Donald Trump’s announced sanctions on Iran are proving to be quite a headache for European companies that had re-expanded their business in the market since the July 2015 agreement.
It is vital here to draw a distinction between a potential political nuclear agreement between Iran and the other signatories of the previous 2015 accord (apart from the US) on the one hand and the issue of economic sanctions on the other, which would severely hamper Iran’s economic growth as foreign companies working with the country would be subject to hefty penalties from the US. Before 2015 we witnessed the extent of such penalties on banks that had tried to evade sanctions, and a number of banks had actually continued to steer clear of Iran, even after the 2015 agreement as they were not convinced it would last. In this respect, the timing of the ZTE affair is perfect. The Chinese company operating in the telecoms sector and specializing in 5G technology is highly dependent on US components to pursue its growth. After pleading guilty of shipping US components to Iran and North Korea in 2016, it is now facing legal action for failing to comply with measures it was supposed to take against managers involved in the affair.
ZTE will no longer be able to buy US components so will not be able to continue work as usual in either producing and selling smartphones, or in telecoms research.
This timing of this announcement is perfect as the impact of sanctions can be steep for ZTE, and the importance of the affair is reflected by the high-powered participants in talks – Xi Jinping and Donald Trump. What company would want to take the same risk?
The key questions for companies now are i) do they depend on US suppliers, ii) do they have access to the US market and iii) are they dependent on dollar financing.
Looking to the first point, for companies that do rely on US suppliers, the ZTE example is reason enough for them to adopt a defensive attitude.
On the second question, the issue even more directly affects companies that have access to the US market and the United States’ entire sphere of influence as a whole, which is vast. Can European companies seeking to grow their business really do without these markets?
Lastly, as regards dollar financing, it is worth noting that two thirds of international transactions take place in dollars. It would be easy to get around the sanctions if the dollar were not the main currency, for example if the euro were the reference currency, as its area of influence would also be huge around the world. But this is not the case, so the US holds strong sway worldwide and any company that needs dollars has to comply with Washington’s will.
Issuing a collective European response to limit sanctions and safeguard European companies’ independence in Iran, as mentioned last week, is a political response with limited economic impact.
Can an EU-wide agreement be found to confront the US on this issue? This looks doubtful, and even if an agreement were reached in principle, we have to wonder what the practical implications would be. Countries would have to address a whole raft of details that have long obstructed agreement in other negotiations, e.g. deposit guarantees as part of banking union.
In the short term, it seems unrealistic to expect a comprehensive and satisfactory response from Europe before sanctions are implemented in the fall.
Neither can we wave a magic wand to turn the euro into the dollar.
In other words, sanctions are poised to be restrictive for European companies in Iran pending a potential change in stance from the US.