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Europe sidesteps U.S., creates new vehicle to continue doing trade with Iran

Being able to buy the basics while not being able to export its oil is cold comfort to Iran.

A man counts US Dollar banknotes in an official exchange house. CREDIT: Kaveh Kazemi/Getty Images.
A man counts US Dollar banknotes in an official exchange house. CREDIT: Kaveh Kazemi/Getty Images.

Germany, France, and the United Kingdom on Thursday unveiled the Instrument In Support Of Trade Exchanges (INSTEX) — a new channel with Iran intended to provide a means for the European parties to comply with the terms of the 2015 nuclear deal, of which the United States is no longer a party.

“We’re making clear that we didn’t just talk about keeping the nuclear deal with Iran alive, but now we’re creating a possibility to conduct business transactions,” German Foreign Minister Heiko Maas told reporters on Thursday.

While it sounds like an instant camera from the 1980s, INSTEX is a state-owned company that does not seek to avoid U.S. sanctions, said Esfandyar Batmanghelidj, publisher of Bourse & Bazaar, in a call with reporters organized by Foreign Policy for America. “It is more of a trade intermediary” rather than a “sanctions-busting” tool.

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INSTEX will be based in Paris, managed by a German banking expert, and operated with a British advisory board. It is intended to be used primarily for the sale of food and medical supplies — at least initially — and may eventually allow other countries to make use of it as well.

There is no hard timeline for when INSTEX will be up and running, but it will likely take months, as Iran will have to create a mirror vehicle and entity first.

ThinkProgress reached out to the U.S. Treasury Department seeking clarification on how INSTEX will work under sanctions re-imposed by the Trump administration last year, but did not receive a response. The U.S. State Department said it would be “closely following” the development.

Dealing with a bruised JCPOA

The nuclear deal with Iran, known the Joint Comprehensive Plan of Action (JCPOA), included the Germany, France, and the United Kingdom (E3), as well as the United States, China, and Russia, which all agreed to lift sanctions on Iran and allow for investments in exchange for stringent controls and inspections on Iran’s nuclear energy program.

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Although repeated inspections by the U.N.’s nuclear watchdog agency has proved that Iran has not violated the deal, President Donald Trump alleged that Iran was violating “the spirit” of the deal. Pointing to issues that do not fall under the scope of the JCPOA, such as Iran’s ballistic missile program and its regional activities, President Trump violated the deal in May 2018, and reimposed sanctions.

The E3’s statement on Thursday indicated that they 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 [International Atomic Energy Agency — the U.N.’s nuclear watchdog].”

Oil and aviation parts are not covered by INSTEX, which is classified as a “Special Purpose Vehicle” (SPV). It’s important to note that although the SPV covers critical goods that are already exempt from sanctions, Iran’s limited access to banking mechanisms effectively make companies stay away from selling even these basics. 

Tarja Cronberg, former chair of the European Parliament’s delegation to Iran, has been in touch with Iranian lawmakers who, she said, have grown frustrated with Europe’s lack of response on the damage Trump has done to the JCPOA.

“When I was in Tehran, there was a kind of despair over medicines being a problem…this has more than a symbolic function,” she said.

She added that, now, the “JCPOA is no longer an empty shell, where there’s a need for content.”

Iran’s Foreign Minister Javad Zarif tweeted a tepidly-enthusiastic response to the measure, calling it “long overdue.”

The SPV, while useful in that it helps Iranians import food and medicine, doesn’t even begin to cover what has been lost as a result of the re-imposition of sanctions, including on Iran’s oil sales.

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“The economy is in really bad shape. Oil exports are down to one million barrel a day and even that is offered at huge discount rate. The forecast from IMF is not encouraging either,” said Mehrzad Boroujerdi, professor of political science at Syracuse University.

Iranian President Hassan Rouhani’s efforts to stabilize the country’s economy, keep inflation in check, and address massive youth unemployment, have been dealt a huge blow as the country’s oil exports dwindle and as foreign investors leave before they’d even really arrived.

A tough sell

To hear the Europeans talk about INSTEX, one might think the clouds are parting over Iran. But that’s not so.

After decades of sanctions, Iran negotiated the JCPOA and stuck to the terms. Now, the only concession it is getting from its European partners essentially boils down to, “well, you can at least by foods and medicine.” With the next round of presidential elections in both Iran and the United States coming up in 2021 and 2020, respectively, there’s some chance that both countries might vote for presidents who are willing to negotiate a new deal.

Not only has Trump reimposed sanctions against Iran, but Iranians have also found themselves banned from entering the United States, thanks to the president’s Muslim travel ban. Having been through decades of diplomatic darkness, starting from less than zero after the U.S. pulled out from the deal will be a bitter pill for some 80 million Iranians to swallow. Besides, said Boroujerdi, it’s unclear how effective INSTEX will be.

“Based on the reservations expressed by major corporations, I doubt that too many big European firms would be willing to deal with Iran through this channel,” he said, via email. “Yes, you don’t have to use dollar as the currency, but America’s power can come to hunt them in other ways such as secondary sanctions, bad publicity, etc …”

“This will give the Iranians a reason to stay within the JCPOA, to be sure, but this is not in and of itself going to solve Iran’s economic problems,” said Richard Nephew, former director for Iran on the National Security Staff under the Obama administration.

“The Europeans would have to get beyond this and go to fundamental economic cooperation to have a much more significant impact,” Nephew added, via email. “This, I think, they will not do. The JCPOA will be saved by a) Iranian readiness to stay within it notwithstanding US pressure, which I think is a wasting asset; and, b) U.S. avoiding maximalist pursuits when it comes to the Iranian nuclear program. This too, I think, is not a terribly optimistic option.”

Boroujerdi expects the Rouhani administration to do whatever it can to maximize the use of this channel while keeping one eye on the conservative faction that might try to torpedo the ambiance of good will on the part of Europeans.

While issues of money laundering and corruption will continue to be an issue in Iran, Boroujerdi said that the country will do its best to keep the nuclear agreement alive.

“Iran can bluff about getting out of JCPOA but how exactly will it help their bottom line? So the poverty of options situation forces them to maintain the status quo,” he said.

President Trump, however, continues to insist that Iran has somehow violated the terms of the deal, and is now engaged in a public fight with his own intelligence officials, who on Tuesday briefed senators on Iran’s compliance with the JCPOA.

On Wednesday morning, President Trump tweeted that the officials were “passive,” “naive,” and “needed to go back to school.”

The Trump administration plans to hold an anti-Iran conference in Poland in mid-February. Tehran has been excluded from the event it has classified as “hostile.”

This story has been updated to include comments from Richard Nephew.