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Good morning and welcome to this Wednesday’s edition of Global Insider! I’m Matthew Karnitschnig, POLITICO’s Chief Europe Correspondent, reporting once again from Berlin. Germany took a surprising step last year when it agreed to go along with an EU plan to outlaw new gasoline-powered vehicles in the bloc from 2035. Chancellor Olaf Scholz surprised everyone again this year when he walked back his approval. More below. But first, a spotlight on Iran.

LOOPHOLE EXPERTS. It’s no secret that Iran has perfected the art of sanctions evasion over the years. The Islamic Republic has been the subject of varying degrees of U.S. and international sanctions ever since the 1979 revolution. Under former President Donald Trump, Washington tried to really turn the thumbscrews on the mullahs with the “maximum pressure campaign,” but here again the Iranians proved adept at finding loopholes.

CLOSING THE GAP. One of the biggest of those loopholes — also known as the United Arab Emirates — might be about to close. Last week, the U.S. government agencies — Treasury, Commerce and Justice — signaled they were going to crack down on individuals and jurisdictions that are helping Russia to evade Western sanctions. One of the main hubs for that activity, according to Western diplomats, is the UAE.

UNDER THE RADAR. Yet Western officials told POLITICO that most of the sanctions evasion in the UAE, which is carried out through shell companies, doesn’t involve Russia, but Iran. The officials estimate one-quarter of Iran’s total foreign trade flows through the UAE and its banks, via front companies used to mask sanctioned transactions involving oil and petrochemicals. That trade has continued largely unabated throughout the recent domestic upheaval in Iran and in the face of the intense international concern over its nuclear program.

THE ENEMY OF MY ENEMY. A big fear in Washington and other Western capitals, as POLITICO reported in November, is that Tehran is sharing its sanctions-evading playbook with Moscow. The U.S., which needs the UAE’s cooperation on other fronts in the Middle East, had been reluctant to crack down on the Iranian dealings, but recent intelligence showing that Russia has begun to rely on the Gulf states as a backdoor to evade sanctions has prompted Washington to take a tougher stance.

A “compliance note” issued by the U.S. agencies last week —“Cracking Down on Third-Party Intermediaries Used to Evade Russia-Related Sanctions and Export Controls” — reads like a instruction manual for how Iran has gamed the UAE financial system to evade international sanctions.

HOW IT WORKS. A lack of adequate enforcement in the UAE has turned its currency, the dirham, into the world’s most powerful sanctions-evading tool, the diplomats said. The way it works is that shell companies used for illicit transactions receive funds in dollars or euros and then convert them into dirhams, which Tehran can then use to fund trade between UAE, the gateway for much of Iran’s foreign trade, and the Islamic Republic. Some of the funds are also converted into a different currency, making the original transactions even more difficult to trace.

“The dirham is like a bus station,” one Western diplomat said. “One passenger – or currency – gets off and another one gets on.”

UAE RESPONDS. The UAE insists that it has “clear and robust processes in place” to handle such abuse. Western officials, however, say that assertion couldn’t be further from the truth.

The only question now is whether Washington’s bark is worse than its bite.

Few countries are as closely associated with a single business as Germany is with its storied automobile sector. All the more surprising then that Berlin agreed last summer to go along with an EU plan to kill the heart and soul of Germany’s most important industry — the internal combustion engine.

THE PROPOSAL. Under the proposed EU regulations, no new gasoline-powered vehicles could be registered in a member state from 2035 onward. The thinking behind the plan is that it would force Europe’s auto sector to go electric, reducing emissions and (with a bit of luck) help to save the planet.

COLD FEET. What seemed like a good idea back in July when much of Germany was baking during a heat wave seems less attractive in the dead of winter as the country’s political class becomes increasingly concerned about the economic outlook (and their electoral future) amid the war in Ukraine and other pressures. Much to the surprise of just about everyone in Brussels — even European Commission President Ursula von der Leyen, a German — Berlin is shifting gears. At the very last minute, just days before the auto ban was due to receive rubber-stamp approval after years of arduous negotiation, Berlin got cold feet.

COUNTERPROPOSAL. Germany and a few other EU countries are now blocking the move. What Berlin wants is for the EU to create an exemption for so-called e-fuels, made from captured CO2 which can be used as an expensive replacement for fossil fuels. Though e-fuels pollute less than traditional gasoline, they are extremely expensive to make and their production requires much more energy than generating electricity to power cars. The big advantage for Germany, however, is that e-fuels can be used to power traditional automobiles. In other words, the German car industry wouldn’t have to go all electric. More important: The thousands of jobs that would be at risk in an electric-car future could be preserved. Maybe.

HERE’S WHY. The math is simple: An internal combustion engine has more than 300 components. A typical electric motor has a fraction of that and does not require the vast majority of the highly engineered steel components German engineers have spent the past century perfecting. That means the thousands of mid-sized German companies that make those parts — known as the Mittelstand — won’t have much of a future.

TOO LATE? Just how hard this shift would hit the Germany economy isn’t clear. But it could be devastating. The auto industry and its long tail account for one-third German economic output by some accounts. Sure, the Germans make electric cars too, but they’ve been slow to innovate and lag the likes of Tesla and Asian manufacturers when it comes to developing long-range batteries — the crucial component in an electric vehicles. That probably explains why Germany’s business friendly Free Democrats, the smallest of the three parties in the government coalition, are now saying “Nein!” to killing Das Auto. Trouble is, it might already be too late. Big German carmakers like Mercedes are well on their way to going all electric in Europe.

WARNING FOR EU. The biggest lesson from this episode has nothing to do with cars, but with how Brussels works. Germany’s move to renegotiate the car ban after a deal had been reached is unprecedented and insiders warn it will make European decision-making, fraught at the best of times, that much more complicated. The worry is that other countries will take their cue from Germany and try to win better terms on deals at the last minute after a consensus has been reached.

GEORGIA ON MY MIND. Amid growing worries that Georgia’s government could be leaving its pro-Western path, thousands of people demonstrated in the former Soviet republic overnight, waving EU flags and facing down riot police in protest against a controversial law that critics, including, the country’s president, say is “dictated by Moscow.”

KLEPTOWATCH

HIS OWN HARSHEST CRITIC? A growing uproar in the EU over the bloc’s top transport official accepting free flights from Qatar Airways while the country was in the midst of negotiating open access to the European market took an unexpected turn when the Commission revealed that the official in question, Henrik Hololei of Estonia, was himself responsible for determining whether his flights posed a conflict of interest. The EU executive branch previously said that Hololei's trips had been in line with the rules, and all potential conflicts of interest were "carefully considered and excluded” at the time.

PUTIN’S PALS UPDATE. Gerhard Schröder, the former chancellor of Germany who negotiated the controversial Nord Stream natural gas pipeline with Russia and then went to work for the company after leaving office, can’t be kicked out of his Social Democratic party, a court ruled. Schröder’s close ties to Putin and his business entanglements there don’t justify stripping him of this membership card, the judges said.

MERCENARY MAMA. The mother of Wagner group chief Yevgeny Prigozhin won a court case against sanctions at the European Union’s second highest court. The General Court ruled that merely being a family member of Russian President Vladimir Putin’s ally Prigozhin wasn’t enough of a reason to be put on a sanctions list and annulled Violetta Prigozhina’s listing.

“Exile,” narrated by Mandy Patinkin (of “Homeland” fame). In the episode “The Missing Maidens,” the podcast looks at a German who refuses to do the right thing.

“A Plan B to Contain the Islamic Republic.” With the Iran nuclear deal all but off the table amid the regime’s crackdown on its citizens, Biden needs a new plan, argues Suzanne Maloney in Foreign Affairs.

“Homelands: A Personal History of Europe,” by Timothy Garton Ash. The renowned British historian reflects on his more than 50 years of exploring and trying to understand the Continent.

Thanks to editor Sanya Khetani-Shah and producer Andrew Howard

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