Javad Zarif surprised nearly everybody by showing up in Biarritz last week. What are the chances of his visit actually achieving anything? For a clue, Frances Cowell peers below the surface.
Macron’s and the EU’s efforts to retrieve what they can of the Iran Nuclear deal spearheaded by Obama in 2015 is as welcome as it is ambitious, and we all hope that they can avoid yet another escalation of conflict in the Gulf. But there are reasons not to be too optimistic.
Javad Zarif’s visit to the G7 meeting in Biarritz is probably a genuine effort at constructive talks aimed at easing the stress on ordinary Iranians inflicted by sanctions re-imposed by the US in 2017.
But, as subsequent statements by President Rouhani hint, it is not certain – despite the severe damage to Iran’s economy – that its government whole-heartedly supports an end to sanctions – even if Mr Zarif does. He was chosen by reform-and peace-minded President Rouhani as his Foreign Minister, and has an impressive CV, including, from 2002 to 2007, Iran’s Permanent Representative to the United Nations, member of the UN Eminent Persons Group on Dialogue among Civilizations, Head of the UN Disarmament Commission, member of the Eminent Persons Group on Global Governance, and Vice President for International Affairs at the Islamic Azad University.
Yet neither he nor Mr Rouhani has a free hand in governing Iran. Real power is said to sit with the clerics, headed by Ali Khamenei, Supreme Leader, who was never a fan of constraining Iran’s nuclear capabilities. In pulling out of the nuclear deal, the US strengthened the hand of those conservative clerics, who now say they were right not to trust it.
And because US firms, including oil producers, were slow to invest in Iran when sanctions were lifted, not only do they now not lose out from sanctions, but some benefit from the higher oil prices that result from the strangling a big supplier – not to mentions the geo-political tensions that result. And it turns out that sanctions rather suit the ayatollahs and their business interests, which do quite nicely from the smuggling opportunities that the sanctions regime presents.
Who loses most from sanctions? You guessed it! Ordinary Iranians and Iranian firms obviously pay the highest price. But a number of western, mainly European, organisations are also hurt. Firms like Daimler, Siemens and Total were quick to invest in post-sanctions Iran. Some have established significant operations there.
Do you see a pattern emerging here?
What is to be done? Can the rest of the world, most of which thinks the nuclear deal was working well enough, carry on their legitimate business with Iran in the face of tantrum Trump? Yes, but no.
The USD is the world’s reserve currency, controlled by the US government, and a big chunk of global commerce is conducted in USD. Because the US financial system is so central to global commerce, its secondary sanctions regime inflicts pain far and wide. To avoid punishment, it is not enough just to conduct business with Iran in a non-USD currency, because pretty much any bank you deal with pretty much anywhere in the world (with the possible exception of, erm, Russia) also needs access to the US banking system to survive. In time, other currencies may step in as alternatives, but for the foreseeable future, the US President wields an effective stranglehold on the global financial system.
With significant commercial interests of its own to protect and promote, in early 2019 the EU sought to find a work-around. France, Germany and the UK came up with INSTEX, a system of barter, which they hope will allow at least some legitimate commerce to take place with Iranian firms and alleviate the pain for ordinary Iranians. So far its effect has been minimal, largely because firms and banks fear – not entirely without reason – that participation in an EU-sponsored barter system will expose them to US ire and harm their commercial prospects in the US and their ability to transact in USD. The EU has vowed to keep trying, to scale up INSTEX, and find some way to compensate firms for losses caused by US sanctions.
Their scope for doing so is limited though. They cannot, for example, compensate through any form of cash transfer, as that would amount to an EU subsidy of US belligerence. Favourable trade terms risk having the same effect.
With the US acting in bad faith and Iran at best ambivalent, it may turn out that the main benefit from Mr Zarif’s visit is the show of goodwill by the EU the Iranian government – and the evident discomfiture it caused Mr Trump.