By John Irish, Robin Emmott and Francois Murphy
PARIS/BRUSSELS/VIENNA (Reuters) - France and Germany are to take joint responsibility for an EU-Iran trade mechanism to minimise the risk of U.S. punishment but few now believe it will cover oil sales, heightening fears for the fate of the landmark international nuclear deal with Iran.
Diplomats said the French-German gambit is a "safety-in-numbers" tactic to overcome the refusal of individual EU states to host the mechanism to sidestep the risk of being targeted by the revived U.S. sanctions regime against Iran.
But with U.S. threats of retribution for sanctions-busting unrelenting, they told Reuters that the goals of the nascent trade mechanism could be scaled back to encompass only less sensitive items such as humanitarian and food products.
That may well fall short of what Iran's moderates wish for to fend off anti-Western hardliners demanding Tehran ditch the 2015 nuclear deal which they opposed in the first place.
"The SPV (Special Purpose Vehicle for trade) is important, but what's more important to the Iranians is oil and ensuring their exports in the long term," said a senior French diplomat.
"None of the measures that we're trying to put in place will perform miracles, but what we're trying to do is a series of measures to convince the Iranians to keep to their nuclear commitments. That is our objective," he said.
France, Germany and Britain - European signatories to world powers' 2015 deal with Iran that curbed its disputed nuclear programme - have scrambled to come up with measures to preserve its economic benefits for Tehran after U.S. President Donald Trump denounced the accord as weak and withdrew from it in May.
The European Union has so far enabled its lending arm, the European Investment Bank, to add Iran to a list of countries with which it does business and introduced a law to shield European companies from U.S. sanctions.
Both measures are part of a wider package meant to show European good faith to Iran and would be complemented with the so-called SPV, a clearing house that avoids monetary transfers in dollars between the EU and Iran.
The goal was to have the SPV legally in place by the time Trump reimposed oil sanctions on Iran on Nov. 5, though not operational until next year.
However, after no countries came forward to host the SPV and only Austria and Luxembourg - small states with solid financial systems - refused for fear of incurring U.S. sanctions, France, Germany and Britain were forced to go back to the drawing board.
"What's in the air now is that France or Germany would host or preside over the SPV," said an EU diplomat. "The French are the most pushy and the Germans are more prudent, but at the same time France doesn't want to bear the brunt for everyone else."
Two other diplomats said that if Paris and Berlin took joint control of the SPV it could deter the Trump administration from directly confronting two major U.S. allies.
Britain is still considering how to contribute, but is restrained by the distracting process of its pending departure from the EU and by the fact the SPV would be trading in euros, not Britain's sterling currency.
French Foreign Minister Jean-Yves Le Drian told the bloc's ministers in a closed-door meeting in Brussels on Nov. 19 that the Paris and Berlin were working closely together to achieve something by year-end, two other EU diplomats said.
The French, German and British finance ministers will discuss the SPV on the sidelines of this weekend's G20 summit, according to a French Finance Ministry source.
Under the 2015 deal, Iran restricted its declared civilian nuclear power programme, widely seen in the West as a front for developing the means to make atomic bombs, in exchange for an end to international sanctions against it.
To circumvent renewed U.S. sanctions, the SPV was conceived as a possible way to help match Iranian oil and gas exports against purchases of EU goods, an effective barter arrangement.
However, those ambitions appear to have been toned down with four diplomats saying the SPV could realistically only be used for smaller trade that might be tolerated by the Trump administration, for example humanitarian or farm products.
Asked whether the mechanism would be able to handle oil sales after all, EU Energy and Climate commissioner Miguel Arias Canete said only that work was continuing.
"We are developing a very sophisticated special purpose vehicle. It is not easy,” Arias Canete said in an interview with Reuters on Tuesday.
The SPV's legal and technical aspects, such as ownership structure, jurisdiction and what banking infrastructure to use if any, were still being finalised, diplomats said.
A person informed of the discussions also said the European Commission was sounding out Washington on the SPV. U.S. officials have repeatedly warned that European banks and firms who engage in the mechanism would be at risk.
IRANIAN OIL PRIORITIES
Continued oil sales to mega-energy consumers India and China could be enough for now to satisfy Iran, easing the need for the SPV to immediately cover crude trade, the French diplomat said.
But another EU diplomat was more blunt, arguing that European efforts were symbolic and ultimately any decision by Iran to stay in the nuclear deal would be political and not based on European measures.
"You can't do big business with pistachios," he said, referring to one of Iran's major, but less lucrative, exports.
Highlighting just how sensitive the issue is in Tehran and the possible disconnect between what the EU can do and Iran's aspirations, Iranian officials have repeated to European counterparts in recent meetings that they are under pressure by clerical and security hardliners and cited the possibility and consequences of Iran exiting the deal in the coming weeks.
"Our priority is to be able to enjoy some banking system for financial transactions and to be able to sell our oil," Ali Akhbar Salehi, head of the Atomic Energy Organisation of Iran, told Reuters in an interview on Tuesday.
"If the SPV answers the two priorities that I just mentioned..., then yes it could be a workable proposal, it can be helpful in keeping the deal alive.”
But a senior Iranian official close to influential hardliners in the Iranian leadership said the Islamic Republic was losing time "by betting on the wrong horse”.
"The EU will think about its own interests. The amount of trade with Iran is like a drop compared to the (EU's) ocean of trade with America. They will eventually leave us. Besides, what have we gained so far? Just words."
(Additional reporting by Alissa de Carbonnel in Brussels, Parisa Hafezi in Dubai and Leigh Thomas in Paris; Editing by Mark Heinrich)