By Frances Coppota – Re-Blogged From Forbes
Europe has found a way of circumventing U.S. sanctions on Iran. The governments of France, Germany and the United Kingdom have developed a special purpose vehicle (SPV) to enable European businesses to maintain non-dollar trade with Iran without breaking U.S. sanctions. That SPV, known as INSTEX, is now up and running.
The three governments announced the successful implementation of INSTEX at a meeting of the Joint Commission of the Joint Comprehensive Plan of Action (JCPOA) on June 28, 2019. The meeting was chaired on behalf of the EU by the Secretary General of the European External Action Service (EEAS), Helga Schmid, and was attended by representatives of China, France, Germany, Russia, the United Kingdom, and Iran.
In a statement, Schmid said:
France, Germany and the United Kingdom informed participants that INSTEX had been made operational and available to all EU Member States and that the first transactions are being processed. Ongoing complementary cooperation with the Iranian corresponding entity (STFI), which has already been established, will speed up. They confirmed that some EU Member States were in the process of joining INSTEX as shareholders, the special purpose vehicle aimed at facilitating legitimate business with Iran. They are also working to open INSTEX to economic operators from third countries.
JCPOA is better known as the “Iran nuclear deal.” The U.S. unilaterally withdrew from JCPOA in May 2018, when it reimposed sanctions on Iran’s oil export sector. But other countries, including EU member states, have so far declined to follow suit. They claim that Iran is complying with the terms of the deal, and the U.S.’s decision to reimpose sanctions was unjustified.
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When the U.S. withdrew from JCPOA, it said that companies breaking the reimposed sanctions would face stiff penalties. Among the companies the U.S. administration listed as potential sanctions-breakers was the Brussels-based international messaging service SWIFT, which is the lifeblood of international payments. In November, evidently concerned about the potential consequences for global payments if the U.S. retaliated against it, SWIFT announced that it would comply with U.S. sanctions:
In keeping with our mission of supporting the resilience and integrity of the global financial system as a global and neutral service provider, Swift is suspending certain Iranian banks’ access to the messaging system. This step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system.
This was widely seen as a setback for the EU, which had been hoping that SWIFT would defy the U.S. and maintain payment services to Iran. But European governments were still determined to find a way of keeping trade with Iran going. If SWIFT wouldn’t help, they would create something to replace SWIFT for Iranian trade. Thus, INSTEX was born.
Exactly how does INSTEX facilitate trade with Iran without making sanctions-busting cross-border payments? In a word – barter. INSTEX matches the Euro payments of companies buying goods from Iran with the Euro receipts of companies selling goods to Iran. Imagine a company based in France wants to sell transport equipment to a buyer in Iran. Receiving Euro payments directly from that buyer would break U.S. sanctions. So instead, the French company would register the sale documentation with INSTEX. INSTEX would look on its own books for a company buying foodstuffs from Iran. It would match the two cash flows so that in effect the two European companies pay each other. The goods would still travel to and from Iran, but the money would stay entirely within the EU.
On the Iranian side, INSTEX is mirrored by a similar SPV, known as STFI. STFI would likewise match incoming and outgoing transactions. So the two Iranian entities would also effectively pay each other. Thus, everyone would receive their goods and payments, but no money would cross the Iranian border.
INSTEX will most likely facilitate trade by smaller firms, especially in humanitarian produce (food, medicines), at least to start with. However, trade volumes need to be high enough for INSTEX to be able to match cash flows reliably. If volumes fall too low, or become significantly imbalanced, there would be payment delays and potentially solvency problems for INSTEX itself. European governments, concerned that companies might be reluctant to use INSTEX for fear of U.S. retaliation, have therefore taken two further steps to encourage its use.
Firstly, they have created a “diplomatic shield.” INSTEX is explicitly backed by the three sponsoring governments, and its governing council consists of high-level government officials. The JCPOA statement also reveals that other EU countries are becoming shareholders of INSTEX. The idea is that the U.S. would find it diplomatically difficult to pressure companies whose governments are backing INSTEX. Admittedly, the present U.S. administration has shown little concern for diplomatic niceties: if a country does something it doesn’t like, it retaliates. It is therefore unclear how effective this “diplomatic shield” will be.
Secondly, as the JCPOA statement indicated, the aim is to open INSTEX to third countries. China and Russia were both present at the meeting, and both have an interest in trading with Iran. Crucially, their trade could include oil. The European Council on Foreign Relations (ECFR) observes that “the SPV is more likely to succeed if it links with revenues related to Iran’s oil exports to countries such as China, India, and Japan.”
Washington has not yet responded to the announcement that INSTEX is up and running. But it could regard such defiance of its stance on Iran as an unfriendly act, particularly as tensions escalate between the two countries over the shooting down of an American drone. Arguably, by helping companies circumvent sanctions, the EU is inviting retaliatory action. But should the U.S. really be able to force other countries to follow its lead when those countries fundamentally disagree with its stance?
The fact that INSTEX’s implementation went ahead despite President Trump imposing additional sanctions on Iran shows how little support there is in Europe for the U.S. administration’s belligerence. If INSTEX also succeeds in attracting major third countries such as China, the U.S. may find itself increasingly isolated. This could call into question not only the relationship between the U.S. and its allies, but also the U.S.’s power in the world.