A crude agreement

On Monday Brussels announced an EU-wide ban on oil contracts between Iran and member states. The hope is that these sanctions will choke the Islamic republic’s finances, and prevent its nuclear programme from progressing further. However, as with countless other EU foreign policy objectives, the goals look to have been undermined by the lack of consensus between EU member states.

Diplomats admitted that negotiating the embargo had been difficult. Quite an understatement given that the enforcement of the embargo has been delayed six months just to ensure that an agreement could be met. The key dispute comes from the fact that Greece, Italy and Spain are far more dependent on Iranian exports than their Northern neighbours. Greece imports up to a third of its oil from the Islamic state, with which it has negotiated a favourable rate. Italy and Spain buy 10% of their oil from Iran.

Forcing these countries to source such a large percentage of their oil from another producer in such a short time frame will undoubtedly put additional costs on their economies (not to mention the potential for higher prices which we discuss below). This seems slightly counterproductive to say the least when they are already struggling to stay afloat in the storm of the eurozone crisis. Not that you can abandon all policy goals on the basis of economics, but it highlights the breadth of impact which the eurozone crisis will continue to have until a lasting solution is found.

That said, fears of an impending energy crisis are alarmist. For one, Saudi Arabia has assured European governments that it will increase its production capacity to replace Iranian imports, which represent a fairly small share of overall EU oil consumption. Gaps in supply can also be met by Libya, which is set to boost exports after a year in remission.

A massive price hike is also unlikely, with refineries taking the hit more than consumers. Providing it does not switch to other Middle Easter suppliers, China will become the biggest consumer of Iranian oil, creating a monopsony through which it can drive down prices. Iran has shown itself willing to sell oil under the market price during previous embargoes. An interesting side effect then is that China could end up benefitting most from this ban by sucking up the excess Iranian supply at low prices. Not the EU’s fault, but it seems to undermine any prospect of the embargo having a huge financial impact on Iran.

Will Europe’s energy future be unaffected then?

Possibly, if two conditions hold:

- First, Iran must not blockade the Strait of Hormuz, through which Europe accesses Saudi oil. This seems unlikely since doing so would likely cause a full scale military conflict as the US has vowed to defend EU cargoes.
- Second, Iran must not throw a spanner in the works by cutting off oil supply immediately (something which Europe could not cope with as the delayed start of the embargo shows).

Will any of this bring Iran ‘back to the table’?

As EU High Representative on Foreign Affairs Catherine Ashton outlined, the aim is to “bring Iran back to the table”. It’s not clear this will be the case - Iran has survived previous embargoes, some of which have even hardened support for the regime. Without China and India joining the embargo (highly unlikely) Iran may not feel much of a squeeze. Even if they did, oil prices would skyrocket creating even more problems for the eurozone.

All in all then, this embargo has been a bit of a mess. Whether or not the aims are valid, it has once again highlighted the disparities in foreign policy goals within the EU, and therefore the limits of a combined foreign policy. It also brings home that, despite its size, the EU’s power is to some extent dwarfed by that of China and the US. Ultimately, their decisions will make or break this embargo, not the EU’s.

All talk and no action

As we've noted before EU government's refusal to stop spending tax payers money supporting business ventures in Iran - let alone agree to more general economic sanctions - is helping the mullahs continue to defy the international community.

Since the 15 British sailors and marines were kidnapped last week the British government has been attempting to use its diplomatic influence to ratchet up the pressure on Tehran. Unfortunately they are not doing too well. The UN Security Council issued a watered down communication yesterday which stopped well short of demanding the release of the sailors and instead spoke of their "grave concern" about the situation.

Now Reuters tells us that EU Foreign Ministers - meeting in Bremen today - will back Britain: as long as they don't actually have to do anything about it.

German Foreign Minister Frank-Walter Steinmeier said, "It is clear that a message of solidarity with Great Britain must be sent from here".

But EU countries have rejected British requests to stop doing business with Iran. French Foreign Minister Philippe Douste-Blazy told RTL radio this morning, "We must avert a course towards confrontation, any escalation. The Iranian authorities must simply return to dialogue."

Luxembourg Foreign Minister Jean Asselborn told Deutschlandfunk radio: "While we are in complete solidarity with Britain, we have to do everything to build in the necessary brakes so that things don't explode. We have to be careful that we don't go on outbidding each other with sanctions on Iran and talk of freezing relations".

Is the EU making war with Iran more likely (II)

Just noticed some more worrying news from yesterday’s FT. Apparently Eon, Germany’s biggest importer of natural gas, is pursuing its first gas supply contract with Iran. The company told the paper: “One of the producer countries is, of course, Iran.” But it’s not just the Germans. Centrica, the UK’s biggest residential energy supplier, also has said it was looking at Iran as a potential source of gas supplies.

A British official said, “No one is discussing full-blown trade and economic sanctions at this stage. All we can do is to suggest to companies that when they are looking at the Iranian market that they want to bear in mind that Iran is essentially in the international dock. Is it a good investment prospect at this particular point in time?”

Despite being seen as a risky investment Iran has also attracted AngloDutch Royal Dutch Shell and Spain’s Repsol as potential foreign partners in its Persian Liquid Natural Gas project, and Total of France and Malaysia’s Petronas for its Pars LNG project.

Not exactly a joined up foreign policy...

Is the EU making war in Iran more likely?

EU enthusiasts boast about the EU’s “soft power” – its ability to use its economic weight and influence to influence world events without having to resort to force.

EU leaders also say they don’t want Iran to build nuclear weapons, but also don’t want to see military action. So why aren’t EU leaders using the economic clout they do have to help head off a seemingly inevitable conflict?

The prospects of either Iran acquiring nuclear weapons, or military action to prevent this happening, both represent potentially disastrous scenarios for global peace and stability.
Although European leaders have publicly stated that both are totally unacceptable, by not taking a tougher line on sanctions against Tehran, EU leaders may be increasing the chances of a war.

The Iranian leadership’s determination to build a bomb remains undimmed: Iran has ignored the February 21 deadline to comply with UN demands for a halt to uranium enrichment, and on Sunday President Mahmoud Ahmadinejad vowed to press on with the programme, which he claims is now as “unstoppable” as a “runaway train” with “no reverse gear”. Iran has also begun tests on longer range rockets (and is already able to hit the eastern edge of Europe) and it will soon be able to enrich uranium on an industrial scale.

A recent editorial in the Jerusalem Post argued that “Iran’s ambitions, unlike those of Libya and North Korea, are not just regime survival but regional and even global domination”. The article goes on to argue that a nuclear armed Iran would not scale down the scope of these ambitions, but rather would have additional leverage over its rivals in the pursuit of this agenda of aggression. This thought is the top concern of negotiators in Europe, the US and, most of all, Israel, who are trying to stop Iran building a bomb. It is also widely argued that Iran acquiring nuclear weapons would lead to a regional domino effect, with Saudi and other countries in the region following suit and building nuclear weapons, potentially creating an even more unstable situation.

It is more or less certain that Tel Aviv will not countenance a nuclear armed Iran. As several recent news reports have made it clear - if Israeli leaders believe it is necessary they will take military action to prevent what is seen by many in Israel as nothing less than an existential threat to the state.

The real deadline for resolving this situation therefore is not dictated by how long it will take Iran to produce weapons-grade uranium – but rather how long Israel will restrain itself from launching military strikes against nuclear facilities. The odds are that unless Iran changes course this will happen sooner rather than later – possibly later this year.

That means there is less time available than is often assumed for negotiators to secure a settlement with Iran that will halt uranium enrichment and prevent Iran getting the bomb. The more the process of reaching agreement is delayed, the more likely a war becomes.

For this reason, it is all the more astonishing that EU policy towards Iran is not contributing to an expeditious solution. In fact, it may be doing the opposite.

The US has for some time been urging the EU to impose tougher and wider-ranging financial sanctions on Iran, including a halt to export credit guarantee programmes for European companies doing business in Iran. With UN-wide sanctions stalled in the security council by Chinese and Russian opposition, the US has already imposed a raft of its own economic sanctions.

Iran is acutely sensitive to such economic pressures. Because of a huge baby boom following the revolution (70% of Iran’s 70 million people are under the age of 24) Iran now needs to create 800,000 to 1,000,000 new jobs a year just to hold unemployment constant. With the unemployment rate among young people estimated at nearly 50%, the current regime is rightly concerned that economic slowdown could lead to their overthrow.

Even on their own, American financial sanctions have begun to bite in Iran. With inflation rising sharply and the economy in trouble despite record oil prices, less extreme Iranian leaders have begun to openly criticise President Mahmoud Ahmadinejad. After the fiery speech in which he said the nuclear programme was like a runaway train, there was unprecedented criticism of the president in the Iranian press, with one political rival openly attacking him for using “the language of the bazaar” and making an “unhelpful” speech.

But the EU members potentially have far more economic clout with Iran than the US, which has had only limited ties to Iran ever since 1979. In contrast EU members are Iran’s largest trading partner – taking 36% of all Iran’s exports and providing 40% of all its imports. However, EU leaders are not only reluctant to agree sanctions, but in fact continue to subsidise trade with Iran via export credits.

Europe’s resistance to a tougher sanctions regime is easily explained. A recent leader in the Wall Street Journal noted that Iran tops Germany's list of countries with the largest outstanding export guarantees, totalling €5.5 billion. France's export guarantees to Iran amount to about €1 billion. Italy's come to €4.5 billion, accounting for 20% of Rome's overall guarantee portfolio. Even Austria had €800 million of its exports to Iran covered by guarantees in late 2005. The UK provided £111m in export credits to the country in 2005-06.

The continuing export guarantees to Iran mean that taxpayers in Europe are underwriting trade and investment that would otherwise be deterred by the risk of doing business with a rogue regime. Since most of Iranian industry is state controlled, much of this continued European investment effectively supports the regime quite directly, and by extension, its weapons programme.

This situation was hardly improved when the EU’s High Representative for Foreign Policy, Javier Solana, circulated a controversial report to member states’ foreign ministers in early February. It argued that although Iran is well on the way to developing nuclear weapons, little can be done to prevent it, and that sanctions would not work in any case.

In response to this report, Israel suggested that the EU was the ‘weak link’ in international efforts to halt Iran’s weapons programme, with Avigdor Lieberman, the Minister for Strategic Affairs saying “This report illustrates an attitude that suggests ‘nothing can be done’. However any surrender can only encourage the aggression and ambitions of Iran to become a regional force capable of imposing its power across the entire Middle East.” (Le Figaro, 14 February)

These statements would not have gone unnoticed in Tehran, and risk undermining Europe’s negotiating clout. Denial of the effectiveness of sanctions risks creating a self-fulfilling prophesy. Moreover, there is evidence to suggest that the US-only sanctions so far in place, burgeoning economic crisis in Iran, and fear of military intervention are strengthening the hand of opposition groups, who want to see a step back from what they see as irresponsible brinksmanship on Ahmadinejad’s part.

The failure of European governments to take a tougher line on financial sanctions towards Iran blunts the effectiveness of existing sanctions, weakening domestic pressure on the Tehran government to come to the negotiating table.

Europe is in a position to impose such sanctions without international authorisation, but the current climate of myopia – placing business interests above security concerns – merely allows the present regime in Iran to buy more time. Ironically, the EU approach is probably making a dangerous war ever more likely.