Can blocking regulations help Europe protect its Iran business from Trump?

Bourse and Bazaar | Esfandyar Batmanghelidj: In the last week, European business leaders and policymakers have grown more vocal about the possibility that the European Union would employ blocking regulations to protect European businesses from the reach of US secondary sanctions on Iran. These regulations would penalize European companies for complying with secondary sanctions, which may snapback if the Trump administration decides to withdraw from the Iran nuclear agreement.

Total CEO Patrick Pouyanné became the first high-profile European executive to publically call for such measures to be considered, disclosing that Total has been in discussions with French and European authorities about “means to protect investments already made in Iran, even in the case of the return of sanctions.”

Speaking at a conference in Paris last week, Denis Chaibi, head of the Iran Task Force of the European External Action Service, stated that the EU was “looking at a number of possibilities” regarding the regulations.” In his assessment, “it is not complicated to do it legally in that the legal instrument exists, but it doesn’t require a huge internal debate,”

These public statements come as European concerns grow regarding the Trump administration’s ultimatum to “fix” the Joint Comprehensive Plan of Action. The critical deadline is May 12, when the United States will need to once again waive its secondary sanctions on Iran. Failure to do so would see secondary sanctions “snapback,” exposing European companies to extraterritorial penalties for their commercial activities in Iran.

But even if the European Union finds the political will to reinstitute blocking regulations in the event of snapback, it is unclear whether they fully effective as a standalone measure to protect European trade and investment in Iran. Blocking regulations are a legal mechanism which seeks to mitigate the extraterritorial effects of sanctions under Public International Law (PIL), the body of law that governs relations between sovereign states and their unions, such as the European Union.

International trade attorney, Edward Borovikov, managing partner at the Brussels office of Dentons, a global law firm, notes that under international law “Sovereign states are expected to exercise moderation and restraint if their legal acts may affect vital economic and commercial interests of another state. But sometimes states violate the principle of restraint for their own national security considerations.” The snapback of secondary sanctions by the Trump administration would represent once such case. In such situations, “there is no efficient and universal legal avenue under PIL to challenge such non-compliance,” says Borovikov.

While the World Trade Organization (WTO), which was established under the authority of PIL, may seem a venue to challenge extraterritorial sanctions which restrict trade in goods and services, it is unlikely Europe would be able to successfully challenge the snapback of U.S. sanctions under the WTO’s legal authority.

Article XXI of the General Agreement on Tariffs and Trade (1994) declares that nothing in WTO rules will “prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests.” Borovikov explains that this exemption “means that member states can depart from WTO commitments on trade in goods and services” and points out that while there have been several attempts to bring to WTO adjudication disputes on the application of national security exemptions, “none of the cases ended with conclusive guidance.”

In 1996, the European Union began a dispute process against the United States with regard to extraterritorial sanctions against Cuba. This dispute reached the state of WTO consultations. But ultimately, the EU and US reached a political solution in which the US assured that its secondary sanctions would not be enforced upon European companies. The WTO case was suspended.

The political solution was necessary for a simple reason. “Even if the WTO had found in the favor of the EU, deciding that the national security exemption did not apply, the United States was never going agree with a WTO’s interpretation of its national security requirements,” observes Borovikov. “The idea that the United States would comply with WTO recommendations in such a situation is hard to believe.”

Given the dead end presented by the WTO dispute avenue, the EU has sought legal mechanisms that rely on the legal authority of the union and its member states. The legal act is the 1996 EU Blocking Regulation. This regulation was established in response to US sanctions on Iran, Cuba, and Libya. The regulations prohibit EU entities and courts from complying with foreign legal acts, such as sanctions laws, listed in an annex. Borokivov explains that “in principle any new extraterritorial laws of any third country may be added to the Annex and indeed help EU persons to continue business with a sanctioned third country.” However, the past success of such regulations in enabling European companies to continue conducting business in these jurisdictions such as Iran was the result of political rather than legal influence.

Borovikov warns that these blocking regulations “cannot provide full protection from secondary sanctions because if the EU persons doing business in the US start economic activities in the Iran, they are at risk of being penalised under the US sanctions regime.” Even if the European Union seeks to penalize its companies for complying with US sanctions, “it is clear that a lot of EU companies would simply face a dilemma between doing business in the US or Iran and where to accept the penalty,” he says.

Given the fact that the US market both frequently offers more attractive economic opportunities and poses more severe penalties and consequences for non-compliance with US law, most companies are likely to wind down their Iran operations and pay any penalties that the EU or their national governments may levy under the blocking regulations.

However, the discussion about blocking regulations is nonetheless worthwhile. Borovikov notes that the prospect of such regulations has in the past played “an important role in bringing about an acceptable solution. The regulations are secondary to the political process between the US and EU and its member states that will hopefully lead to an understanding on Iran business.”

Ellie Geranmayeh of the European Council on Foreign Relations, echoes this assessment: “The threat of reviving the EU blocking regulation in itself can be a useful political tool for Europe to create a cost for the Trump administration and make it think twice about its actions.” Moreover, while the blocking regulations may only be partially effective for major multinationals, they can “provide an avenue for smaller-medium sized companies in Europe and Asia that have little or no US exposure to continue conducting business in Iran in non-dollar currencies,” says Geranmayeh.

Multinational executives seem to agree. In a recent survey conducted by Bourse & Bazaar and commissioned by International Crisis Group, a substantial 54 percent of senior executives indicated that “assuming Iran remains committed to the nuclear deal,” blocking regulations, which would protect companies from U.S. penalties, would positively affect the “decision to invest in Iran.”

Blocking regulations can serve an important role as part of the suite of political, legal, and commercial measures that can be employed by European governments to protect their businesses from the consequences of snapback. At a time when the economic quid-pro-quo that underpins the nuclear deal is under threat, each and every such measure ought to be considered.