Iran Trade Mechanism INSTEX is Shutting Down

At the end of January, the board of the Instrument in Support of Trade Exchanges (INSTEX) took the decision to liquidate the company. Established in January 2019 by the United Kingdom, France, and Germany, INSTEX’s shareholders later came to include the governments of Belgium, Denmark, the Netherlands, Finland, Spain, Sweden, and Norway.

The state-owned company had a unique mission. It was created in response to the Trump administration’s withdrawal from the Iran nuclear deal in May 2018. European officials understood that the reimposition of US sanctions would impede European trade with Iran. The nuclear deal was a straightforward bargain. Iran had agreed to limits on its civilian nuclear programme in exchange for the economic benefits of sanctions relief. If European firms were unwilling or unable to trade with Iran, that basic quid-pro-quo would be undermined. For this reason, supporting trade with Iran was seen as a national security priority.

In August 2018, EU high representative Federica Mogherini and foreign ministers Jean-Yves Le Drian of France, Heiko Maas of Germany, and Jeremy Hunt of the United Kingdom, issued a joint statement in which they committed to preserve “effective financial channels with Iran, and the continuation of Iran’s export of oil and gas” in the face of the returning US sanctions. They pointed to a “European initiative to establish a special purpose vehicle” that would “enable continued sanctions lifting to reach Iran and allow for European exporters and importers to pursue legitimate trade.”

In November 2018, when the basic parameters of a special purpose vehicle were still being formulated by European officials, I co-authored the first public white paper explaining why establishing such a company made sense. Conversations with European and Iranian bankers and executives had made clear to me that trade intermediation methods were being widely used to get around the lack of adequate financial channels between Europe and Iran. If these methods could be packaged as a service by an entity backed by European governments, it would reassure European companies about remaining engaged in the Iranian market, while also reducing costs.

A few months later, INSTEX was founded. In the beginning, the company was run by the Iran desks at the EU and E3 foreign ministries. The officials tasked with working on INSTEX, who were often very junior, quickly realised they had little knowledge of the mechanics of EU-Iran trade. When they sought to enlist help from colleagues at finance ministries and central banks, they frequently met resistance. Many European technocrats were reluctant to support a project which had the overt aim of blunting US sanctions power, even at a time when figures such as French finance minister Bruno Le Maire and Dutch prime minister Mark Rutte were making bold statements about the need for European economic sovereignty. Even INSTEX’s inaugural managing director, Per Fischer, departed given concerns over his association with a company that had been maligned by American officials as a sanctions busting scheme. Then, in May 2019, when the Trump administration cancelled a set of sanctions waivers, European purchases of Iranian oil ended. That left INSTEX as Europe’s only gambit to preserve at least some of the economic benefits of the nuclear deal for Iran. 

Later that year, INSTEX hired its first real team after a new group of European governments joined as shareholders and injected new capital into the company. For a time, things looked more promising. Under the newly appointed president, former German diplomat Michael Bock, a small group of talented individuals worked to define INSTEX’s mission and build a commercial case for the company’s operation. Their efforts led to INSTEX’s first transaction, which was completed in March 2020—the sale of around EUR 500,000 worth of blood treatment medication. The political pressure to provide Iran some gesture of tangible support during the pandemic had also greased the wheels in European governments.

But many considered the INSTEX project doomed even before the first transaction was completed. Certainly, Iranian officials were derisive of the special purpose vehicle. Given that Europe had failed to sustain its imports of Iranian oil and was unable to use INSTEX for that purpose, focusing instead on humanitarian trade, Iranian officials dismissed the effort, even after the feasibility of the special purpose vehicle was proven. That it took more than a year to process the first transaction also meant that the Europeans missed their chance to fill the vacuum caused by the US withdrawal from the nuclear agreement. Without full cooperation from its Iranian counterpart, which was called the Special Trade and Finance Instrument (STFI), INSTEX could not reliably net the monies owed by European importers to Iranian exporters with those owed by Iranian exporters to European importers.

European officials will no doubt blame Iran for the fact that INSTEX failed, and it is true that the Iranian government never fully appreciated the political significance of European states taking concrete steps to counteract even the indirect effects of US sanctions. Of course, the decision to liquidate the company follows a spate of recent actions by the Iranian government—nuclear escalation, the sale of drones to Russia, and the brutal repression of protests—that make the continued operation of INSTEX politically untenable.

But most of the blame for INSTEX’s failure must lie with the Europeans—the company’s demise predates Iran’s recent transgressions. European officials promised a historic project to assert their economic sovereignty, but they never really committed to that undertaking. A mechanism intended to support billions of dollars in bilateral trade was provided paltry investment. European governments never figured out how to give INSTEX access to the euro liquidity needed to account for the fact that Europe runs a major trade surplus with Iran when oil sales are zeroed out. For the Iranians, this alone was the evidence that European leaders saw INSTEX as a political gesture that might placate Tehran, rather than an economic instrument that would bolster Iran’s economy in the face of Trump’s “maximum pressure.” 

Paradoxically, Iran will lose nothing as the liquidators shut down INSTEX, quietly selling the few assets the company had accumulated—laptops, office chairs, and perhaps some nifty pens. It is Europe that is losing out. INSTEX was supposed to be a testbed for new ways of facilitating trade without relying on risk-averse banks to process cross border transactions. Successful innovation in this area would have given a new dimension to European economic diplomacy and helped Europe assert the power of the euro in global trade. 

With the writing on wall, INSTEX’s management made one final attempt to give the company a future. Beginning in 2021, the company pursued a French banking license—a pivot that INSTEX’s board had approved on a provisional basis, but which was halted in early 2022. It is hard to overstate how significant it would have been had INSTEX emerged as a state-owned bank with a specific mandate to process payments on behalf of European companies that wish to work in high-risk jurisdictions, including those under broad US sanctions programme. Such a bank could have become a powerful tool for Europe to assert its economic might in the face of US sanctions. Moreover, it would even have been useful in cases where Europe is applying sanctions, like Russia. After all, a commitment to humanitarianism means that goods such as food and medicine must continue to be bought and sold even when most transactions with a given country are prohibited. INSTEX could have helped make European sanctions powers more targeted and more humane. 

For a company that managed just one transaction, a surprising amount has been written about INSTEX. It has been the subject of news reports, think pieces, and academic articles. Even if many people struggled to understand what the special purpose vehicle aimed to do, its existence was novel and therefore noteworthy. For those insiders directly involved in the company’s saga, and for those of us who have closely followed from the outside, the main takeaway seems to be that there is much yet to be learned about the complex ways in which US sanctions impact European policy towards countries like Iran, through both political and economic vectors. In this respect, INSTEX did achieve something. A group of technocrats in European foreign ministries and finance ministries learned valuable lessons, often reluctantly and with great difficulty, about the limits of Europe’s economic sovereignty. Whether those lessons can be institutionalised remains to be seen. But a fuller post-mortem on INSTEX would no doubt offer important lessons for the future of European economic power in a world dominated by US sanctions. Learning those lessons would be its own special purpose.

Photo: Wikicommons

Why The Iran Nuclear Deal Still Matters for Europe

Three years ago, Iran and global powers implemented the Joint Comprehensive Plan of Action (JCPOA), curtailing the country’s nuclear weapons program in exchange for sanctions relief. The deal continues to hang together—but only just. There are growing indications of signatory states’ fatigue and frustration in attempting to prevent the collapse of the JCPOA, following the US withdrawal from it last May. In this climate, it is important for the deal’s stakeholders to remember why it remains valuable:

• The JCPOA is the product of more than a decade of negotiation. The West worried that Iran’s expanding nuclear programme posed a major nuclear proliferation risk. Most troublingly for Europe, there was a possibility that the United States, Israel, or both would launch military attacks on a country of 80 million people. After the invasions of Afghanistan in 2001 and Iraq in 2003, Europeans wanted to avoid further instability in their neighborhood.

• The JCPOA is imperfect for all sides. But it centers on a political compromise that addresses the core concerns of both Iran and P5+1 (the US, France, the United Kingdom, China, Russia, and Germany). According to US estimates, the JCPOA increased the period it would take Iran to create a nuclear bomb – its “break-out time” – from two or three months to roughly one year. In return, Tehran received relief from UN, EU, and US nuclear-related sanctions. Although the US has reimposed the sanctions it originally lifted under the JCPOA, the UN and the EU have refrained from doing so.

• Under the JCPOA, Iran shipped out 98 percent of its enriched uranium; capped its level of uranium enrichment at 3.67 percent; removed two-thirds of its installed centrifuges; agreed to convert Fordow enrichment plant into a research facility; redesigned the Arak heavy water reactor; and provided international inspectors with broader access to its nuclear facilities. (For more on this, see ECFR’s JCPOA explainer.)

• The International Atomic Energy Agency (IAEA), which oversees the JCPOA, has produced more than ten reports verifying that Iran continues to comply with the deal. The country has done so despite President Donald Trump’s abrogation of US responsibilities under the deal. Trump did so despite the US intelligence community’s confirmation of IAEA conclusions on Iranian compliance.

• Besides its nuclear benefits, the JCPOA created a political opening for the West and Iran to gradually ease their mutual hostility on the nuclear issue – and to perhaps work towards eventually normalising their relationship.

This normalisation is an outcome that Iran’s foes in the Middle East fear most. Thus, Israel and Saudi Arabia have stepped up their efforts to precipitate the collapse of the JCPOA. The United States’ withdrawal from the deal and “maximum pressure” campaign—as Trump calls it—is a gift to both this camp and to hardliners in Tehran, all of whom seek to undermine relations between Europe and Iran.

Europe faces growing pressure from the US, Israel, and Saudi Arabia to downgrade its ties with Iran at all levels and jump onto the maximum pressure bandwagon. The summit on the Middle East (which will reportedly focused on Iran) that the US and Poland plan to host in Warsaw next month forms part of this strategy to drive a wedge between Europe and Iran.

Until now, despite the difficulties facing the JCPOA, mounting US pressure, and recent strains on relations with Iran, European governments and the EU have continued to engage with Tehran. Europe’s strong political commitment to the nuclear deal, not least through its promise to create a special purpose vehicle (SPV) designed to facilitate trade with Iran, is one of the key factors in the country’s adherence to the JCPOA.

Given the severity of the latest US secondary sanctions, Iran is likely to only continue complying with the nuclear deal if Europe, China, and Russia provide it with far more tangible reasons for doing so. There are growing signs that Iran’s patience will not last forever, especially given that its oil sales, a critical source of revenue for the country, have reportedly fallen by almost 60 percent since the US reimposed its sanctions.

Ultimately, all signatories to the JCPOA recognise that it will only fully function once the US re-engages with it in some fashion, at least easing its secondary sanctions on foreign firms that do business with Iran. Until then, Europe must maintain its efforts to hold the JCPOA together. This will require the registration and operationalisation of the SPV (while genuine work on the measure is under way, it is reportedly still weeks away from completion). China must also do its part to address the recent decline in trade with Iran rather than waiting to see whether it can benefit from a European SPV.

The collapse of the JCPOA would create a real risk of further military conflict in the Middle East. Indeed, influential figures in the Trump administration, especially National Security Advisor John Bolton, have long advocated a US military operation against Iran. As recent history suggests, such an intervention would come at a high cost for Europe – and it is an outcome that Europe must do all it can to avoid.

Photo Credit: IRNA