On January 31, Britain, France, and Germany announced the establishment of a Special Purpose Vehicle (SPV) for European companies to facilitate trade with Iran. The entity is formally named the Instrument in Support of Trade Exchanges (INSTEX). The “exact method INSTEX uses will be the first instance in which Europe tries to mitigate the effects of U.S. secondary sanctions on what it sees as legitimate trade,” according to Ellie Geranmayeh and Esfandyar Batmanghelidj.
European leaders said that INSTEX will enable companies to trade humanitarian goods – such as food, medicine, and medical devices – that are exempt from U.S. sanctions under the Trade Sanction Reform and Export Enhancement Act of 2000 (TSRA) with Iran by means of barter, thereby avoiding transactions in U.S. dollars. “It is a political act. It is a gesture to protect European companies,” said French Foreign Minister Jean-Yves Le Drian.
INSTEX is part of a wider European effort to ensure that Iran receives economic benefits under the 2015 nuclear deal, despite the U.S. withdrawal. Although TSRA goods are exempt from U.S. sanctions, major European banks have reportedly been reluctant to facilitate any trade with Iran out of concern of running afoul of complex U.S. sanctions laws. When asked for comment on the SPV, a U.S. State Department spokesperson warned that “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.” The official did not expect the SPV to impact U.S. efforts to put economic pressure on Iran to change its behavior.
Geranmayeh and Batmanghelidj outlined how INSTEX could work in a brief for the European Council on Foreign Relations. An excerpt is below, followed by European, U.S., Iranian and international comments on the SPV.
An important element of the mechanism is its sovereign backing from the E3. The supervisory board of INSTEX will include senior European diplomats such as UK Permanent Under-Secretary of State for Foreign Affairs Simon McDonald; Miguel Berger, head of the economic department at the German Foreign Office; and Maurice Gourdault-Montagne, secretary-general of the French Ministry of Europe and Foreign Affairs. The E3 governments are also shareholders of INSTEX.
The E3 have gone to great lengths to create a diplomatic shield around INSTEX and to share risk among the biggest economies in Europe. With the E3 having stuck their necks out, several other European countries are also considering joining the SPV as shareholders. While this does not eliminate the risk of US pressure on the mechanism, it does substantially raise the stakes for Washington should it seek to directly sanction or otherwise coerce a sovereign European entity or its senior management board – as it has with the European private sector.
It is important that the Iranian government now establishes another SPV to mirror INSTEX inside Iran. To persuade European companies to use the SPV, the Iranian entity will need to meet high standards of transparency in anti-money laundering and counter-terrorism financing regulations. Thus, the E3 would prefer that the Iranian SPV was either a new company or operated under an Iranian bank that has not been subject to US secondary sanctions. This is likely to reduce the risk that the US administration will apply pressure to INSTEX’s operations.
In theory, Iran should establish its SPV more quickly than the E3 did their mechanism, given that Tehran will not need to balance the interests of several countries. However, it is inevitable that this issue will be caught up in extensive political debate in Iran. To speed up this process, Tehran should carefully consider offers from the European Union and the E3 on technical assistance in launching an Iranian SPV.
How INSTEX could work in practice
INSTEX is best understood as an international trade intermediary that provides services to ease trade between Europe and Iran. Although the new company is not a bank, it will have a role in coordinating payments relating to trade with Iran. This coordination is necessary. Iranian importers have struggled to purchase and receive euros from the Central Bank of Iran on time – as is necessary to make payments to European suppliers. Even when they do acquire euros, Iranian importers struggle to make payments to suppliers, as European banks remain hesitant to accept funds originating in Iran. This holds true even for humanitarian trade that is formally exempt from sanctions: several exporters of food and medicine to Iran have reportedly experienced disruptions in recent months, contributing to troubling shortages and sharp price increases.
INSTEX will seek to facilitate Europe-Iran trade while reducing the need for transactions between the European and Iranian financial systems. It will do this by allowing European exporters to receive payments for sales to Iran from funds that are already within Europe, and vice versa. For example:
• A European exporter with an order for medicine from an Iranian importer provides INSTEX with the relevant documentation on the transaction. This will include evidence that the importer has practised reasonable due diligence in relation to the Iranian buyer and the end user. Crucially for European companies, INSTEX will not provide the requisite due diligence service.
• Once it has approved the sale, INSTEX will register it on a ledger of trade.
• INSTEX will examine its ledger to identify an instance in which a European importer has registered a purchase of pistachios from an Iranian exporter.
• INSTEX will then approve a payment from the European importer of pistachios to the European exporter of medicine, meaning that the payment can be made from one European bank to another without using funds that originated in Iran.
• To complete the process of trade intermediation, the Iranian counterpart to INSTEX will coordinate a similar payment from the Iranian importer of medicine to the Iranian exporter of pistachios. These funds will remain within Iran.
While it is novel for European governments to establish a state-owned company that performs this function, the basic mechanism at work here will not be new to international companies active in Iran. The innovative aspects of the new mechanism are its scale and the backing it receives from European countries rather than companies.
These transactions will not always match up perfectly, individually or in aggregate. This is particularly so given the European companies have stopped purchasing Iranian oil. Even companies in Greece and Italy that received US waivers to continue importing Iranian oil have reportedly not used them. Overall, European trade in food with Iran is roughly balanced: according to data from Eurostat, in the first eleven months of 2017, the EU’s food exports to Iran totalled €298m and its imports of similar goods from the country totalled €292m. The bloc’s trade in medicine and medical devices is far more imbalanced, with exports totalling €851m and imports just €27m in the period. As such, there will likely be greater demand for the new mechanism in facilitating sales to Iran than purchases from the country.
INSTEX will need to find a way to balance payments within both overall trade flow and at an operational level, so that payments can be settled in timely fashion – ideally, within 60 days. In balancing overall trade, European policymakers should attempt to maximise Iranian food exports to Europe through the mechanism.
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Joint Statement on the Creation of INSTEX
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 E3 reaffirm that their efforts to preserve the economic provisions of the JCPOA are conditioned upon Iran’s full implementation of its nuclear-related commitments, including full and timely cooperation with the IAEA.
INSTEX will support legitimate European trade with Iran, focusing initially on the sectors most essential to the Iranian population – such as pharmaceutical, medical devices and agri-food goods. INSTEX aims in the long term to be open to economic operators from third countries who wish to trade with Iran and the E3 continue to explore how to achieve this objective.
The creation of INSTEX is a major first step taken by E3 countries today. The operationalisation of INSTEX will follow a step-by-step approach:
- The E3 together with INSTEX will continue to work on concrete and operational details to define the way the company will operate.
- The E3 will also work with Iran to create an effective and transparent corresponding entity that is required to be able to operationalise INSTEX.
INSTEX will function under the highest international standards with regards to anti-money laundering, combating the financing of terrorism (AML/CFT) and EU and UN sanctions compliance. In this respect, the E3 expect Iran to swiftly implement all elements of its FATF action plan.
The E3 underline their commitment to pursue the further development of INSTEX with interested European countries to make this instrument in support of trade exchanges with Iran operational by following the steps set out above.
— Jan. 31, 2019 in a joint statement released by the foreign ministries of the United Kingdom, France and Germany
U.K. Foreign Secretary Jeremy Hunt
Today we have taken a significant step forward in delivering our commitment under the Iran nuclear deal to preserve sanctions relief for the people of Iran. We – the E3 – have registered a new Special Purpose Vehicle which, when operational, will allow legitimate trade between Europe and Iran.
This is a clear, practical demonstration that we remain firmly committed to the historic 2015 nuclear deal struck with Iran, the Joint Comprehensive Plan of Action, for as long as Iran keeps implementing it fully.
The SPV will facilitate legitimate trade under European and international law. Its immediate focus will be on enabling trade in goods where the immediate need of the Iranian people is greatest, ie foodstuffs, pharmaceuticals and consumer goods.
Registration is a big step, but there is still more work to be done. The E3 are working closely to address all the technical and legal aspects required to make this vehicle operational. That includes work with Iran to establish necessary counterpart structures.
The Iran nuclear deal remains central to international efforts to halt nuclear proliferation and is crucial for the security of the region. But we are clear, this commitment does not in any way preclude us from addressing Iran’s hostile and destabilising activities.
—Jan. 31, 2019, in remarks at the E.U. Foreign Ministers’ meeting in Bucharest
French Foreign Minister Jean-Yves Le Drian
“It is a political act. It is a gesture to protect European companies.”
—Jan. 31, 2019, in remarks to reporters after the E.U. Foreign Ministers’ Meeting in Bucharest
U.S. Department of State
“We are closely following reports about the SPV to gain additional details about the mechanism. As 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. We do not expect the SPV will in any way impact our maximum economic pressure campaign.”
—Jan. 31, 2019, in a comment to CNBC
Iranian Foreign Ministry Spokesman Bahram Qassemi
The Islamic Republic of Iran believes the recent move by the European Union to register and announce its special financial mechanism [for trade] with Iran is Europe’s first step in fulfilling its obligations towards Iran as per a May 2018 statement by the foreign ministers of Iran and the three European countries.
Following the US withdrawal from JCPOA, despite political positions held by the EU about protecting the deal and the need for Iran to gain economic benefits and limited moves by the EU such as updating its blocking statute, unfortunately we have not seen tangible results and practical moves to Iran’s benefit.
The EU’s move to create the special financial mechanism was carried out too late and the E3 and the EU must ensure that the move will compensate part of illegal US sanctions.
The Islamic Republic of Iran is ready for continuing constructive engagement with the European Union and its member states based on respect and mutual interests.
Meanwhile, considering the limited, incomplete and long overdue fulfilment of EU obligations outlined in the May 2018 statement, Iran believes the bloc must accelerate the move and the fulfilment of its other obligations to let the Iranian nation reap the economic benefits of JCPOA.
—Jan. 31, 2019, in a press release
Chinese Foreign Ministry Spokesperson Geng Shuang
QUESTION: On January 31, French, German and UK Foreign Ministers announced the creation of the Instrument for Supporting Trade Exchanges for Iran in a joint statement. What is your comment?
SHUANG: The Chinese side speaks highly of these efforts made by the European countries in upholding the JCPOA and supports the creation of the Instrument for Supporting Trade Exchanges (INSTEX). This showcases that the European side is determined to safeguard multilateralism. China supports their efforts in sustaining cooperation with Iran, getting INSTEX up and running at an early date, and keeping it open to third parties to promote normal economic and trade cooperation between the international community and Iran. We also firmly support the EU's leadership role in making political and diplomatic efforts to uphold the JCPOA.
China maintains that the JCPOA, as an important outcome of multilateralism endorsed by the United Nations Security Council, should be implemented in a comprehensive and effective way. This will serve peace and stability in the Middle East, the international nuclear non-proliferation regime and the common interests of the international community. We hope that all relevant parties could bear in mind the long-term picture, stick to the direction of political and diplomatic settlement, and work together to preserve the JCPOA.
—Feb. 1, 2019, in a press conference at the Chinese Ministry of Foreign Affairs