The EU’s loss is China’s gain

On May 18, the European Commission officially announced it was taking several steps – in direct defiance of upcoming US secondary sanctions – in relation to the Joint Comprehensive Plan of Action (JCPOA) also known as the Iran nuclear deal.

The announcement empowered President Junker and High Representative Mogherini to lead the efforts to act on four major fronts to help safeguard European business interests.

Firstly, it formally introduced the process to launch “the Blocking Statute” which would forbid EU nationals from complying with the US sanctions regime and allow European companies that face damages from sanctions to receive compensation. It also nullifies any foreign court judgments that are based on the sanctions against EU companies.

Secondly, it officially launched the process to allow the European Investment Bank (EIB) to support EU investments in Iran, specifically small and medium-size businesses conducting commerce in Iran.

Both of these measures have to approved by both the EU Council and Parliament, something that is far from guaranteed in a union that is fragmented deeply between the right and left political parties, as well as more recently establishment and populist agendas of various ruling governments throughout EU member states as well as EU institutions themselves.

Thirdly, the Commission will continue cooperation and assistance on a sector-by-sector basis, with a particular focus on the energy sector (i.e. petroleum).

Lastly, the Commission will encourage EU member states to conduct one-time bank transfers to the Central Bank of Iran. Both of these moves are directly related to the ensuring and thereby proving to Tehran that they will receive the revenue from their petroleum exports to the EU, despite US sanctions.

But it is significant to note that these steps don’t mean much, despite the fact that they were approved via consensus by the heads of state/government of all EU member states in Sofia on May 16. The first two steps are likely to fail, as they may get tied up or all together flop in the voting procedure of the Council and/or Commission, and the last two steps are symbolic at best, without any real soft (or hard) power behind them.

In reality, none of this matters, as it will be up to EU companies – as well as other foreign companies – each in its individual capacity, to decide whether it wishes to remain in the Iranian market or risk US secondary sanctions. Foreign companies have much more to lose if shut out of the US market. For example, Russian oil giant Lukoil just announced that it is halting all Iranian projects until further notice. Reliance Industries, which owns the largest refinery in the world (located in north-western India) will halt all oil imports from Iran to their facilities. This is despite the Indian government’s recent announcement that they will honor the JCPOA and refrain from adhering to the US sanctions.

Much of this is a result of the potential for foreign companies to be denied access to the US financial market, where they can access insurance, credit as well as capital for debt repayments, among other important financial tools. Even economic activities outside of Iran but that are being conducted with Iranian companies are under scrutiny. British Petroleum (BP) recently announced the delay of a project in the Rhum oil field in the North Sea as the drilling of a new well is co-owned with the Iranian state-owned Iranian Oil Company.

Of the most significance is that EU companies are currently withdrawing or placing their operations on hold – and their contracts are being snapped up by Chinese companies that are usually state-owned. Royal Dutch Shell recently decided to leave a $3 billion contract to develop the Yadavaran oil field and is being replaced by Sinopec, a Chinese oil titan. Total, the French energy giant, is currently pursuing a US sanctions waiver. The company has halted its large offshore exploration of the South Pars gas field. The Iranian response has been to give Total 60 days to gain access to the sanctions waiver or hand its majority stake over to Chinese state controlled CNPC which holds a 30% stake in the South Pars gas field project with Total.

Asia, as a whole, imports approximately 1.8 million of the total 2.6 million barrels of Iranian oil produced daily. While each individual country (and in most cases companies) will decide one way or the other, China’s appetite for crude oil is only growing with time, and the Europeans withdrawal is giving China every opportunity to use its not-so-subtle proxies and front companies to secure much-needed gas and oil reserves.

The Transatlantic Alliance is on fire from the disagreement between the US and Europe on the return of secondary sanctions following the US withdrawal from the JCPOA, to the newly minted “Trade War,” with tit-for-tat tariffs on everything from steel and aluminum to jeans and (in the future) cars. The internal struggles within Europe are threatening to tear apart the EU, from Poland to Hungary and more recently Italy – and that is without even mentioning Brexit. A loss of trust between the Western allies will create immense bitterness, resentment and a sow discontent, something the Western world cannot afford with the recent return of great power competition between the US, Russia and China. The fruits of that are beginning to ripen with a rising China and a new Russian sheriff in the Middle East.

Regardless of the serious disagreements between the traditional transatlantic allies- within the microcosm of the JCPOA, Iran and US secondary sanctions – the US economy (for now) still reigns supreme, at least for those of us in the West.

As we can see clearly in this case, Europe’s loss is China’s gain.

The author is a project manager at the Institute for National Security Studies (INSS) in Tel Aviv.