Iran and the European Union: Prospects and Challenges

Executive summary

The European Union has historically enjoyed much closer ties with Iran than the United States, as both the nuclear deal and its aftermath have demonstrated. With the recent bilateral talks concluding in a ‘roadmap for cooperation’, it is apparent that the impetus for this comes from both sides. This relationship, particularly since the nuclear deal and lifting of sanctions, has profound implications for bot sides but also for other key stakeholders like the US and GCC countries. Not only will the deal cement Iran’s place in the Middle East’s tightly contested hegemonic order but also significantly strengthen its economy, infrastructure, political credibility and civil society. For EU member states, there are enormous trade and investment opportunities as well as immense scope for extensive cooperation in a number of arrays. Moreover, along with Iran’s nuclear programme, the severely contentious issues of terrorism, regional security and human rights can also be discussed through a framework of negotiations and cooperation. Indeed, this functionalist EU rationale ­ creating opportunities for deeper cooperation through negotiations and compromise ­ remains the most enduring feature of the nuclear deal. It has set a precedent for crisis-resolution, particularly in cases where the EU takes the lead and sanctions have been imposed on one or more actors.

Introduction

The past week has seen the highest-level talks take place between the European Union (EU) and Iran in more than a decade. Accompanied by seven EU commissioners on a one-day visit, EU foreign policy chief Frederica Mogherini met with the Iranian foreign minister to discuss trade, energy, environment and the conflict in Syria. The talks come a year after Iran’s historic nuclear deal with a group of six world powers led by the United States1and the EU. The deal has resulted in the gradual lifting of economic sanctions levied against the Islamic Republic as well as a thawing of relations with Western states. These EU-Iran talks are therefore both symbolic and an important indication of the improving relations between the EU and Iran.

The nuclear agreement not only impacts Iran’s nuclear capabilities and trade prospects but also the region as a whole. Any analysis of EU-Iran relations after the deal must therefore address the expectations on both sides regarding the deal as well as its actual impact from a variety of angles. Moreover, the deal highlights the potential of security agreements in fostering cooperation and the prospects for such functionalist relations between Iran and its longstanding enemies in the Middle East. Perhaps most importantly, the deal raises a number of important questions, particularly for policymakers and researchers focusing on the EU, Iran and the wider Middle East region:

First, how are these developments perceived from both sides? Was the nuclear deal the only point of contention between the two? If not, how precarious is this relation in reality? Second, what has changed in practical terms and what potential do these developments hold for cooperation on key strategic, political and economic matters? Third, what challenges do these developments pose to Iran, EU member states, the United States and the Middle East and North Africa (MENA) region in general? Lastly, what impact will this deal have on our understanding of how practical, functionalist cooperation can improve relations between states?

Background on EU-Iran relations

The EU and Iran’s complex relationship has historically demonstrated two key themes: frequent departure from the US position on the EU’s part and a strong preference for on-going dialogue on a number of issues including trade, nuclear power and human rights. In fact, prior to revelations about Iran’s clandestine nuclear activities and its subsequent refusal to fully cooperate with the International Atomic Energy Agency (IAEA), the EU had a markedly unique approach towards Tehran. Eschewing 

the US’ isolationist policy of containing Iran, the EU has consistently engaged with Iranian authorities, even at the height of hostility. Indeed the EU has often negotiated with Iran on key matters on behalf of the international community and frequently acted as a mediator between Tehran and Washington. At the same time, Brussels has not fully pursued a trade agreement2 - within the framework of the European Neighbourhood Policy (ENP) - with Iran, which it has done with the rest of the region.

It is not difficult to comprehend why the EU has not followed the American lead in this matter. Not only is Iran a key regional player and stakeholder in the Middle East, it also counts the EU as its main trading partner. Iran’s importance in the eyes of EU member states has historically been rooted in its vast oil and gas reserves and the boost in oil prices after the 1973 oil crisis only served to make Iran both an attractive source for foreign investment and a lucrative market for European exports.

This gradually improving relationship was, however, severely tested after the 1979 revolution and the resultant conservative shift in Iran’s domestic and foreign affairs. Nevertheless, unlike the US, the EU did not fully sever ties with Tehran and beginning in the early 1990s, an official EU-Iran dialogue to discuss political, economic and human rights issues took place more or less consistently until 2003. In 1992, the European Council formally reached out to Iran in the form of a ‘critical dialogue’ rather than a Political Dialogue Agreement, largely because of the existing issues of contention between Brussels and Tehran, namely Ayatollah Khomeini’s 1989 fatwa calling for the death of author Salman Rushdie and the regime’s repressive treatment of human rights issues. In fact, the dialogue sought to address these issues and demonstrate to the Iranian regime that only an improvement in Iranian behaviour ­ regarding terrorism, treatment of human rights and the Rushdie affair ­ could facilitate better relations between Europe and Iran.

Things came to a standstill again in 1997 when a German court accused Iranian officials of the murder of four Kurdish dissidents at the Mykonos café in Berlin in 1992. The EU subsequently withdrew all European ambassadors from Tehran. The dialogue was revisited in 1998 as a ‘comprehensive engagement’, after the surprise election of President Khatami who actively pursued a reform agenda at home. This consisted of the EU making an EU-Iran Trade and Cooperation Agreement contingent on Iran’s efforts on four areas of concern: the promotion of democracy; improvement in human rights record; suspension of ties with terrorist organisations; and abandonment of the intention to develop nuclear weapons. Following Khatami’s re-election in 2001, the EU made concerted efforts to deepen this relationship with the ultimate objective of establishing formal trade and political dialogue agreements.

In 2002, revelations that Iran had clandestine nuclear sites at Natanz and Arak ensured that these issues were all gradually frozen and eclipsed by Iran’s nuclear programme. An IAEA board of governors meeting in September 2005 found Iran in non-compliance with its safeguarding obligations and reported its findings to the UN Security Council (UNSC) in February 2006. This resulted in several UNSC resolutions imposing economic sanctions on Iran and culminated in UNSC resolution 1929 in 2010. The period marks a distinctive turning point in EU-Iran relations, which saw the EU adopt an approach that closely resembled the American policy towards Iran. In fact, between 2010 and 2013 the EU imposed increasingly restrictive sanctions on Iran, including an oil embargo.

Nuclear deal and lifting of sanctions

EU-led efforts to resolve the nuclear crisis were intensified following the 2013 election of Iranian President Hassan Rouhani, though the EU had mediated between the US and Iran throughout the crisis itself. In fact, talks for the November 2013 interim nuclear agreement were led by former EU foreign policy chief Catherine Ashton while those leading to the final agreement in July 2015 were chaired by her successor, Mogherini.. Throughout the crisis and the negotiations leading to the deal, the ‘Big Three’ ­ Britain, Germany and France ­ played a particularly crucial role. The EU was therefore instrumental, from the onset, in engaging the Iranians on behalf of the international community and establishing the nuclear agreement.

The deal itself was a preliminary framework that realistically came into effect on January 16 2016 ­ Implementation Day - when the IAEA verified that Tehran had complied with the necessary steps outlined in the deal to allow for the implementation of the agreement. By this time, Iran had dismantled and removed close to two thirds of the centrifuges installed at Fordo and Natanz, shipped 25,000 pounds of enriched uranium out of the country, began efforts to decommission the nuclear reactor at Arak and granted unprecedented access to its nuclear facilities to IAEA officials. The objective of these measures is to drastically increase the ‘breakout’ time needed to attempt the production of enough fissile material for a single nuclear weapon.

In return, certain UN, US and EU sanctions have been lifted. UN sanctions included asset freezes targeting Iran’s defense and shipping industries, nuclear scientists, Revolutionary Guards Corps officials and firms involved in the nuclear programme. The UN’s embargo on the export of conventional weapons to Iran still remains, although all arms-related sanctions are due to be removed in 5-8 years. US and EU nuclear sanctions have also been lifted, removing obstacles to Iran’s international trade, particularly in the areas of oil and gas. This essentially allows foreign oil companies into Iran, and European investors are particularly eager to take advantage of the market. In addition, Iran now has access to the previously frozen revenue from its sales of oil and gas to Asian countries in the past. Finally, the removal of sanctions on foreign trade and renewed access to the global finance and banking system will significantly boost Iran’s international trade. However, should Iran not comply with or violate any of the deal’s conditions, the UN sanctions will immediately snap back into place for the next decade.

With respect to economic ties with the EU, the lifting of sanctions has resulted in the following:

• Money will be able to move between the European Union and Iran without special authorization or notification. The EU will allow Iranian banks to open offices in EU member states

• Brussels will allow member states to import and sell Iranian crude oil and gas

• The EU will allow trading of gold and other precious metals (meanwhile, the US will no longer sanction non- US citizens who are involved in trading gold or other precious metals with Iran)

• The EU will release all funds that have been frozen for numerous individuals and companies, including the Central Bank of Iran, and will cancel their visa bans.

Impact of the deal

There can be no doubt that the nuclear deal has immense and widespread implications for not just Iran and the EU, but also the rest of the world. The deal is already producing fundamental changes in the areas of trade, energy and regional conflicts amongst others. The recent EU-Iran talks, for example, included a discussion of the EU’s remaining sanctions on Iran ­ based on terrorism and human rights ­ as well as efforts to resolve the Syrian crisis and consequently, ease Europe’s migration woes.

It is important to remember that Iran is not like other oil producing states in the region, i.e. it is not a rentier state, but one that possesses an industrial economy and a largely educated and skilled workforce. It is one of the world’s largest economies, in fact, with approximately 80 million people and vast energy reserves. With the region’s second-largest stock exchange, it is estimated that foreign investment after the deal will grow exponentially over the next few years. Total oil production in Iran, according to the US government, could rise from around 2.8 million barrels a day to 3.5 million by next year. As a result, some analysts and economists have estimated that the next decade may see Iranian GDP surpass that of regional powerhouses like Saudi Arabia and Turkey.

Iran

From Iran’s perspective, the deal brings welcome relief after an extended period of crippling economic sanctions and at a time of deep political unrest in the region. The sanctions had been steadily destroying the Iranian economy, costing the country more than $160 billion in oil revenue since 2012 alone. In fact, one of Iran’s key motivations for signing the deal was to secure access to global financial markets.

Not only will Iran now be able to resume selling oil on international markets, it will also gain access to the billions in frozen assets abroad as well as use the global financial system for trade. The deal has also greatly boosted President Rouhani’s approval at home and greatly diminished Iran’s pariah status on the world stage.

The deal also comes after a period of growing unrest in Iran about the use of nuclear weapons and whether they were even worth the sanctions. One of the key reasons for Rouhani’s success in the 2013 election, in fact, was his promise to end the era of sanctions, improve the economic situation and cultivate closer relations with Europe. For the Iranian population, the removal of sanctions means access to essential items such as foreign medicines and medical equipment and accordingly, a better quality of life. However, there is a widespread assumption that all sanctions will be lifted as part of the deal, which is of course, not true. And in fact, it is unclear whether more sanctions will be removed over time or not. Unless there is a tangible improvement in the country’s economy with a discernible trickle down effect on its population, hardliners may very well accuse Rouhani and his allies of curbing Iran’s nuclear capabilities for nothing.

European Union

At the other end of the spectrum, the EU has long sought such a deal, not just because Iran’s nuclear ambitions are being effectively constrained but also because of the immense economic and strategic benefits the deal brings to Europe. Iran’s nuclear ambitions and the resultant sanctions also impacted the EU negatively - both by limiting its trade and investment options in Iran and by pushing back the issues of human rights, regional cooperation and other key EU objectives from any negotiations. Not surprisingly, the EU therefore has much to gain from this agreement, both economically and in terms of how the world perceives its policy-making power.

Regional security has remained high on the EU agenda, not least because of the region’s geographical proximity and European member states’ enduring colonial legacies and vested interests. From Brussels’ perspective, a resolution of Iran’s nuclear crisis has always been a prerequisite for peace and stability in the region since the alternative could have been a military campaign targeting Iran’s nuclear facilities. The result would likely have precipitated a region-wide conflict, feeding on Sunni- Shia tensions and the hegemonic rivalry between Iran and Saudi Arabia (along with its Gulf allies).

Historically, the majority of Iranian exports to Europe have been from the energy sector with France and Italy, in particular, trading heavily with the Islamic Republic. As a result, a large number of delegations visiting Iran in the latter half of 2015 were from Europe. In July, Mogherini visited Tehran for talks about a number of mutually relevant issues while the British Foreign Secretary visited in August to re-open the British Embassy in Tehran. He was accompanied by a group of British businessmen seeking investment and trade opportunities in Iran. In fact, a staggering number of European economic delegations visited Iran in 2015 for the same purpose.

From the Iranian side, President Rouhani embarked on a five-day trip to Europe ­ visiting Italy, the Vatican and France ­ in January 2016. While he was visiting Italy, the two sides signed deals worth approximately 18.4 billion dollars in the energy, infrastructure, shipbuilding and mining sector; and issued a joint statement outlining a roadmap for bilateral cooperation. In France, similarly, the two sides signed close to 20 agreements on economic, political and cultural cooperation and Iranian officials closed a deal with Airbus to deliver more than 100 commercial jets to Iran. Nevertheless, Rouhani’s visit to France witnessed protests by French human rights groups against the scale and nature of executions in Iran, indicating that human rights remains a contentious issue between Europe and Tehran.

US, Russia and MENA states

The United States has been keen to diminish Iran’s nuclear capabilities due to the threat it poses to regional security, its perceived support for terrorism, violation of human rights and hostility towards Israel, a key US ally. The Americans, therefore, agreed to the deal specifically because it prevents Iran from obtaining or building a nuclear weapon and also because Iran is a potential ally in the fight against the so-called Islamic State (IS).

The closeness of Iran-Russia relations in recent times is unprecedented, with both sides openly providing one another with support on a number of issues and trading goods and services. This is particularly evident in the MENA region, where both countries back the Assad regime and hold similar views about how to tackle Islamist terrorism. Moreover, Russia has historically provided Iran with key assistance and equipment for its nuclear programme. Accordingly, as one of Tehran’s key allies, Russia has keenly supported Iran’s calls for the lifting of sanctions, not least because of the sanctions imposed on Russia by predominantly Western states over the Ukraine crisis. The deal is being considered as a precedent for the Russians who believe that the same can be done in their case. As a result, analysts consider Russia’s policy on Iran to be motivated by global interests, including boosting Russia’s influence on important issues, often at the expense of the West.

Reception of the deal within the Middle East itself has been far more conservative, with the Gulf states in particular, fearing the prospect of a stronger Iranian presence - and perceived Shia expansionism - but appreciating that Iran’s nuclear ambitions have been curbed. These states, led by Saudi Arabia, fear that a stronger and richer Iran will have more resources and influence to boost non-state actors (such as Hezbollah) in the region and bring further political instability to the Middle East. In addition, this may precipitate deeper Iranian involvement in the region’s conflicts ­ Iraq, Syria and Yemen ­ to the detriment of the Gulf states. Despite this, there are vast opportunities for trade and investment within the region, but it remains to be seen how forthcoming Iran and its neighbours are in using them. Certain states, such as the UAE, Oman and Qatar welcomed the lifting of economic sanctions warmly, largely because of the economic opportunities it presents. On the other hand, GCC governments are currently dealing with a combination of decreasing oil revenues and astronomical government spending at home. Iran’s re-entry into the oil production market will almost certainly decrease oil prices even further, making the situation worse for those particular countries.

Conclusion

“The Vienna deal tells us that we all have much to earn if we choose cooperation over confrontation. Making the most out of this opportunity is entirely up to us,” wrote Mogherini in her July 28 2015 op-ed on the nuclear deal. The EU’s functionalist rationale has always maintained that improved relations and cooperation between Iran and the West can help resolve crises. The nuclear deal, driven as it was by Brussels, remains true to that principle. And yet, it is far too early to discern what real impact the deal will have on either Iran or Europe. The continuing presence of both certain sanctions and tensions with the US means that Iran is still not completely out of the woods. Moreover, turmoil in the MENA region and continuing tensions between Iran and Gulf states, particularly Saudi Arabia, diminish the deal’s potential for bringing peace and stability to the region.

And if the nuclear deal can really be seen as a triumph for the European principle of functionalism, surely there are important lessons here for North Korea, Russia and other countries on which sanctions have been imposed. In simple terms, can negotiated compromise really foster cooperation and reduce hostilities? If so, can the same principle be applied to the Middle East regarding Iran’s relations with Gulf states and Israel? Nevertheless, whether the deal realises its potential completely or not, it remains a milestone in Iran’s relationship with the West as well as one of the EU’s more successful multilateral efforts in recent times.