international analysis and commentary

Is an eastward-looking Iran turning away from Europe?

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Russia’s Vladimir Putin with China’s Xi Jinping and Iran’s Hassan Rouhani

With the United States disavowing the nuclear deal and Europe struggling to maintain legitimate trade, Iran has begun to set its sights eastward. Russia provides nuclear technology, India buys Iranian oil, China is open to all sorts of trade – and Tehran is sure to let its European partners know that it has more than just one option. Is this the beginning of the end of the EU’s détente with the country, brought about by renewed US sanctions but hastened by Iran turning its back on the West entirely? Not so fast, because pragmatism rather than principle is at play here.

True, EU-Iran trade has stalled in the course of 2018. Even before US President Donald Trump announced his country’s withdrawal from the groundbreaking 2015 deal, resignation had sunk in. Remaining US bans on financial transfers had hampered even lawful trade; with Washington re-imposing all of its original sanctions in early November 2018, most multinational companies have now left Iran. After EU-Iran trade in goods nearly doubled after the agreement (from 7.8 billion euros in 2015 to 13.7 billion in 2016), it increased by another 50% in 2017 (to 20.9 billion euros). This, however, seems to have been the high water mark: In the face of increased US pressure, the International Monetary Fund projects negative growth in Iran this year and next with the economy shrinking by 1.5% and by 3.6% year-on-year, respectively.

Given this fading of the “promised” European market, it appears understandable that Iranians would turn their trade eastward. Yet it is the politicized rhetoric coming from the top that gives this move a certain twist: “Looking to the West and Europe has no benefit other than having to stand idle, begging favors and undergoing humiliation”, Supreme Leader Ayatollah Khamenei advised his countrymen in a speech in October, after it became clear that the Europeans could not easily counterbalance US sanctions. This position signals a more fundamental shift on the eve of the 1979 revolution’s 40th anniversary, which made Iran’s independence from world powers a cornerstone of its political ideology – and Neither East, nor West, but the Islamic Republic its motto.

Yet, the substance for such an eastward turn is less pronounced than the rhetoric. True, energy consumption continues to rise in Asia, while it is declining in Europe, so an oil and gas-rich country will find its customers there, not here. However, the Iranian economy has become fairly diversified over the past decade, with agriculture and services (including tourism) each outweighing oil exports as a share of domestic production. Non-oil products have grown steadily also as a share of exports. Still, as a source of hard currency for the government, oil exports remain crucial (even if they do not create employment for the many Iranian graduates entering the job market each year). That is where the US sanctions waivers granted to eight countries, including Italy and Greece as European customers, come into play. So the EU is not out of the game when it comes to trade, as efforts by member states to set up a “special purpose vehicle” for financial transactions with Iran demonstrate.

The broader question, however, is one of strategy. Tactically, it appears natural for Iran not to place all its (economic) eggs into one (European) basket – and to make its EU partners aware of it. Strategically, however, turning away from Europe to focus – primarily or even exclusively – on trade with China, Russia, or India does not pay off. Each country has certain benefits to offer: China is already a partner in oil and gas exploration and provides access to its Belt and Road trade route linking Asia to Europe; Russia provides nuclear technology and arms; and India invests in Iranian infrastructure linking the Indian Ocean to Afghanistan and Central Asia (i.e. bypassing neighboring Pakistan). Yet none of them offers the full range of cooperation that the EU has proposed after the signing of the deal, from trade relations to energy and environmental issues, from challenges of migration and drug trafficking to academic and educational exchanges as well as culture. Moreover, Iranian policymakers feel that these “Eastern” (i.e. non-Western in a political sense) partners treat Tehran better when their country maintains its alternatives in, rather than cutting ties with, Europe.

This latter point leads to the issue of trust or, rather, lack thereof. Much as Iranians are frustrated at the Europeans’ inability to disassociate their businesses from US regulations, they understand that the willingness to engage is sincere. What Europeans thus lack in autonomy, they make up with authenticity. With countries in the East, it is different: Their companies may be more autonomous in their actions, as they can more easily ignore US sanctions – be that because they have no ties to the American market, they already face US restrictions in their own domestic context, or they are state-owned and thus less bound by commercial logic. Yet, at least for the time being, suspicion prevails: Iran feels that for big players like Russia and China, it is a pawn that is useful to align with against the United States, but that would be dropped anytime if a bigger bargain is to be had with Washington (while India does not even pretend to withstand US pressure). In turn, Beijing and Moscow are aware that Iran’s first choice for business is Europe – and Tehran approaching them is rather a plan B, aborted the moment that the EU manages to resume trade ties or the United States changes course.

Still, even if there is little to substantiate Iran’s eastward bend, the signaling is important. Europe, policymakers in Tehran are saying, should also pay a price for upholding the deal that it claims to cherish so much. For them, it is already unbearable that Washington gets away scot-free from breaking the deal, as Iran continues to abide by its terms even without receiving the promised economic benefits. Rather than take Iran’s professed reorientation to the East as a fact, the EU needs to appreciate the underlying dynamics (which still put it in a preferred position) and live up to its original commitments. The costs incurred are not primarily to Iran’s benefit but should be weighed against Europe’s aspiration to be a more capable and recognized, independent global actor.