Is Europe’s trade tool with Iran just a ‘political act’?

Some in Europe see INSTEX as challenging US dominance of world financial systems built up through dollar-clearing and SWIFT financial messaging since the September 2001 terror attacks on the United States.
Sunday 17/02/2019

INSTEX, the European mechanism to facilitate trade with Iran in the face of tightening US sanctions, has drawn a lukewarm reaction in Tehran.

Iranian President Hassan Rohani, Foreign Secretary Mohammad Javad Zarif and leading conservative parliamentarian Alaaeddin Boroujerdi all described INSTEX — Instrument in Support of Trade Exchanges — as an overdue “first step.”

Amir-Hossein Ghazizadeh Hashemi, principlist deputy from Mashhad and Kalat, slammed INSTEX as a “disgrace.” He said it undermined Iran’s independence and violated the 2015 nuclear agreement, formally known as the Joint Comprehensive Plan of Action (JCPOA), under which Iran was to curb its nuclear programme in return for the lifting of sanctions.

In general, the Iranian media expressed scepticism that INSTEX would help Iran maintain oil exports. The vital foreign-exchange earner is well down from 2.6 million barrels per day since the United States imposed sanctions after leaving JCPOA last May. Iranian Oil Minister Bijan Zanganeh recently said the only European country buying Iranian oil was Turkey, although Greece and Italy as well as Ankara have been given waivers from Washington’s oil sanctions.

INSTEX is designed to isolate trade with Iran from threatened US penalties against anyone buying Iranian oil or dealing with Iranian entities, including the Central Bank of Iran. Essentially, it would match anyone buying from Iran with anyone selling to Iran, with the buyer paying INSTEX, which would pay the seller. The Europeans said the mechanism would start with medicine and food.

“INSTEX has potential because it favours smaller firms in both EU and Iran,” said Djavad Salehi-Isfahani, an economics professor at Virginia Tech and visiting fellow at the Brookings Institution in Washington. “Iran’s smaller firms have a harder time getting around sanctions and are treated worse in markets with less competition, like Russia and China.

“Large firms like [energy major] Total will not use INSTEX because they would lose business in the US. Links to the EU help Iran have a more diversified trade and foreign policy.”

Sir Richard Dalton, UK ambassador to Iran from 2002-06, said INSTEX’s effects should not be exaggerated. “It will not lift the growth rate [in Iran], improve oil sales short term, reduce inflation or unemployment,” he said. “It will therefore not address the structural problems plaguing Iran under US maximum pressure. It will not, on its own, restore hope to Iranians in general nor give Rohani’s government much to go on in their struggles with hardliners over the future of the JCPOA.”

Dalton identified immediate challenges in Iran establishing an institution to liaise with INSTEX and in establishing confidence among European exporters that they can safely deposit in their banks “inflows to their accounts that are not ‘Iranian funds’ but are due to them because of transactions with Iran.”

Nonetheless, Dalton said INSTEX was “really welcome and a stout effort” by Europe. He expressed optimism it would yield fruit: “If these problems are surmounted, and I expect them to be, INSTEX should — I’ll guess by June — start easing the supply of drugs and medical devices to Iran. Later, perhaps by 2020, INSTEX may assist the supply of key industrial goods and the sale of some Iranian oil.”

Michael Tockuss of the Iran-Germany Chamber of Commerce told the German business magazine WirtschaftsWoche that 5,000-7,000 small and medium-sized German companies want to continue trade with Iran. He suggested the only firms at risk of US sanctions were those “that have American employees or shareholders or have used American money in their company or their activities, such as hedge funds.”

While Europe shares US and Gulf misgivings over Iran’s missile programme and its regional alliances, Europe’s strategy is not just to keep Tehran within the JCPOA but to draw it further into multilateral institutions and the global economy. The EU statement on INSTEX referred explicitly to Iran joining the Financial Action Task Force, the intergovernmental financial transparency body, a move under consideration in Tehran.

Some in Europe see INSTEX as challenging US dominance of world financial systems built up through dollar-clearing and SWIFT financial messaging since the September 2001 terror attacks on the United States. Hence, French Foreign Minister Jean-Yves Le Drian called setting up INSTEX “a political act.”

How far might this go?

Chinese Foreign Ministry spokesman Geng Shuang welcomed the European Union’s “determination to uphold multilateralism” and said he looked forward to INSTEX being “open to third parties.”

“Potentially INSTEX is a watershed in seeking to establish that European businesses should trade where EU law permits and should not be held hostage to the dollar and US extra-territorial sanctions,” said Dalton.

“Will other countries link some of their trade to the INSTEX procedures? A stone has been thrown into the pond, and no-one can be clear how far the ripples will go or when.”