EU and Iran Towards a New Partnership?

The recent visit of Catherine Ashton, High Representative of the European Union for Foreign Affairs and Security Policy, to Tehran is a clear sign that diplomatic relations between Iran and the EU are improving. This event should be seen as a continuation of the process started in November 2013 in Geneva when Iran and the P5+1 (5 members of the National Security Council of the United Nations and Germany) signed a ‘Joint Plan of Action’ (JPA), an agreement for a negotiation, which, if successful, could settle the Iranian nuclear crisis.

EU relations with Iran started to improve at the beginning of the 1990s. On the Iranian side, under the pragmatic leadership of Akbar Hashemi Rafsanjani, president since 1989, there was a willingness to rebuild the Iranian economy after the Iran-Iraq war and to normalise relations with the West. The EU wanted to reach out to Iran due to its economic and strategic importance. On the European side, these relations took the form of a ‘critical dialogue’ where sensitive issues like Iran human rights violations, support for terrorism, or opposition to the Middle East peace process could be discussed. After Mohammad Khatami, an advocate of political moderation was elected president in 1997, EU-Iran relations intensified in areas of trade, culture, academics, etc. Negotiations on a Trade and Cooperation Agreement between EU and Iran started in 2001. But suddenly, with the revelations in 2002 that Iran had not reported nuclear sites; the nuclear issue came to dominate the political debate between the two sides. Even then however, despite US opposition, the EU maintained the previous policy of dialogue with Iran. This method led to an agreement between Iran and the EU in 2004: Iran accepted to stop enriching its uranium in exchange for economic, technological and nuclear cooperation.

Throughout this period, trade between the EU and Iran intensified. EU exports to Iran increased from €3.9 billion in 1996 to €11.3 billion in 2006 and imports from €5.8 billion in 1996 to €14.1 billion in 2006 . The main EU exports to Iran were machinery and appliances, transport equipment and chemicals, whereas oil represented 90 percent of EU imports from Iran. The EU also became Iran’s main trade partner. In 2006, the EU was the destination of 38 percent of Iranian oil exports and the main exporter to Iran (31 percent of Iran imports). Major European oil companies like Eni (Italy) and Total (France) invested in Iran’s natural gas sector in the 1990s despite US sanctions. Discussions also started in Europe on the possibility of importing natural gas from Iran to decrease dependency on Russia. One possible support for Iranian natural gas imports could have been the Nabucco project; in 2002, it was suggested that a pipeline from the Caspian Sea to Austria be built to transport natural gas from Central Asia to Europe. In fact, Iran, which possesses the world’s largest natural gas reserves, was the only country that could have met European needs.

The nuclear crisis reached a new momentum with the decision of Mahmoud Ahmadinejad, the new elected president in 2005 to restart the programme of uranium enrichment. Then, partly due to the provocative style of the new Iranian president and change of leadership in Europe , the EU came to take a similar position as the US on the Iranian nuclear issue; Iranians could not be trusted and negotiations were leading nowhere … Europe came to accept the US strategy of imposing bilateral sanctions on Iran. So, in a U-turn in terms of strategy, the EU decided on an oil embargo on Iran, imposed sanctions on a large number of Iranian banks and insurance companies, and decided to deny access to Iranian banks to SWIFT, a provider of specialised financial messaging services. The impact on trade was clear. EU exports to Iran declined from €11.3 billion in 2006 to €7.3 billion in 2012.

Contrary to most expectations, a moderate cleric, Hassan Rouhani, was elected president in Iran in July 2013. The new Iranian government expressed willingness to solve the nuclear issue through negotiations. A first important step was made with the agreement in November 2013 between Iran and the 5+1 for a JPA. According to this plan, during the first phase, Iran would stop enriching uranium at levels higher than 5 percent in exchange for lifting certain sanctions. After this, the two sides would have six months to one year to negotiate a final agreement. The philosophy of these negotiations is that Iran should give guarantees that its nuclear programme is for civil purposes in exchange for the suppression of all nuclear related sanctions. The two sides started negotiating a final agreement in February 2014.

A possible deal on the nuclear issue obviously created expectations that the Iran-EU partnership could be resumed. An Iran-EU partnership could be a way for Europe to leverage more influence in the Middle-East and lead to a more active and influential policy in crises like Syria or Iraq. There should be critical dialogue with the Iranian leadership on human rights issues, but also more cultural and academic exchanges to really engage with Iranian society. Basically, the Iranian society (and its quest for modernity) should be put at the core of the EU policy on Iran.

Europeans are also interested in the economic gains from such a partnership. European companies in the fields of energy, automobiles, railway and aircraft industry (with Airbus), telecommunications and agro-business believe that Iranian markets offer innumerable opportunities. It is a market of nearly 80 million people (with an emerging urban middleclass), quite close to Europe and without payment issues (in the absence of sanctions). In the energy sector, Iran, with the world’s fourth largest oil reserves and the largest natural gas reserves, is attracting European energy majors. Besides, there is a clear strategic dimension to an Iran-EU energy partnership. The present Ukraine crisis has renewed concerns on the EU dependency on Russian oil and natural gas imports . Before the EU embargo, oil imports from Iran represented around 6 percent of EU oil imports. And there is huge potential in terms of natural gas imports from Iran . In the automotive sector, the Iranian market looks very promising. In fact, Peugeot, the French car maker, enjoyed the largest market share before leaving the market in 2012. But the competition is expected to be fierce as Chinese, South Korean and Indian companies are already operating in Iran, and US companies are expected to arrive soon.

On the Iranian side, there are also obviously high expectations. Iran needs European technology in sectors like energy, automotive industry, agro-business, etc. European investment could be specially needed to develop Iran’s natural gas sector. Attracting FDI from Europe would help the Iranian government reach its stated objectives of increasing the size of Iran’s private sector, liberalising the economy and promoting diversification away from oil. Besides, Iranian companies, which have already established cooperation in the past with European companies (in the car industry, for example) are willing to renew such cooperation.

Nevertheless, all these opportunities are dependent on a positive outcome of the present negotiations on the Iranian nuclear issue. On the economic side, some sectors like the car and the petro chemical industries have already been exempted from sanctions with the first phase of the Geneva deal. But most of the sanctions are still in place pending a final agreement. An interesting point is that it may be easier for the EU to lift all the sanctions against Iran than for the US where Congress, which will have to approve the removal of sanctions, could show some reluctance in this respect. This could give the EU some advantage in its quest for the Iranian market.

Despite difficulties in negotiations, there are real hopes that a positive outcome is possible, primarily because the Iranian regime (and the Supreme Leader, Ali Khamenei) and the US government support this process. This means that the geopolitical environment of the Middle East could soon change completely if the US and Iran normalise their relations. It is now time for the EU to defend its strategic interests in the region by starting a new partnership with Iran. Such a partnership has vital economic and diplomatic dimensions for Iran and the EU. Besides, framing a policy with Iran with regard to European economic and geopolitical concerns could also be a way to increase EU’s legitimacy in Europe and abroad.