Can Instex save the Iran nuclear deal?

ID : N-4267 Date : 2019/02/04 - 12:00

(Persia Digest) - Germany, France and the UK have created a special financial channel to enable trade with Iran to continue despite the reimposition of US sanctions on Tehran. The new mechanism, unveiled by the so-called E3 last week, is an attempt to save a landmark international nuclear deal after Donald Trump pulled the US out of it last May.

The Financial Times looks at the measures announced by the Europeans, what’s at stake — and whether they are likely to succeed.

What exactly have the three European powers done?

The group has created a “special purpose vehicle” or SPV to insulate international trade with Iran from the impact of US sanctions. The targets of Washington’s extensive measures range from the oil industry to the central bank in Tehran.

The SPV is a France-registered limited liability company called Instex, headed by Per Fischer, a German banker. Germany, France and the UK, which were signatories to 2015 nuclear deal, will all be shareholders.

European diplomats say the idea is to cut the number of potentially sanctionable cross-border payments between Iran and the states with which it trades.

This would be done via mirror-image financial clearing mechanisms in Europe and Iran: essentially, a barter system, in which transactions for, say, Iranian oil exports, are matched against imports of industrial machinery.

The Europeans plan to start cautiously, focusing first on supplies of essential goods such as pharmaceuticals and food that are likely to fall under humanitarian exemptions from US sanctions.

But the details of how Instex will work are still far from clear. The E3 acknowledges it needs to work out the technical and legal means to make the SPV operational — a process likely to take months. If the mechanism is proved to work, it could eventually also be used by non-EU countries.

Why have they created Instex?

The new channel is a linchpin of European efforts to persuade Iran to stay in the nuclear deal, despite the US withdrawal. The EU wants to preserve the economic benefits that came from the lifting of sanctions and were crucial to Tehran agreeing to curb its nuclear programme.

The creation of the SPV comes after the EU last year set up a “blocking statute” to forbid European companies from complying with the reimposed US sanctions — and threatening legal action against them if they did.


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Even European diplomats say the financial benefits of the much-delayed SPV are likely to be modest, as most big companies with US business interests will not want to risk antagonising Washington. Only smaller European companies with no significant ties to the US are likely to risk using Instex.

However, many point to the immediate political dividend. Instex shows Tehran — and the US — that the Europeans are serious about the nuclear deal.

How important is Instex to Iran?

Iran has welcomed Instex as a “long overdue first step”in European efforts to maintain the nuclear deal’s economic benefits. The European move has bolstered Tehran, allowing it to present itself as holding the moral high ground by staying in the accord in the face of the US withdrawal.

Instex and other European measures to rescue the nuclear deal also feed into Iran’s internal power struggles. President Hassan Rouhani and his allies have staked their credibility on the agreement and its economic benefits. The collapse, or withering away, of the agreement would empower Mr Rouhani’s hardline foes who opposed it from the start.

How has the US reacted to Instex?

Washington has for months condemned the E3’s proposed mechanism. The US last week questioned Instex’s effectiveness and said the new channel was unlikely to have any effect on its campaign of putting maximum economic pressure on Iran.

But the US has given no immediate sign that it will try to sanction the SPV itself or the institutions and individuals linked to it.

That could change if the European countries decided to extend Instex’s range and allow it to be used by third countries, particularly India, China and Russia. Beijing and New Delhi are historically big buyers of Iranian oil, while Moscow helps to trade it. China and Russia are also signatories to the nuclear deal.

The Europeans would then have to weigh the financial and political advantages of Instex against any anger in Washington. The third country involvement would potentially undermine the US policy of financially squeezing Tehran. It could also play into rising tensions between Washington and Moscow and Beijing.

Will Instex achieve its aims?

Its creation has already made a political statement, but many analysts question whether it will ever have much of a commercial impact. Any decision on whether to open it up to other countries such as China and Russia would be coloured by EU states’ own disputes with those countries.

The EU’s calculations have grown more complicated because its relations with Iran in other spheres have become more fraught. The bloc last month imposed its first sanctions against Tehran since the nuclear deal was signed, over alleged Iranian involvement in plots to murder political opponents living in France and Denmark. Tehran has denied the claims.

The EU plans to give a statement on Iran soon that will address concerns about the country’s ballistic missile programme and its role in conflicts in countries including Syria and Yemen.

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