Judgment at Luxembourg: will Iran forgo a negotiated outcome?

March 22, 2013

By Javier Serrat – At the March meeting of the International Atomic Energy Agency’s Board of Governors (BoG), the five permanent members of the UN Security Council (UNSC) plus Germany (P5+1) – a group of countries which since 2006 negotiates with Iran on its nuclear program – underscored their expectation that current negotiations with Iran must produce “tangible results […] at an early stage”. As the six powers have grown impatient with Tehran’s tendency to stymie serious progress at the negotiating table, they seem to be ever more unified in pursuing intense diplomatic engagement with Iran – an effort supported by a multifarious collection of nonproliferation tools that include economic pressure, financial monitoring, law enforcement operations, and even covert action. 

 

 

The European Union (EU) in particular has adopted a panoply of trade and financial measures that has steadily expanded after the IAEA Director General’s November 2011 dossier on Iran’s possible military dimensions activities. Despite many European countries’ long-standing commercial partnerships with Tehran, the 27 ministers of the European Council (EC) moved in January of last year to curtail the importation of Iranian oil and petrochemical products; this in addition to a ban on shipping insurance services for Iran’s cargo vessels and oil tankers, an asset freeze against its central bank, and a ban on trade in diamond and precious metals, among others.

 

The significance of the EC’s decision should not be understated, especially in light of the fragile political and economic climate under which the 27 reached that consensus. The Council began discussing an oil embargo against Iran in the midst of a particularly severe economic crisis in the Eurozone. Greece, whose recently-formed government was trying to avoid a default on its debt, was reluctant to support sanctions against one of its few loyal trade partners. Lack of bank financing had forced Athens to stop purchasing crude from Azerbaijan, Kazakhstan, and Russia, while Iran was willing to sell oil to Greece at discounted prices and through open credit – a deferred payment scheme. The sense of urgency among EC members about the need for decisive action on Iran’s nuclear program had to be carefully balanced against the fears of a worsening economic situation in Greece with important repercussions for the Eurozone at large. The EC, however, managed to reassure Athens that alternative oil supplies would be secured, and the 27 proceeded to announce the embargo.

 

In the months since, Brussels has augmented its economic pressure on Tehran by targeting more sectors of importance to Iran’s economy, including natural gas, banking, and shipbuilding. Meanwhile, Iran has been exploring legal avenues to formally dismantle the U.S. and EU sanctions regime. As early as 2010, Iranian diplomats voiced their intention to seek sanctions relief through the International Maritime Organization (IMO) in response to U.S. restrictions that targeted state-owned Islamic Republic of Iran Shipping Lines (IRISL). The measures were subsequently adopted by the EC and have resulted in IRISL’s inability to obtain required liability insurance coverage and safety checks. No formal request seems to have been lodged at the IMO, and it was not clear that the technical agency would have the mandate to address Iran’s complaints. But Tehran never fully abandoned the idea of a legal path to sanctions relief, and now the P5+1 dual-track strategy of pressure and diplomacy might well start to unravel.

 

Over the last few weeks, the General Court of the EU, based in Luxembourg, has ordered the EC to lift its sanctions on a number of Iranian banks implicated in proliferation transactions. The most recent annulment involves Bank Saderat, one of Iran’s largest commercial banks, servicing clients through over 3,000 domestic locations and branches in a dozen countries, including Afghanistan, France, Germany, and the United Kingdom. Saderat has not been designated by the UNSC, but UN members are required to monitor transactions involving the partially state-controlled bank. The U.S. Treasury Department froze Saderat’s assets in 2007, under an anti-terrorist financing provision, citing the bank’s alleged role in providing funds to Hezbollah, Hamas, the Palestinian Islamic Jihad, and the Popular Front for the Liberation of Palestine-General Command. In July 2010, the EC designated Bank Saderat for providing financial services to entities procuring components for Iran’s nuclear and ballistic missile programs. Specifically, the EC claimed that Saderat had facilitated transactions from at least two UN-designated proliferators, including the Defense Industries Organization and Mesbah Energy Company.

 

Nevertheless, last February the General Court held that the EC had not provided sufficient evidence about Bank Saderat’s alleged support of proliferation transactions. The court issued a similar ruling in a case involving Bank Mellat, which, like Saderat, is a large commercial bank with a network of overseas branches (in Turkey and South Korea) and other business ventures abroad. Mellat has been accused of providing services to the Atomic Energy Organization of Iran, which controls the nuclear program, and Novin Energy, another Iranian UNSC sanctioned entity that operates within the AEOI and has transferred funds on behalf of the AEOI to entities associated with Iran’s nuclear program.

 

Some forty other banks and other designated firms have lodged petitions for judicial review at the Luxembourg-based court. It must be noted that the lifting of sanctions does not automatically plug large Iranian banks back into the global financial grid. The United States still has in place a number of highly restrictive measures that prevent Iranian financial institutions from engaging in global trade. Yet, were the annulments to take effect, the banks in question would again be able to use the financial messaging services of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.

 

Brussels-based SWIFT is a cooperative that enables secure interbank communications as well as the transfers of funds and securities. More than 10,000 banks and firms around the globe use this financial telecommunications network to exchange an average 17 million messages every day. Iranian banks, too, are among the thousands of financial institutions that use SWIFT. In 2011, 20 Iranian banks and 29 firms exchanged more than 2 million messages. These included Saderat, Mellat, and other U.S. and EU-designated entities. But in March 2012, after pressure from the U.S. Congress and a decision by the EC, SWIFT announced that it would abide by Belgian law and disconnect EU-blacklisted institutions from its network. The decision was seen as a major step towards curtailing Iran’s access to the financial global system; likewise, reconnecting these banks to the network could enable Iran to use the financial clearinghouse to continue purchasing nuclear hardware and other illicit goods.

 

It should be noted that the EU’s General Court decisions are not final, and the EC can still appeal the rulings, over the next few weeks, and meet the burden of proof the court demands in order to maintain the sanctions. (Legal experts have noted that the EU did not invoke the need to protect classified information but simply failed to provide any response to the court’s request for evidence.)

 

The more consequential issue, however, is whether these and future court rulings in Luxembourg will affect Iran’s negotiating strategy.

 

Ever since Iran’s nuclear file reached the SC and the UN body adopted the first round of sanctions, Tehran has consistently demanded that the international community recognize what it sees as its right to enrich uranium and that the economic penalties be lifted. Instead, since 2006 the Security Council has adopted three additional resolutions containing trade, financial, and other restrictions against individuals and companies believed to be involved in Iran’s nuclear and ballistic missile technology procurement activities. A round of negotiations in Istanbul, in January 2011, broke down after Iran demanded that sanctions be lifted as a precondition to the talks. In Moscow, Iran presented a proposal that included sanctions relief in exchange for cooperation with the IAEA.

 

Contrary to Iran’s demands, the United States and a coalition of like-minded countries, including the EC-27, have only augmented the pressure and expanded the sanctions regime. At the negotiating table, the P5+1 had only been willing to offer spare parts for Iran’s decrepit and highly unsafe fleet of 727s and 747s Boeing airplanes. But press reports about the most recent round of negotiations in Almaty indicate that the P5+1 have offered to ease restrictions on trade in gold and precious metals, petroleum-related commerce, and some banking activities. 

 

One might ponder whether these concessions are substantial enough to motivate concrete actions from Tehran that address the international community’s concerns. However, in light of events in Luxembourg, a more pressing question seems to be whether Iran’s focus will remain on easing sanctions through negotiations, or, instead, Ayatollah Khamene’i will conclude that the EU court can give Iran most of what it wants, in terms of sanctions relief, without having to meet the demands of the Security Council.

 

An unclassified U.S. intelligence assessment released last week notes that “Iran’s nuclear decisionmaking is guided by a cost-benefit approach.” Will the annulments alter this cost-benefit analysis? Will Tehran judge that it stands a better chance with the EU courts than with the negotiators?

 

The P5+1 two-pronged strategy rests on the notion that intense economic pressure will compel Iran’s leadership apparatus to seek an end to the impasse and demonstrate to the international community that its nuclear program has no military underpinnings. The colossal depreciation of the rial, rising inflation, and supply shortages of consumer goods like dairy products, medicines, poultry, and vehicles, have been interpreted as signs of the aggravating effect of sanctions on a chronically mismanaged economy. The October 2012 riots in Tehran, where hundreds marched to demand economic relief and angry merchants at the bazaar shut their shops, further highlighted the role of sanctions, along with other structural factors, in fostering the kind of internal turmoil that might threaten the regime’s political stability.

 

This approach assumes that the prospect of sanctions relief will entice Iran to accept greater transparency and limitations on its nuclear activities. But the strategy cannot work if Iran finds a more advantageous alternative to serious diplomatic engagement. By potentially opening up other avenues for sanctions relief, the lifting of restrictions against Iranian banks (and possibly energy and shipping firms) could significantly alter the dynamics of the negotiations.

 

In the run-up to the first Almaty meeting, the proceedings in Luxembourg and their potential repercussions on the nuclear diplomacy went largely ignored by pundits and the media. As the parties prepare for a second round of talks in the Kazakh city, the question remains: will Iran acquiesce to Western demands and accept the modest package of incentives on the table or will the Supreme Leader opt to bypass negotiations in hopes of obtaining potentially faster and more substantial relief from the courts – while paying virtually no political cost at home?

 

Javier Serrat is a Research Associate and former Scoville Fellow at the James Martin Center for Nonproliferation Studies in Washington, D.C. He specializes in the topic of international sanctions as tools to combat nonproliferation. He is fluent in Spanish and German.

 

Leave a Reply