Published daily by the Lowy Institute

European companies driven out of Iran

The US decision to re-impose nuclear sanctions on Iran has significant implications for European businesses.

Renault sports car (Photo: Dan Istitne/ Getty)
Renault sports car (Photo: Dan Istitne/ Getty)
Published 19 Oct 2018 

Prime Minister Scott Morrison is considering a review of Australia’s support for the Iran nuclear deal. The news comes after US President Donald Trump announced the US withdrawal in May from what is officially known as the Joint Comprehensive Plan of Action (JCPOA). The US has subsequently begun re-imposing nuclear-related sanctions that had been lifted.

The car industry illustrates the particular dilemma that EU companies face in deciding whether to continue doing business in Iran.

The US decision will leave its Iran sanctions regime at odds with that of the European Union, which, together with the other “P5+1” countries – Britain, China, France, Russia, and Germany – is committed to upholding the nuclear deal. In order to mitigate the effect of re-imposed US sanctions on European businesses wishing to continue trade with Iran, the EU has set out a plan to keep Iran in the 2015 nuclear deal.

It has proposed to establish a so-called “Special Purpose Vehicle” (SPV) – a non-US dollar dominated payment system – that will facilitate transaction between Iran and EU companies. The EU has also updated its “blocking statute” to allow EU entities to recover damages arising from the re-imposed US sanctions on Iran and nullifying the effect in the EU of any foreign court rulings based on these sanctions. These measures are specifically designed to decrease the dependency of EU companies on the US financial system, and reduce the exposure of EU companies to fines and litigation.

Details on how the SPV will operate are yet to be announced. However, the new measures will certainly not entirely mitigate the risk for EU companies wishing to remain active in Iran. While the SPV would provide for a mechanism to conduct financial transactions, its personnel, the goods traded, and any cash that would fund the SPV could be subject to US sanctions.

Moreover, if the US choses to take a hard line it could decide to sanction any EU company that uses the SPV, including a company’s US employees or US subsidiaries.

Such secondary sanctions would ultimately jeopardise access of EU companies to the US market. This will force companies to make a choice between access to the Iranian market and the US market – 45 times the size of Iran’s. Logically, a large number of companies have already signalled their intent to leave Iran as to not risk access to the US market. Danish shipping company Maersk, French oil company Total, and German industrial manufacturing conglomerate Siemens, to name a few, have all pulled the plug on their activities in Iran.

The car industry illustrates the particular dilemma that EU companies face in deciding whether to continue doing business in Iran. Since the easing of sanctions in 2015, the car industry in Iran had managed to attract a number of top European car manufacturers, such as Renault, Volkswagen, Volvo, Scania, and Peugeot. There is a lot to compete over. According to data from the International Organisation of Motor Vehicle Manufacturers, Iran is the 12th largest car manufacturer in the world. Car sales have risen by almost 50% between 2015 and 2017, making it the 10th largest market in terms of sales.

French car company Renault, for example, has invested US$660 million in Iran and is planning to manufacture 150,000 cars per year in a venture with the Iranian Development and Renovation Organization (IDRO). The re-imposition of sanctions on the Iranian car industry as of 6 August could now make the company a target of US secondary sanctions and enforcement action.

Back in October 2017, Renault said the company would not exit Iran if the US reinstated sanctions. Any US fines levied on Renault could be recovered from the EU under its blocking statute. Exclusion from the US market would do little to a company that neither sells nor produces cars in the US. Meanwhile its daily financial transaction could be conducted through the new SPV.

Renault’s partners – Nissan and Mitsubishi – on the other hand, are active in the US market. Many Renault cars use engines and transmissions manufactured by Nissan, while many Nissan and Mitsubishi cars use Renault’s platform parts. If the US decides to target Renault’s partners for doing business with a company that is active in Iran, Renault may decide to pull out of Iran after all.

The Renault case illustrates that depending on how the US approaches the SPV, few multinational companies will not have exposure to US secondary sanctions. Companies that are likely to stay in Iran are either small and medium enterprises that are not active in the US market, or companies that are trading in industries that are exempted from Iranian sanctions, such as humanitarian goods, agricultural commodities, medicine, and aviation safety equipment, and possibly Chinese, Indian, and Turkish companies that will remain active in sanctioned sectors such as the oil industry.

In the end, it may not be the SPV, but Chinese, Indian, and Turkish business that will prove to be crucial in offsetting the economic damages inflicted by US sanctions, and ultimately upholding the nuclear deal.

You may also be interested in