by Derek Davison
Three European nations scrambling to salvage the Iran nuclear deal (the Joint Comprehensive Plan of Action or JCPOA) announced on January 29 the formation of a new “special purpose vehicle” (SPV) to preserve their commercial ties with Iran in spite of U.S. banking sanctions. France, Germany, and the United Kingdom—three of the JCPOA’s original seven signatories, along with China, Iran, Russia, and the United States—unveiled the SPV, or the “Instrument in Support of Trade Exchanges” (INSTEX)—which will allow Iran to barter for European goods in transactions that steer clear of financial networks and do not rely on the U.S. dollar.
European leaders trumpeted INSTEX as a sign that they remain invested in the nuclear deal’s survival. UK Foreign Secretary Jeremy Hunt called it “a clear, practical demonstration that we remain firmly committed” to the JCPOA. European Union foreign policy chief Federica Mogherini issued a statement welcoming the formation of the SPV, arguing that the new instrument “will provide economic operators with the necessary framework to pursue legitimate trade with Iran.”
However, what the Europeans announced on Thursday was not what they described when they began talking about forming an SPV last year. At that time, the SPV was envisioned as a much larger financial mechanism that could allow Iran to continue selling oil and gas to Europe with minimal disruption. But major European firms, worried about even the possibility of running afoul of U.S. sanctions, have cut ties with Iran, and it seems unlikely that any degree of assurance from the EU would be enough to get them to risk losing access to U.S. banks and the U.S. market.
Consequently, INSTEX is likely to be a much less ambitious device, used primarily by small European firms with little exposure to U.S. sanctions and only—at least initially—to trade in humanitarian goods like medicine and food. U.S. sanctions do not directly block Iran’s import of these items, so by focusing on them INSTEX would avoid a potential confrontation with Washington. But banking sanctions generally prevent Iranian firms from financing their purchase, and so INSTEX could fill an important role in easing the pain those sanctions are causing to the Iranian people.
In a press call held by the European Leadership Network (ELN) on January 29, Bourse & Bazaar founder Esfandyar Batmanghelidj explained the benefit the new mechanism could provide to Iranians struggling to obtain basic necessities:
And what that means is that even compliance trade, meaning trade that’s exempt from U.S. secondary sanctions, such as trade in food and medicine, has been negatively impacted, and these are two categories that are really important for the Europe-Iran trade relationship.
So, for example, Europe exports around 800 million euros of pharmaceuticals and medical devices to Iran every year, and by comparison, China exports just around 200 million euros worth. So, the relationship with Europe is really key in these categories, and as you can imagine, these are goods that have a really big impact on sort of quality of life and well-being in Iran. These are goods that the households in Iran really depend on, whether it’s consumer goods or medicine or food products. So, the role of the SPV is to try and retain a reasonable volume of trade or basically mitigate the negative impact on this trade from the U.S. secondary sanctions.
Also this week, the International Atomic Energy Agency reiterated that Iran is complying with its obligations under the JCPOA. But since the United States violated the agreement last year by re-imposing sanctions, Iranian leaders have insisted that they will not remain party to the agreement unless they receive its promised economic benefits. The re-imposition of U.S. sanctions has probably made that impossible, but the Iranians still may be made to feel that they have more to gain by remaining in the JCPOA than by leaving it and restarting an industrial-scale nuclear program.
Will this pared-down SPV be enough to satisfy Iranian leaders? Iran’s deputy foreign minister, Abbas Araghchi, welcomed the INSTEX announcement as “the first step within the set of commitments the Europeans have made to Iran,” but pointedly did not go any further than that. On the ELN press call, Tarja Cronberg, the former chair of the European Parliament’s Delegation with Iran, called INSTEX “an effective response” to Iran’s demands that “will take sort of the heat off…at least for the time being” in terms of quieting the demands of Iranian hardliners to quit the JCPOA.
U.S. reaction to INSTEX has been relatively muted so far. Secretary of State Mike Pompeo criticized the idea of the SPV when it was initially discussed, but that was before its scope was reduced. About INSTEX, the State Department merely said that it is “closely following reports about the SPV to gain additional details about the mechanism” and that it does “not expect the SPV will in any way impact our maximum economic pressure campaign” against Iran. Indeed, as long as it stays focused on ensuring that Iranians can get access to basic goods like food and medicine, INSTEX could actually bolster the Trump administration’s claims that its sanctions are not meant to punish the Iranian people.
INSTEX hasn’t been entirely well-received in DC, especially within the regime-change echo chamber. Mark Dubowitz, CEO of the hawkish Foundation for the Defense of Democracies, tweeted somewhat colorfully that “Trump administration must neutralize this trade channel before it becomes the camel’s nose under the tent. Don’t be misled by need for a humanitarian channel; multiple such channels already exist given escrow funds + Iran banks on Swift.”
INSTEX’s farthest-reaching impact may not directly relate to Iran at all. Although its scope is small and explicitly designed to minimize confrontation with the United States, it nevertheless reflects a growing interest in Europe to insulate European interests from broad U.S. sanctions. That could have major ramifications for the efficacy of future U.S. sanctions, as ELN Policy Fellow Axel Hellman explained:
The last point I’d like to make on this is just to kind of look at this from an American perspective. What we can say is that what has enabled the United States to use economic and financial sanctions so effectively is the power position that United States has, the centrality of U.S. capital markets in international finance, the importance on the U.S. dollar as a tool for clearing international transactions, and the buy-in from allies to U.S. policy when it has leveraged that strength to impose sanctions. That is, for instance, what we saw on the international sanctions regime on Iran leading up to the nuclear deal.
So, the growing concern now in the United States—among some people, I should mention—is that when you now have a situation where you first don’t have that active buy-in from allies you have the other key players—Russia, China, and, of course, the European Union—disagreeing with U.S. policy over Iran and remaining in the nuclear deal, but also actively trying to set up alternative structures such as the SPV. The risk to the U.S. position is that over time this will lead to a degradation of U.S. ability to use sanctions the way that it has been recently.
U.S. foreign policy has become increasingly reliant on sanctions as a tool for throwing Washington’s weight around short of open military conflict. But it’s a tool that will lose its effectiveness the more it is overused, as even U.S. allies are driven to find ways to protect themselves from those penalties. INSTEX does not appear to be comprehensive enough to seriously challenge the potency of U.S. sanctions. But, to borrow Dubowitz’s phrase, it could be the “camel’s nose under the tent” for a much bigger challenge to Washington’s influence.
It is very naive to think that secular Iranians will get any business done with the outside world. Only Ayatollah businesses will benefit from this. They will literally set up hundreds of tiny proxy companies to bypass the sanctions. Europe knows this and is colluding with inhumane Ayatollahs.
Question is, whether helping Ayatollahs is the same as helping secular Iranians?
If you are outside Iran, like me, you are seen by anti-Shah activists as an enemy. If you are anti-US, you are seen as pro-Ayatollah. These two camps have created an atmosphere that has produced a 40 year political deadlock.
Iran’s future is in the hands of its people who are stuck in a never ending political name-calling, obscene and very rude personal attacks, that have plagued the various opposition groups, and have benefited those who hate Iranian culture.
If you don’t believe me read the reactions to this post and my previous posts. There is a reason I post here. It is to prove that Iranians cannot discuss controversial political discussions in a civil manner.
Ali Mostofi speak for your self! You are a pro-Shah & MEK and against the Ayatollahs and the interests of the people, period.
We don’t like Ayatollahs either but we have the interests of the people at heart and will never join the freaking Pahlavi or MEK against the people of Iran. So stop showing off as if you’re anti-Ayatollahs! You do have a hidden agenda and you are like an open book being pro-Pahlavi and MEK.
Mostofi, from your very first post on Lobelog that you call love for the Iranians that you haven’t been in touch for 40 years, you have managed to systematically insult every single author of this site with your very limited ayatollah scope and a fifth grader vocabulary. And of course it hasn’t allowed for a single discussion to develop. How’s that possible that you haven’t been able to connect with one person here, author or reader ? maybe it’s time to move on and spare us the so called your reason to be here.
I looked up Ali Mostowfi- he is the son of Bagher Mostowfi who ran Iran’s petrochemical industry and was accountable to the king and British Prime Minister Anthony Eden. A true Iranian patriot who worked for the British and helped with the coup d’etat that restored the King and got us into all this mess. So his bitterness is quite understandable as he comments on his face book page that his dad found oil in Iran and never made a dime of it. The king did reward him and his dad quite handsomely off the books. He should be an Iran hater since he is no longer in the privileged class.
@JackSpade, What you said is all true and well said. Unfortunately Ali’s dad was our big boss as the ceo of the Iranian petrochemical co reporting directly to Shah! Fortunately left them in 1971.
In addition to your comment Bagher’s family are descendants of Mostofi-aldoleh or they’re ghajaries and blood related to Shah’s mother whom was a ghajarie as well. As you may know ghajarieh dynasty has been and sill is the darkest chapter in history of Persia and 2nd to the Pahlavi dynasty! They sold all the northern states to Russia for pennies in order to satisfy their addiction to opium! Glad that those corrupt families are decimated or near extinction!
Pretty soon we have to get back to our educational discussions on Lobelog instead talking about this pest!
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