Timid EU Trade Tool To Keep Tehran Standing

Iran’s president Hassan Rouhani, at a rally marking the 40th anniversary of the Islamic Revolution in Tehran on Monday, vowed to overcome US sanctions. But while Rouhani once placed great hope in the Joint Comprehensive Plan of Action that was signed with the United States and other world powers in July 2015, his government is now forced to reckon with a new, untested European vehicle for trade.

On January 31, the United Kingdom, Germany and France announced the creation of a long-negotiated special purpose vehicle called INSTEX, or the Instrument for Supporting Trade Exchanges. The purpose was to protect the nuclear deal.

The EU3 in their joint statement described the initiative as a “first step,” which would primarily address “pharmaceutical, medical devices and agri-food goods.” The three governments said they hoped that in the long term, third countries wishing to do trade with Tehran would also be able to utilize it.

The initiative has garnered mixed reactions in Iran. Foreign Minister Javad Zarif, who led the nuclear deal negotiations, has welcomed it and expressed hope it could be expanded. But many hardline politicians saw it as humiliating.

Now the question remains: is INSTEX a game-changer in the current conundrum of Iran sanctions?

Crude reality

Though INSTEX is still on paper and in order to have a balanced appraisal about its full effect on Tehran’s foreign trade, one needs to wait for further operational details to be announced. There are certain issues which need to be highlighted.

First, the scope of INSTEX is limited – at least for now – to necessary goods such as food and pharmaceuticals.

Second, INSTEX does not include third parties. Given that Iran’s main trade partners, as well as its main importers of oil, are China and India, the special purpose vehicle’s effectiveness for handling much-needed oil money remains in question, as Mohammadreza Pourebrahimi, the head of the Economic Committee of the Iranian Parliament, recently pointed out.

Europe does not import considerable crude from Iran. Even Greece and Italy, which were granted exemptions from sanctions by Trump’s administration, did not resume buying Iranian oil after the sanctions came into force. Furthermore, European companies who have business with the United States still do not have any incentive to do business with Iran and risk their fortunes in the larger US market.

Strings attached

Another element which may put the special purpose vehicle in jeopardy, or at least stir political infighting against moderates inside Iran, is that it requires Tehran to get in line with the intergovernmental Financial Action Task Force on Money Laundering (FATF). 

Iran is now on the Paris-based group’s blacklist. The requirement to “implement all elements of its FATF action plan” has been met with the fierce opposition from the conservatives and hardliners in the Expediency Discernment Council.

Regardless of how effective INSTEX might be, the future of the Iran sanctions will depend on decisions to be taken by multiple parties with yet unknown outcomes. Iran’s ability to handle the US sanctions will depend partly on whether Washington extends its six-month sanction waivers given to eight countries to buy limited amounts of Iranian crude, valid until April 2019, or it persists on its goal of bringing Iran’s oil exports to zero.

If new sanction exemptions are not issued by the US, then oil importers hardly would continue their business with Iran regardless of the operational details of INSTEX. In that scenario the question for oil companies would not be how to transfer oil money to Iran, but to choose to do trade either with Iran or the US.

Towing Trump’s line

The creation of INSTEX has led some observers to speculate that this special purpose vehicle could be the beginning of Europe’s gradual financial independence from the United States. It would be followed by establishing a rival to the dollar-clearing system and the US-dominated SWIFT. 

However, the E3 has been equally vigilant not to provoke US President Donald Trump, and have thus limited INSTEX to food and medicine purchases – items already exempt from the US sanctions. Perhaps the relatively soft reaction of the Trump administration to INSTEX was evidence of a covert mutual understanding between both sides about keeping within Washington’s red lines. 

The goal of the European trio is to ensure that Iran will adhere to its commitment to the JCPOA and thus deter any regional crisis resulting from its potential pull-out.

The success of that goal may depend, however, on whether Europe has the political will to expand INSTEX into a practical vehicle to facilitate the day-to-day financial needs of Iran, and also to expand it to include third parties.

The most critical factor, however, may lie to the east.

The outcome of upcoming US trade negotiations with China, one of Iran’s top trade partners, may well determine the future of sanctions against Tehran. Though there is no evidence that any matter related to Iran is on the table as part of ongoing trade talks, scheduled to conclude March 1. However, the outcome will inevitably affect China’s level of cooperation in sanctions against Iran.

If an agreement is reached between the two powers, it is likely that China will take a tougher position against Iran and limit the Islamic Republic’s access to its financial institutions. Already, China’s Bank of Kunlun – which is controlled by the state-owned China National Petroleum Corporation and which has been a vital institution for transferring money to Iran – has halted those transfers, perhaps in a move to appease Washington.

While INSTEX may not be an ideal means for Iran to trade with the world, and while it does not provide incentives for European companies to do business with Iran at the expense of the US, it will help to procure necessary food and medicine. 

Only a cursory look at the situation in Iran, where a recent shortage of red meat sparked a surge of prices and government rationing, indicates that even a narrow channel like INSTEX may prove pivotal for a regime confronting the worst economic challenge in its 40-year history. 

Cover photo: Iranian deputies face the EU High Representative for Foreign Affairs Federica Mogherini after President Hassan Rouhani’s swearing in ceremony for his second term at the Iranian parliament in Tehran on August 5, 2017. Photo: AFP/Anadolu Agency

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