Under deepening sanctions pressure from the United States, Iran is increasingly relying on allies such as the European Union to help prop up its economy. The formation of a special purpose vehicle is a way for Iran's EU allies to extend their support to Tehran by helping it avoid some U.S. sanctions.
Germany, France and the United Kingdom announced Jan. 31 that they had established a channel for trade with Iran that circumvents U.S. sanctions. The system, known as the instrument in support of trade exchanges (INSTEX), will facilitate commerce between European businesses and Iran. INSTEX will be a state-owned trade intermediary based in France, managed by a German, run by a British-based supervisory board and all overseen by the European Union. Meanwhile, countries outside the bloc, such as India, China or Russia, may be able to join later. Under INSTEX, an Iranian enterprise will be able to sell its products in Europe and receive credit to buy European goods. In the beginning, trade will focus on food and medicine, which do not face U.S. sanctions, and likely benefit small and medium-sized European enterprises the most. Iran, however, still needs to set up its counterpart to INSTEX, and that could take months.
Why It Matters
Whether or not it works, the formation of INSTEX (a legal entity known as a special purpose vehicle or SPV) shows that Tehran's EU allies want to stand behind the Iran nuclear deal. The United States withdrew from that deal, known as the Joint Comprehensive Plan of Action (JCPOA), last year. INSTEX also sends a message to Washington that European countries are willing to conduct trade unilaterally with Iran despite rising U.S. sanctions pressure. In addition, it is notable that France decided to host the institution (in a Foreign Ministry building) after the European Union reportedly encountered difficulties in finding a host country. INSTEX is part of Paris' push for greater EU "strategic autonomy" and independence from the United States. Moreover, the SPV is a trilateral initiative by three powerful EU countries, meaning that the United States will have to think twice about sanctioning such important allies.
However, the future of the SPV is uncertain. European companies may fear that INSTEX doesn't offer enough protection from U.S. sanctions and decline to use it. Iran, too, is aware of the SPV's vulnerability. On Jan. 31, Deputy Foreign Minister for Political Affairs Abbas Araqchi said, "Americans have already threatened they are going to deal with this mechanism." Indeed, the United States has said it will take aim at the SPV if it facilitates trade in goods beyond food, medicine and humanitarian items.
European companies may fear that INSTEX doesn't offer enough protection from U.S. sanctions.
Another source of uncertainty for the SPV lies in how Europeans and Iranians view it, with Tehran urging quicker development of the mechanism. According to the French government, INSTEX will focus mostly on food and medicine during the initial stage. Iran, however, wants the channel to be used for sanctioned goods as well and at a faster pace — highlighting a potential point of contention between Tehran and European Union.
The European Union has been trying to keep Iran in the JCPOA since the U.S. pullout in May 2018. The formation of the SPV is one factor among many that could alter Iran's decision-making. But Tehran will need to evaluate the vehicle's effects on trade and gauge whether it provides the economic benefits it needs. Those decisions and benefits will determine whether Tehran continues to follow the JCPOA and cooperate with its EU allies. Those allies are taking a multifaceted approach to dealing with Iran, as evidenced by France's decision to host INSTEX. But France is ultimately trying to continue its humanitarian trade and its economic ties to Iran, even as it and others in the bloc have emphasized the need to curtail some of Iran's ballistic missile activity and develop a common EU position on the issue before a summit on Middle East security and Iran in mid-February.