Very often in the course of geopolitical striving, groups or individuals deciding to act defiantly resort to methods and tactics that barely push their own agenda forward. These efforts often amount to the political equivalent of grasping at straws.
Last week, three European powers jointly announced the creation of a trade channel to keep commerce open between the European continent and the Islamic Republic of Iran.
The foreign ministers of Britain, France, and Germany unveiled INSTEX, the “special purpose vehicle aimed at facilitating legitimate trade with Iran.” The term “special purpose vehicle” (SPV) is just fancy talk for a mechanism designed to avoid regular financial channels.
“France, Germany and the United Kingdom, in accordance with their resolute commitment and continued efforts to preserve the Joint Comprehensive Plan of Action (JCPOA) endorsed by United Nations Security Council resolution 2231, announce the creation of INSTEX SAS (Instrument for Supporting Trade Exchanges), a Special Purpose Vehicle aimed at facilitating legitimate trade between European economic operators and Iran,” the three foreign ministers said in a joint statement.
“We’re making clear that we didn’t just talk about keeping the nuclear deal with Iran alive, but now we’re creating a possibility to conduct business transactions,” German Foreign Minister Heiko Maas told reporters Thursday after a meeting with European counterparts in Bucharest, Romania where the final steps to activate INSTEX were taken. “This is a precondition for us to meet the obligations we entered into in order to demand from Iran that it doesn’t begin military uranium enrichment,” Maas said.
According to media reports, INSTEX will be based in Paris and will be managed by German banking expert Per Fischer, a former manager at Commerzbank. The UK will head the supervisory board.
What is the SVP Designed to Do?
Following Donald Trump’s decision to abandon the Obama-era nuclear deal with Iran and reintroduce sanctions, the European partners to the deal were left with a conundrum: Keep trade open with Iran and suffer the repercussions of U.S. penalties, or risk the collapse of the nuclear deal all together.
INSTEX is a non-conventional solution to this dilemma.
The U.S. is able to enforce sanctions due to its tremendous influence over the standard mechanism used in financial interactions today, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. America is able to monitor what businesses are dealing with Iran and take action accordingly.
INSTEX sets up a credit account between the Iranian and European sides that companies can use to sell goods, an account the American’s can’t check.
Will it Work?
While certainly a clever idea, because INSTEX must operate via nontraditional pathways of trade, it has very serious limitations.
INSTEX is not an alternative SWIFT, but rather a government-run corporation that acts as a clearinghouse for credit points. For instance, if an Iranian company delivers goods to a European counterpart, it can use the credits it receives to pay for purchased goods. In a way, it is essentially a complex bartering program. But that means that the system works only if trade is somewhat balanced between all parties.
Europe’s new SVP will certainly relieve some of the strain Iran is feeling due to the sanctions, but it is unlikely to restore European-Iranian trade to its pre-Trump levels.
Furthermore, INSTEX does not magically give companies carte blanche to trade with Iran as it wishes. It doesn’t even provide a loophole to sanction rules. All its does is give firms plausible deniability if they do trade with Iranian businesses. Any company using INSTEX will run the risk of being “uncovered” by the federal government.
If anything, being relegated to INSTEX could hurt some of Iran’s national objectives. INSTEX will function under very strict international standards with regards to anti-money laundering and combating the financing of terrorism. This means that it will be near impossible for Iran to use any of the profits gleaned from this system to fund their various proxy wars in the region, such as those in Syria and Yemen.
All of the drawbacks to INSTEX have even lead some Iranian politicians to bash the new SVP.
On 2 February, Prime Minister Amir-Hossein Ghazizadeh Hashemi of Iran’s conservative FIRS party, tweeted that INSTEX is “a disgrace” in the way that it manipulates Iranian leaders to trade in such a confined fashion, adding that the new system is proof “the Westerners have become conditional toward Iran.”
The U.S. Reaction
Technically speaking, the very existence of INSTEX is not a violation of American sanctions. The question is what the alternative system will be used for. As of now, the SVP will only be used to trade in food, pharmaceuticals, and medical devices. All of these products are in any case not restricted under the administration’s sanctions. The problem for Iran has been being able to pay for these items, as many of its payment channels have collapsed or been blocked in wake of the country’s deteriorating economic situation. INSTEX gives Iran the ability to now buy these staple items.
Still, INSTEX is by design meant to dodge Trump’s penalties on dealing with Iran. To that extent, it has drawn suspicion from the administration. Following the launch of the SPV, the State Department said it was “closely following” reports on the European mechanism. A spokesman for the U.S. Embassy in Germany said last week that “the president has made clear, entities that continue to engage in sanctionable activity involving Iran risk severe consequences that could include losing access to the U.S. financial system and the ability to do business with the United States or U.S. companies.”
