INSTEX: Doubts linger over Europe’s Iran sanctions workaround

Berlin, Germany – With the Iranian nuclear deal hanging by a thread and tensions escalating between Tehran and Washington, Europe is hoping that a new financial mechanism to maintain limited trade will be enough to keep the Iranians in the deal.

Iran has warned it may start to enrich uranium to weapons-grade levels if it does not see any economic benefits from the Joint Comprehensive Plan of Action (JCPOA), which the United States abandoned last year.

On Friday, the three European signatories to the deal, France, Germany and the United Kingdom, known as the E3, confirmed that INSTEX (Instrument in Support of Trade Exchanges) was finally operational. 

The mechanism, which was first announced in January, is designed to enable European companies and Iranian companies to trade without any direct financial flows, thus bypassing the dollar and the US financial system. A virtual ledger offsets balances in a barter system so that payments are exchanged between EU companies importing and exporting to Iran, and the same happens on the Iranian side. In April, Iran launched its counterpart, the Special Trade and Finance Institute (STFI).

However, the scope of INSTEX is initially confined to humanitarian goods such as medicine, medical devices and food, which aren’t directly targeted by US sanctions anyway.

US President Donald Trump reimposed sanctions after withdrawing from the JCPOA in May 2018. The 2015 deal, which had been negotiated by the Obama administration and other global powers, had offered sanctions relief in exchange for Iran agreeing to limit its nuclear activities. Now, instead, the Trump administration is exerting “maximum pressure” on Iran, aiming to cut the country’s oil sales to zero and thus force it to negotiate a broader deal that covers its missile capabilities and regional influence.

Sanctions bite

The US sanctions have severely damaged an Iranian economy that had only just started to recover from the previous sanctions regime. According to an IMF review in April, in 2019 the Iranian economy is expected to contract by six percent and see inflation of 37.2 percent.

Meanwhile, the World Bank reported in April that Iran’s “fiscal deficit is projected to widen as incomes continue to fall short of the previous years due to lower tax revenues [as a result of reduced economic activity] and oil exports.”

For example, data compiled by Reuters show that China and India have significantly reduced oil imports from Iran, while Japan and South Korea completely halted them, as US waivers expired. As a result, the imports from the top four Asian buyers in May were down 78.5 percent from a year ago.

It was a step forward, but it is still not enough and not meeting Iran's expectations.

by Abbas Araqchi

Frustrated with the collapse in trade and economic activity, Iran announced in May that it was scaling back some of its commitments under the JCPOA and warned that if it saw no movement from Europe on trade by July 7 it would resume refining uranium to a higher level than permitted by the deal.

With that ultimatum looming, the JCPOA signatories met in Vienna on Friday. As well as announcing that INSTEX was operational, the E3 countries said complementary cooperation with the STFI will now speed up and other European Union member states were in the process of joining INSTEX as shareholders. “They are also working to open INSTEX to economic operators from third countries,” the EU’s diplomatic service, the EEAS, announced.

However, the initial Iranian response was muted. “It was a step forward, but it is still not enough and not meeting Iran’s expectations,” Deputy Foreign Minister Abbas Araqchi told reporters after the talks. There is still little detail available about the transactions already processed or about how much of a credit line has been made available to enable the first trades, something that is deemed necessary due to the imbalance of trade between Iran and Europe.

The announcement comes amid growing tensions between Washington and Tehran after recent attacks on tankers and the shooting down of a US drone.

In response, the US last week imposed additional sanctions on the country’s supreme leader, Ayatollah Ali Khamenei, and other senior Iranian officials.

Limited effect

With the US making it clear it is determined to enforce sanctions, INSTEX is bound to flounder, says Tobias Schneider, a research fellow at the Global Public Policy Institute in Berlin.

Washington, he argues, “has made it quite clear that they would go after any European institutions and companies that would try to skirt US sanctions.”

“Fundamentally in terms of risk calculation, large European corporations are simply not going to take the risk of trading with a country whose trade volume with Europe is small in the first place and unbalanced.

“For the moment it’s a political signal; the reality is that it’s not going to create enough profit for Iran to consider it sufficient to stay in the deal. At the same time, it might really irritate the Americans as well as some other partners, who rank the transatlantic relationship above maintaining the nuclear agreement with Iran.”

Andreas Schweitzer, managing director of London-based Arjan Capital, which advises firms that operate in the Middle East, is also pessimistic about how much effect INSTEX can have. 

“They will do a small symbolic transaction,” he predicts, but ultimately, INSTEX will run up against the fact it is fundamentally at odds with the American policy towards Iran. “Any payment channel will dilute the American ‘maximum pressure’ approach. In their view they have no incentive to support any such approach,” he told Al Jazeera.

The Americans don’t even need to take explicit action, he says. “Just leaving everybody unclear is weapon enough for the Americans, to put enough fear into everybody’s hearts not to use it, so let’s not underestimate the American fear factor.”

Brian Hook, the US special representative for Iran, said recently of INSTEX: “We just don’t see any corporate demand for it because 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.” 

The Guards’ reach

Marketa Hulpachova, director of research at Doublethink, a Washington-based media think-tank that focuses on the Iranian economy, says one major issue for INSTEX is that the structure of the economy makes it very hard to do any business in Iran without even inadvertently violating the US sanctions. 

“Our research shows that 99 of Iran’s top 100 so-called ‘private’ companies are actually linked to the government or are parastatal organisations linked to the Islamic Revolutionary Guard Corps, which remains an object of EU as well as US sanctions,” she told Al Jazeera.

At the same, time, she argues against discounting the effect that INSTEX may have in improving the ability of ordinary people to get their hands on humanitarian goods, such as medicine and food.

The E3 are preparing the roadmap to sustain trade with Iran, for now it's going to be restricted - but there is the hope that it will be expanded with time.

by Ellie Geranmayeh

Ellie Geranmayeh is the deputy director of the European Council on Foreign Relations’ Middle East and North Africa programme. “There are multiple reports from inside Iran that there is a shortage of medical goods and devices,” she told Al Jazeera. “If these goods can be accessed inside Iran at reasonable prices, it should have “a real tangible impact on the ground”.

Furthermore, there could be a wider psychological effect on Iran’s economy: “It could then boost other areas of trade for Iran, whether that’s domestic investment or perhaps, its business in the region.”

Ultimately, however, she sees the launch of INSTEX as important because of the political message it sends. “The E3 are preparing the roadmap to sustain trade with Iran, for now it’s going to be restricted – but there is the hope that it will be expanded with time.”

Meanwhile, the mechanism’s relatively modest scope also lays bare the inability of Europe to counteract the US behemoth when it comes to sanctions, highlighting its relative weakness and economic dependency on the US and the difficulties of carving out its own foreign policy.

However, Schneider of the Global Public Policy Institute argues this interdependence should not necessarily be sacrificed to keep the deal going with Iran, when there are bigger overarching interests that Europe and the US share, such as containing China.

In this context, INSTEX may actually set a dangerous precedent of creating a parallel mechanism that bypasses the dollar. “You are trying to create a backchannel to the integrated, international financial system, the US-centred, US-dollar backed financial system,” he says.

“We can’t on the one hand continuously say that we are invested in this global, liberal rules-based order, another word is integration, and at the same time, try to decrease interdependence,” Schneider argues. “Cutting ties with the US means decreasing integration, interdependence with our closest ally, and the closest thing we have to a partner.”