Elena Ventura’s in-depth analysis for CeSI on Instex, a mechanism for exchanging goods between European and Iranian companies without resorting to financial transactions
On 8 July, Iran declared that it had officially violated the terms of the Joint Comprehensive Plan of Action (JCPOA), after resuming uranium enrichment activities up to 4.5%, therefore beyond the imposed limit of 3.67%. This violation, however, would represent only a first phase of the progressive move away from the provisions of the JCPOA, which should continue towards a potential enrichment of uranium up to 20%, a percentage considered to be the threshold to be overcome to work on the development of a military atomic capacity.
The JCPOA is the nuclear agreement signed in 2015 by the permanent members of the UN Security Council plus Germany and the EU with Iran. This agreement was born with the aim of limiting Tehran’s nuclear research program and averting the acquisition by the Islamic Republic of a military atomic capacity, offering in exchange a lifting of the sanctions imposed by the Security Council. However, the US exit from the JCPOA in 2018 and the subsequent reintroduction of sanctions made this agreement vulnerable and heightened tensions between the US and Iran. Not only have primary sanctions prevented American companies from doing any kind of trade with Iranian entities,
The secondary sanctions, in fact, consist in denying access to the US market to third-country subjects who conduct commercial or financial activities with the Islamic Republic and in freezing or seizing the funds of companies that have branches or are present in the United States and that they trade with Iran. Therefore, many international companies have stopped all economic transactions with Iran for fear of being excluded from the much more profitable US market. In this way, however, the reintroduction of sanctions has effectively nullified the expected economic benefits that should have derived from the JCPOA for Iran and led the Tehran government to think about taking a step back from what was agreed.
The prospect of a normalization of trade with the outside world had been the pivotal reason for Tehran’s choice to sit down at the negotiating table. Since there have never been any beneficial effects on the domestic economy due to American sanctions, Iran has repeatedly accused the European Union and especially Germany, France and Great Britain (the so-called E3 group) of not respecting the commitments made. and created tension in relations between Tehran and Brussels. In particular, Iran’s perception of an EU complicity with respect to the Trump administration’s policy, generated by the failure to take a European position with respect to the re-imposition of sanctions, has led the Iranian government to cool the tone of the dialogue also with the diplomacy of the Old Continent.
The progressive derailment of the JCPOA, therefore, is exerting significant pressure on the European states, which have found themselves not only having to demonstrate to the Iranian counterpart their willingness to safeguard the agreement, but above all having to find a concrete solution to ensure Tehran so much prospected benefits for their economy and thus avoid any further step backwards with respect to the fulfillment of the obligations established by the JCPOA.
To try to move in this direction, the EU has recently inaugurated an instrument to facilitate trade exchanges, known as Instex (Instrument in Support of Trade Exchanges). Designed by E3, Instex is a Special Purpose Vehicle (SPV), which is a mechanism for exchanging goods between European and Iranian companies without resorting to financial transactions. Through this mechanism, in fact, a European company wishing to purchase an asset from an Iranian company would not make the payment directly to the counterpart, but would go through Instex, which would make the payment from its headquarters in Iran, so as to avoid any passage of international money. Instex is based in Strasbourg and currently has a modest capital of 3,000 euros, which is expected to increase in the near future.
Although it represents a concrete initiative to try to circumvent the obstacles posed by sanctions, to date there are still several problems that make Instex only partially effective.
First of all, to be operational this system requires the creation of a parallel system in Iran, the establishment of which has yet to be launched.
Secondly, in order to be effective, the mechanism must have the participation of convincing a large number of companies and member countries to join it. In fact, as previously specified, most European companies have completely abandoned the Iranian market to ensure access to the American one. The centrality and importance of the US dollar in the world market means that almost all international transactions must comply with US regulations. Therefore, the major banks and companies have adopted a culture of so-called over-compliance, i.e. they have preferred to interrupt any economic ties with Iranian entities, as the risk of American sanctions would have much more devastating effects than those caused by the loss of customers or economic partners. Iranians.
Instex does not envisage any collaboration with the United States and, in particular, with Ofac, the Foreign Activities Control Office. The latter is the body responsible for establishing and regulating economic sanctions with the aim of promoting American foreign policy. Although Instex was born out of a need to create an alternative to the centrality of the dollar in the global economy, without any involvement of Ofac, European companies and the system
in general risk suffering heavy repercussions. In fact, as there is no explicit guideline on which Iranian entities are on the white list, the European companies involved in Instex remain at risk of sanctions.
Although it seems destined not to involve large companies, which have a strong market in the United States and would risk severe repercussions, Instex could however represent a good channel for small or medium-sized enterprises, more agile and flexible in the diversification of relations between the United States and Iran.
Finally, crucial for the effectiveness of the mechanism will be the variety of assets and sectors that will be included within Instex. At the moment, in fact, the mechanism only provides for the sale of food, medicine and humanitarian aid. This implies a lack of balance between import and export, as European imports from Iran of this kind of goods are not comparable to Iranian imports from Europe. A solution under consideration is the introduction of the sale of oil, but the sensitivity of the energy discourse in the eyes of the United States is making this step complicated.
The inclusion of oil is also strongly supported by China and Russia, signatory countries of the JCPOA and which look to Instex as a possible tool to facilitate trade also towards their own markets. Although it is not yet clear how the involvement of Moscow and Beijing in the mechanism could be structured, it remains highly probable that the two countries will try to support a development in this direction, also to counterbalance the current position of the United States politically.
Ultimately, it is clear that there are different expectations regarding Instex. The European Union perceives this project as a signal to Iran demonstrating that European countries are willing to defend the Iranian economy and preserve the JCPOA. However, this initiative not only places the European Union in open conflict with US foreign policy, but above all tries to counter the isolation strategy implemented by the White House towards Iran, which has always been an important trading partner for the Old Continent. The success of Instex, therefore, is destined to confront the EU with the need to balance the historic alliance with the United States, on the one hand, and the need to preserve the political and economic interests of the relationship with Iran, on the other. Mostly,
Article published by cesi-italia.org
