On 20 June 2019, the European Union (EU) announced the start of INSTEX, a mechanism to help entities trade with Iran despite American sanctions. The move, instigated by the United Kingdom (UK), Germany and France, aims to incentivize Iran to stay in the 2015 Joint Comprehensive Plan of Action (JCPOA), otherwise known as the nuclear deal.
As German Foreign Minister Heiko Maas explained to Deutsche Welle, the ability to do business with Europe was a precondition for JCPOA partners to “meet the obligations we entered into in order to demand from Iran that it doesn’t begin military uranium enrichment”.
Russia has since expressed interest in coordinating with the bloc on INSTEX despite deteriorating relations between Brussels and Moscow.
So, what is INSTEX? INSTEX – Instrument in Support of Trade Exchanges – is in essence a multimillion-euro credit line that will allow companies to trade with Iran. There are several layers to this.
Firstly, INSTEX will act as a ‘diplomatic shield’ for the exchange of goods as the system is endorsed by EU governments: the three sponsoring governments are major players and high-level officials – UK Permanent Under-Secretary of State for Foreign Affairs Simon McDonald, head of the Economic Department at the German Foreign Office Miguel Berger and Secretary-General of the French Ministry of Europe and Foreign Affairs Maurice Gourdault-Montagne – sit on its governing council, which should make it diplomatically difficult, in theory, for the US to pressure companies from these countries because the system is backed by their own government.
In addition, the mechanism will operate from Paris under the management of Per Fischer, formerly of Commerzbank. The UK will head the supervisory board.
Secondly, transfers do not happen directly between European and Iranian businesses. INSTEX coordinates payments so that euros intended to buy goods from Iran are actually paid to another company due to receive payment for goods it sells to Iran. Iranian companies do the same thing in their currency through the Special Trade and Finance Institute (STFI), which replicates the INSTEX system, so Iranian rials do not need to enter the EU and euros do not need to cross into Iran. A virtual ledger is used to manage the balance.
A further safeguard is in place, namely that INSTEX will initially only focus on humanitarian-type goods such as pharmaceutical products, medical devices and food, which fall outside the sanctions.
The nuclear deal has been on precarious ground since US President Donald Trump unilaterally withdrew last year, reimposed sanctions on Iran’s oil export sector and threatened companies with stiff penalties should they deal with the Islamic Republic.
While Europe and the International Atomic Energy Agency have said the deal is effectively curbing Iran’s nuclear capabilities, the US has disputed this. Indeed, on 1 July, Tehran surpassed the 300kg limit on its enriched uranium stockpile as set out in the agreement. Iran argued it is not in breach as it is entitled to take reversible steps in response to the US reneging.
European leaders have sought ways to keep the JCPOA intact without US involvement despite the deal’s aim of minimizing sanctions on the country. The idea behind INSTEX first emerged in January 2019, when Brussels-based international payments system SWIFT was fingered as a potential sanctions-breaker in international trade between other states and Iran. US action against SWIFT could have had implications for global payments, leading SWIFT to comply with the sanctions and suspend access to certain Iranian banks. Lacking an instrument through which to facilitate payments to Iran, the idea for INSTEX was born.
While relatively few goods are currently in INSTEX’s sights, Federica Mogherini, High Representative of the EU for Foreign Affairs and Security Policy, indicated that the scope and membership of the mechanism could expand in the future and could include Russia. At present, ten EU states are members and the credit line extends to just several million euros, whereas EU-Iran trade had been worth €20 billion annually. There is, therefore, some scepticism that the mechanism will be an adequate solution to the hardship incurred by the sanctions.
Other issues could arise if there are imbalances in the INSTEX ledger between imports and exports as this could mean companies have to wait for payments.
The fact also remains that oil is the biggest area where Iranian trade has been hurt, and Iran needs the revenue from oil sales to use the mechanism. This is where Russia’s and possibly China‘s involvement could be interesting as they both want Iran’s oil.
Still, for companies that do trade through INSTEX, EU diplomats insist the stakes are lower. In response, the US said it was ‘closely following’ reports on the trading mechanism and would not exclude the possibility of ‘severe consequences’ for activities that circumvent US sanctions, including a loss of access to the US financial system and the ability to do business with the US or US companies.
However, Washington made it clear that it does not believe there will be significant demand for the mechanism. “If a corporation is given the choice between doing business in the United States or doing business in Iran, it’s going to choose the United States every time,” said Brian Hook, US Special Representative for Iran.
Other analysts argue that the mechanism may force the US may reassess its position on the JCPOA, considering the three biggest economies in Europe are involved in the scheme.
“It’s not going to be a silver bullet for Iran’s economic problems,” Naysan Rafati, Crisis Group’s Iran Analyst, told Fanack, “but the question is whether it can be built up into a significant enough conduit, financially as well as diplomatically, to keep the agreement from fraying further.”
As a step that has gone ahead despite harsh sanctions, increasing membership outside the EU could leave the US isolated and bring into question its global influence.
However, the Atlantic Council observed that INSTEX, despite being headed by high-level diplomats, does not appear to involve relevant financial experts, begging the question as to whether the mechanism is a political solution rather than an economic one, which may signal to Iran that the EU is not taking its commitments under the JCPOA seriously.
At the same time, the STFI’s appointed members all come from the Iranian banking sector, but none are high-ranking officials like their European counterparts. This may also indicate Iran’s lack of confidence in the mechanism as a legitimate economic solution.
In the background, the Islamic Revolutionary Guard Corps captured the British tanker Stena Impero and its 23 crew members in the Gulf on 19 July, provoked by the UK detaining an Iranian tanker off Gibraltar to stop it taking oil to Syria, which some reports indicate followed pressure from the US. The EU has remained fairly silent on the matter, and Britain is contending with a possible no-deal Brexit under newly appointed prime minister Boris Johnson. While these issues remain separate from INSTEX, the mechanism’s application, membership, scope and survival could prove to be a diplomatic minefield in the current geopolitical environment.