production. The sanctions package also included measures such as a ban on government support for trade with Iran; a ban on the opening of new Iranian bank branches in EU member states, and the sale, purchase or brokering of Iranian government and bank bonds; and a requirement that all transactions with Iran above €40,000 receive prior authorization.

The next major round of autonomous EU sanctions was announced on January 23, 2012. This imposed an embargo on the import, purchase and transport of Iranian oil (allowing deliveries under contracts already in place to continue until July 1, 2012) and of Iranian petrochemical products by EU states, as well as a prohibition on the financing, insurance and transport of Iranian oil and petrochemical products, a ban on the export of key equipment and technology to the Iranian petrochemical sector, and the freezing of Iranian Central Bank assets in the EU. The measures also included a ban on trade with the government of Iran in gold and other precious metals and diamonds. The prohibition on insuring the transportation of Iranian oil had significant implications for the global oil market, as the International Group of Protection and Indemnity Clubs — which is governed by European law — had provided insurance for around 95 percent of the world's oil-tanker fleet.⁴ The sanctions therefore severely complicated the ability of most of the world's tanker fleet to insure the transport of Iranian oil.

The third and, to date, final major round of EU economic sanctions followed on October 15, 2012. This prohibited the import or transport of Iranian natural gas and the insurance and financing of such activities, and imposed a ban on the export to Iran of graphite and semi-finished metals, including aluminium and steel. The headline measure — the ban on gas imports — is largely symbolic, given that the EU previously imported no gas from Iran and no infrastructure is currently in place for such imports, not to mention that Iran more generally is not a major gas exporter, though the other measures have more of a real impact. The measures also included a prohibition on the provision of "software for integrating industrial processes"; a ban on the provision of "key naval equipment and technology for ship-building, maintenance or refit"; a full ban (with humanitarian exemptions) on new (private) financial-support measures for trade with Iran; a ban on all transactions between EU and Iranian banks unless there is advance authorization; a ban on the construction of oil tankers for Iran, the supply of shipping for the transport or storage of Iranian oil and petrochemical products, and flagging and classification services for Iranian oil tankers and cargo ships; and additional restrictions on the export of dual-use items to Iran.

Such measures have been accompanied by repeated expansion of the EU's blacklist of sanctioned Iranian individuals and entities subject to measures such as asset freezes and travel bans. As of December 2012, this stood at 490 entities and 150 individuals.⁵ These sanctions and their enforcement have also had important implications for trade between third countries and Iran. On March 15, 2012, the Council instructed the Belgium-based SWIFT — the world's largest financial messaging network — to disconnect around 25 Iranian banks blacklisted by the EU, further impeding the ability of other countries to do business with Iran.⁶

The bloc's sanctions may not end there. In early October 2012, shortly before the announcement of the third major package of EU sanctions, Reuters reported that member-state governments were also discussing the possibility of imposing a full embargo on trade with Iran.⁷ While the report noted that such an embargo was "still taboo" and faced opposition within the bloc, it is worth noting that the oil embargo was passed despite reports of similar obstacles and concerns.⁸

EU RESPONSE TO U.S. SANCTIONS

EU policy towards U.S. extraterritorial sanctions on Iran has also undergone a notable change. In 1996, the United States passed the Iran and Libya Sanctions Act (ILSA, later shortened to the Iran Sanctions Act, ISA), which instructed the president to impose sanctions on non-U.S. companies investing in the Iranian oil and gas sector, to restrict their ability to do business in the United States.⁹ The legislation came close to sparking a U.S.-EU trade war. The EU strongly opposed such extraterritorial measures and threatened to take the case to the World Trade Organization (WTO).¹⁰ According to one newspaper report, resisting such sanctions was "a matter of principle"¹¹ for European governments.

The row was largely resolved in the form of an agreement that Washington would not impose sanctions on European firms in violation of ILSA (the legislation effectively allowed the president to choose not to impose the sanctions) if the EU would refrain from taking the dispute to the WTO and cooperate on other matters. In practice, prior to 2010, no company — European or otherwise — was sanctioned under ILSA/ISA. Nevertheless, the EU forcefully reiterated its opposition to the legislation in 2001 (when the act was extended): "Unilateral sanctions laws with extra-territorial effects, such as ILSA... violate international law and state sovereignty and are prejudicial to the rights and interests of the European Union."¹²

Since 2010, the United States has imposed a range of new extraterritorial (or secondary) sanctions relating to Iran. The first were contained in the Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA),¹³ signed into law on July 1, 2010. Among other stipulations, it directed the president to impose sanctions on firms selling Iran refined petroleum products and deepened some of the sanctions on oil and gas investment in ILSA/ISA. More such measures followed in the National Defense Authorization Act (NDAA) of 2012, signed into law on December 31, 2011. The NDAA directed the president to apply sanctions against banks that conduct transactions with the Iranian Central Bank, while providing for waivers if the government that has primary jurisdiction over them has "significantly" reduced oil imports from Iran in the last six months. The sanctions against Iran under CISADA were further expanded in the Iran Threat Reduction and Syria Human Rights Act of 2012, signed into law in August of that year, and again under the Iran Freedom and Counter-Proliferation Act of 2012 (part of the 2013 NDAA).¹⁴

In addition, since around 2006 the U.S. government has been pressuring banks around the world to reduce their ties with Iran, through a program launched and run by the former undersecretary for terrorism and financial intelligence of the Treasury Department, Stuart Levey, who served in both the George W. Bush and Obama administrations until March 2011.¹⁵ The U.S. administration in 2008 also banned "U-Turn" transactions involving Iranian clients and imposed large fines on banks for violations of previous U.S. sanctions on Iran. These, in addition to ambiguity over such financial sanctions, have further reduced the appetite of non-U.S. banks for Iran-related business.¹⁶

The EU reaction to the new measures has been markedly different from its stance in the 1990s and early 2000s on ILSA. While member states continue to regard extraterritorial sanctions as illegal and to express their concerns to Washington in private as well as to lobby for exemptions,¹⁷ in public the bloc and its member states have been largely silent on the new U.S. secondary sanctions and have refrained from issuing any further threats, such as taking the United States to the WTO. This is despite the fact that the new secondary sanctions represent a major expansion of such measures and also give the president less room to waive them; indeed, the U.S. administration has actually sanctioned some (non-European) firms under recent legislation.¹⁸ Despite ongoing behind-the-scenes opposition, the EU stance arguably represents an effective capitulation to the U.S. assertion of its right to put such measures in place.¹⁹

EXTERNAL CONTEXT OF THE EU SHIFT

The EU imposition of sanctions and the lack of public reaction to the new U.S. extraterritorial sanctions represent a significant shift in the EU position. One former U.S. official has called the change "remarkable and stunning..., given where they were on sanctions in general and Iran in particular."²⁰ Of course, this change occurred over many years against a backdrop of significant new developments relating to Iran's nuclear program, EU-Iran relations and U.S. policy. The EU positions on sanctions between the mid-1990s and 2001 were formulated before the Iranian nuclear program had transformed into one of the most high-profile issues on the international agenda. This followed the revelation in 2002 that Iran was building a large-scale uranium-enrichment facility at Natanz and a heavy-water plant at Arak, the resumption by Iran of uranium enrichment in 2005, and a rapid expansion of centrifuge capacity at Natanz and low-enriched uranium stockpiles in subsequent years. The profile of the nuclear dispute increased further with the revelation in 2009 of construction of another enrichment site at Fordow (since completed), and the move by Iran to enrich uranium to 19.75 percent. Such developments appear to be the main source of EU motivations for imposing sanctions. In addition to its generally stated commitment to combatting WMD proliferation, EU officials appear to be concerned that Iran's acquisition of a nuclear weapon or the capacity to produce nuclear weapons could spark a destabilizing nuclear arms race and possibly even a nuclear war²¹ in a region that holds the bulk of global oil reserves. The bloc also fears that failure to block (or to be seen to be trying to block) Iranian progress could also lead to an Israeli (or eventually U.S.) military strike against Iran, potentially precipitating a regional conflict with damaging consequences for the global economy.²²

The changes also come in the context of a hardening of the wider international community's stance towards Iran. The late 2000s also saw the referral of the Iranian nuclear case to the board of the IAEA and then to the UN Security Council. From 2006 onwards, the Council repeatedly demanded Iran cease enrichment and imposed four rounds of sanctions; in 2011 the IAEA, also for the first time, reported that what it had identified as Iranian research into a nuclear warhead might have continued beyond 2003, and that some activities might be ongoing.

Furthermore, between 2002 and 2005, France, Germany and the UK had tried and failed to negotiate a range of agreements with Iran to improve ties and later resolve the nuclear standoff, causing a deterioration in EU-Iran relations. This was exacerbated by the 2005 election of Mahmoud Ahmadinejad, who has repeatedly made inflammatory statements on Israel and the Nazi holocaust. Tensions deepened following the repression of anti-Ahmadinejad protests after the 2009 Iranian presidential election. This period also saw the detention of several European nationals by Iranian security forces, and the attack in November 2011 on the British embassy by members of the Basij militia, following the adoption by the UK of sanctions banning transactions between British and Iranian banks (with exemptions for humanitarian activities and family remittances). The upshot was a break in diplomatic relations between Iran and key EU member states. At the same time, President Obama's early attempts to first "engage" Iran, though brief, nevertheless also generated goodwill and foreign support that allowed him to persuade allies to strengthen sanctions against Iran. The United States also appears to have put significant pressure on EU states to bolster their sanctions.²³

These oft-cited developments are of paramount importance in understanding how and why the EU arrived at its current position. However, they largely consist of developments outside the EU to which it has reacted and do not take into account the internal political context that helped to shape such reactions. In fact, though there are some broad constants in EU foreign policy, it is also in part a product of changing internal political dynamics, to which I will now turn.

POLITICAL CHANGES IN THE "BIG THREE"

To examine how internal political changes affect EU foreign policy, it is essential to look at political developments within member states.²⁴ The three most powerful European countries — France, Germany and the UK, the EU3 — tend to take the lead on EU foreign-policy decisions, in general,²⁵ and have notably done so as regards policy on Iran and sanctions.²⁶ Recent major reforms in fundamental EU regulations may also have slightly increased the big states' influence.²⁷

Beginning with the UK, it may seem notable that the first set of autonomous EU sanctions were passed about three months after the Conservative-Liberal Democrat government came to power in 2010. However, this in fact does not seem to have led to a significant change in British policy or played a major role in driving or facilitating the shift in the EU position. Rather, the British stance appears to have been marked by continuity across recent governments (though it may be that the new government pursued sanctions with more energy and vigor). The UK under the (new) Labor administrations of Tony Blair and then Gordon Brown was already strongly pro-American and had previously tended to be the most hawkish of the EU3 on Iran and the nuclear program.²⁸ The previous government had already been aggressive on, for example, designating Iranian banks and had, with France, proposed a ban on energy investment similar to that agreed to the previous year, before the elections.²⁹ This continuity in policy is unsurprising. Maintaining the "special relationship" with the United States has been a key British foreign-policy priority since the 1956 Suez crisis, and Britain has long had strained relations with Iran, exacerbated by tensions and competiton between the two during the British occupation of southern Iraq in the mid-2000s.

Political change in France, however, played a much clearer role in the hardening of the EU stance, above all in the form of the election to the French presidency of Nicolas Sarkozy in 2007. Under the French political system, foreign policy "is made almost entirely by the president himself, more so than in any other democratic system."³⁰ This change of presidents had major implications for policy on Iran sanctions.³¹

The presidency of Sarkozy's predecessor, Jacques Chirac (1995-2007), was marked, following the 2003 Iraq War, by a deterioration in relations with the United States. Chirac appeared sceptical about sanctions and more relaxed than others about the Iranian nuclear program. Notably, in September 2006, Chirac called for a halt to threats of additional sanctions on Iran, suggesting that they were ineffective in general, and said that any additional measures should be "moderate."³² Chirac also reportedly implied that "one or two" Iranian nuclear weapons would not be "very dangerous," though he was subsequently forced to publicly walk back these comments.³³

Sarkozy's election marked a major change. His presidency intensified the already unique degree to which French presidents control foreign policy. U.S. embassy cables suggested that Sarkozy had gained "unprecedented" power over foreign affairs.³⁴ Furthermore, Sarkozy's attitude was characterized by a strong "Atlanticist" inclination. U.S. diplomatic cables described Sarkozy as "instinctively pro-American and pro-Israel," "viscerally pro-American" and "the most pro-American French president since the Second World War."³⁵ Sarkozy's Atlanticism was most famously exemplified by his April 2009 decision to reintegrate the French military into NATO's command structure.

In addition, Sarkozy had strong feelings on Iran and at times appeared to take a more hawkish approach than the United States under Obama.³⁶ "His position was that Iran was a matter of the gravest international security concern, including for France."³⁷ France appears to have been a prime mover on sanctions. As well as proposing the energy-investment ban in 2009, it also appears that France first proposed the EU oil embargo on Iran in late 2011, having previously suggested it might even undertake a unilateral embargo.³⁸ Although Sarkozy was no longer in power at the time the (to date) last round of EU sanctions was imposed, his coming to power played a major role in the initial hardening of the EU's stance on Iran sanctions, setting in motion a dynamic that continued under his successor Francois Hollande. (It is also notable in this respect that the headline measure of the third round of the sanctions, the ban on gas imports, is largely symbolic, as discussed above).

Developments in Germany were in some ways similar. In 2005, two years before Sarkozy's election, Gerhard Schröder, a chancellor who, like Chirac, had fallen out with Bush over the Iraq War, ceded power to another "Atlanticist," Angela Merkel. The change in Germany's head of state does not appear to have had as decisive an impact on the Iran issue as Sarkozy's election did, however; Germany's position seems to have hardened more gradually. An important difference between the two is that the German chancellor's influence over foreign policy is not as total as that of the French president, due to the traditional sharing of power with the foreign minister, a coalition partner.³⁹ Germany also had particularly strong economic incentives to resist rapid movement on sanctions, given its status as Iran's largest trading partner in the EU.

Nevertheless, some observers see the eventual shift in the German position as having been an important factor in the hardening of the bloc's stance,⁴⁰ and domestic political factors may also have played a role. A key development here appears to have been the replacement, following Germany's 2009 federal elections and a change in the make-up of the ruling coalition (albeit with Merkel still at its head), of Foreign Minister Frank Walter Steinmeier of the Social Democratic Party with Guido Westerwelle of the Free Democratic Party (FDP). Supporting this interpretation is a January 2009 article in Le Monde reporting that, while Merkel supported the French and British proposal that month to ban the provision of equipment and technology to the Iranian oil industry, Foreign Minister Steinmeier — despite having been a supporter of the two-track strategy of dialogue combined with the threat of sanctions⁴¹ — reportedly opposed it. This deprived the initiative of full governmental support.⁴²

The following year, with Westerwelle as foreign minister, the EU agreed to impose similar sanctions. This shift may have been in part due to support from Westerwelle himself. However, the change in foreign minister also appears to have strengthened the Chancellery at the expense of the Foreign Ministry. Merkel reportedly backed stepped-up sanctions the previous year, reducing the importance of the Foreign Ministry's position, regardless. According to a former German diplomat who worked on Iran:

Westerwelle was politically sidetracked by his position as the head of the [FDP], which entered a very difficult political phase when Westerwelle became Foreign Minister....⁴³ With a Foreign Minister who is politically occupied with other issues (as Westerwelle was) many important foreign policy issues came under the leadership of the Federal Chancellery....With this switch in influence came also a "hardening" of the German position. In the Foreign Ministry there was [also] a certain amount of disappointment [with the failure of negotiations with Iran], which allowed for the tougher position of the Federal Chancellery to take hold.⁴⁴

THE WEAKENED SKEPTICS

While the views of EU3 leaders are decisive in foreign policy, the views of other member states remain important, given the need for unanimity on Common Foreign and Security Policy (CSFP) decisions. However, despite reports of significant scepticism among some EU member states on autonomous sanctions,⁴⁵ and pressing economic motivations for some to oppose them, such states do not appear to have significantly hindered the imposition of sanctions against Iran.

One likely important development in the formulation of EU sanctions was the weakening of European states that were skeptical of a major escalation in sanctions, most of which (mainly southern European countries) were badly affected by the Eurozone crisis. Opposition to sanctions appears to have varied depending on the type of sanctions proposed.⁴⁶ Nevertheless, a 2009 U.S. diplomatic cable that makes reference to the existence of "pro- and anti-sanctions camps" at an EU meeting,⁴⁷ while not actually defining the "anti-sanctions camp," refers to Greece, Cyprus, Ireland, Portugal, Spain and Sweden as questioning some of the premises behind sanctions.⁴⁸ It is notable that, with the exception of Sweden, all were among the countries hardest hit by the economic crisis.

Several of these countries might have been expected to oppose the oil embargo particularly strongly. One of the most seriously affected countries was Greece, which relied on Iran for a significant proportion of its oil imports (13.8 percent in 2010, though the figure was significantly higher in previous years: 23.8 percent in 2009 and 33.1 percent in 2007).⁴⁹ It also benefited from favorable payment terms that allowed it to buy Iranian oil on 60 days' credit without the need for bank guarantees, which were generally not available to it (some suppliers later charged Greece risk premiums in the absence of such guarantees.⁵⁰) Greece might in any case have been reluctant to be the lone hold-out on sanctions;⁵¹ however, the country was facing a major economic crisis and was effectively being bailed out by northern European countries, pro-sanctions Germany in particular. In addition, given the importance of the United States in determining IMF bailouts, Washington is likely to have played a major role in persuading Greece to agree to the sanctions. This was not an entirely straightforward dynamic; the former German diplomat said that Greece's economic situation made other member states more, rather than less, sensitive to Greek concerns: "There was a fear of collapse, which meant they got more support." Nevertheless, as The Financial Times put it in the run-up to the imposition of the sanctions, "The EU's financial support in the form of a €110bn bail-out package gives it enormous sway over Athens."⁵²

The other significant purchasers of Iranian oil within the bloc were Italy and Spain (around 13 percent of Italian and 14.6 percent of Spanish crude imports in 2010).⁵³ Between them, they accounted for around 70 percent of EU purchases of Iranian crude in 2011.⁵⁴ Italy also had significant trade interests in Iran. While not in as dire financial straits in the run-up to the sanctions as Greece, both Italy and Spain were among the countries worst-affected by the Eurozone crisis and likely fearful of becoming dependent on northern European states, Germany in particular, to bail them out. Domestic political developments may also have played a role here. The election of the more pro-American Partido Popular in late 2011 may have helped put an end to any objections to the oil embargo from Spain, which had previously been one of the most skeptical EU members on Iran sanctions.⁵⁵

THE FALLING COST OF SANCTIONS

There is a third and final factor likely to have helped the EU take the decision to harden its sanctions policy. In the case of at least some of the sanctions, their effective economic costs had gone down. While this is arguably an external factor, given that the reasons for the falling costs were U.S. pressure and the deteriorating investment environment in Iran, it would have manifested itself politically as an internal development — through, for example, reduced pressure from economic ministries over sanctions — and played into EU economic calculations rather than foreign-relations debates.

Most prominent in this category was the stand-out measure of the first set of escalated sanctions in 2010: the embargo on European investment in the Iranian oil and gas sector, as such investment had come to a more or less total halt several years previously. "All oil majors had given up by 2007-2008; there was an investment strike long before the EU made it illegal,"⁵⁶ Sir Richard Dalton, former British ambassador to Iran, said in an interview with the author. This meant that the immediate practical implications of the sanctions for EU companies was limited at best. (The sanctions included an exemption that allowed ENI of Italy, which was continuing to receive payment in oil from Iran as part of an old buy-back contract, to continue — though in practice other factors have made it difficult to receive the oil). Reasons for this include fear of U.S. extraterritorial sanctions, informal pressure from the United States not to invest in Iran, and a deterioration in the investment environment in Iran for Western oil companies — who found Iran's oil buyback schemes and associated delays "increasingly unattractive⁵⁷ — as well as for Western business in Iran in general.⁵⁸

Although to a much lesser extent than in the case of the energy-investment ban, U.S. sanctions and pressure have also likely blunted the effective impact and cost of measures (such as restrictions on banking relations and export credits) making general trade more difficult with Iran. Pressure on banks not to deal with Iran has made payment increasingly difficult,⁵⁹ and some industries in Europe appear to have admitted defeat on U.S. extra-territorial sanctions,⁶⁰ reducing the impact of the EU's own sanctions and hence pressures on member-state governments. European companies dealing with Iran also face additional pressure from groups, such as the U.S.-based United Against Nuclear Iran (UANI), that may have driven some to reduce business regardless of sanctions.

The same logic also applies to some extent to the oil embargo. For example, in September 2010, more than a year before the embargo was imposed, The Financial Times reported that pressure was already causing Iran significant difficulties in selling its oil due to problems of payment and shipping.⁶¹ Furthermore, the extraterritorial measures taken by the United States under the 2012 NDAA (see above) obliged foreign countries to reduce their purchases of Iranian oil "significantly" every six months in order to avoid the imposition of sanctions on their banks. In the absence of an EU oil embargo, it seems likely that EU countries would have felt obliged to respect this (especially given that, as noted above, the United States has actually started to apply extraterritorial sanctions, and recent U.S. measures have given the Obama administration less and less discretion in applying them, steadily squeezing oil imports.)

The point here is not that recent EU sanctions have been purely symbolic, or that their economic costs to EU member states have been insignificant; clearly they have entailed major costs. However, factors such as U.S. pressure and the deteriorating investment environment in Iran have nonetheless seen the effective cost of many measures fall in recent years. At the same time, other factors such as U.S. pressure, the outlook of current EU leaders, and fears of proliferation and a regional war have seen member states' assessment of the benefits of sanctions rise. Combined, the various dynamics are likely to have made the imposition of sanctions significantly more attractive for EU member states.