By Salman Parviz

INSTEX: Europe’s fragile muscle flexing

July 29, 2020 - 19:20

After months of delay the E3 group of Germany, France, and UK finally set up a company called Instrument in Support of Trade Exchanges (INSTEX) in January 2019. With headquarters in Paris, the company was supposed to enable non-U.S. dollar and non-SWIFT barter trade between the European Union and Iran in defiance of U.S. sanctions.

By late November 2019, Belgium, Denmark, Finland, the Netherlands, Norway and Sweden issued a joint statement announcing becoming shareholders of INSTEX.

More than one year after the mechanism was founded, amid Covid-19 pandemic in Iran taking its toll, INSTEX conducted its first transaction in March which entailed trade of $539,667 (500,000 Euros) of medicine by a private Germany company to its Iranian counterpart. The names of the parties were not revealed nor how the financial transaction was completed, i.e. barter or euros or other means.

The special purpose vehicle (SPV) was established to be a prime example of EU’s strategic autonomy from U.S. After the U.S. exited the Iran nuclear deal (also called JCPOA), EU declared its sovereignty regarding both commercial and political relations with Iran, insisting that it could continue trade under the framework of JCPOA. And so INSTEX was designed.

So far this vehicle has proven to be without an engine or driver and doesn’t conform to the trade and investment promises made in return for dramatic reduction in Iran’s nuclear program.

The U.S. continues to increase pressure on its European allies trying to dissuade global leaders from a kick start of a global INSTEX mechanism for trade. Republican U.S. Congressman, Bryan Steil is an outspoken proponent of U.S. sanctions. He introduced the Stop Evasion of Iranian Sanctions Act giving U.S. Secretary of Treasury critical tools to prevent European companies from “inappropriately trading with Iran through a backchannel known as INSTEX.”

In her letter to the former INSTEX President Per Fischer on May 7, 2019 the former U.S. Treasury Department undersecretary and one of the architects of U.S. “maximum pressure” sanctions, Sigal Mandelker clearly stated: “Engaging in activities that run afoul of U.S. sanctions can result in severe consequences, including a loss of access to the U.S. financial system.” 

Due to U.S. pressures, Europe has been reluctant even to export medicine, foodstuff and other humanitarian goods that are allowed under the sanctions. INSTEX, which is more about politics than economics, has no clauses for the trade of oil, export of which from Iran are supposed to reach “zero” as per the “maximum pressure” sanctions.

EU’s fruitless efforts to salvage the JCPOA and the three European economies’ failure on their pledge to protect the Iranian economy, has forced Iran to scale back its JCPOA commitments. 

During a phone conversation on Monday (July 13) between French President Emanuel Macron with his Iranian counterpart Hassan Rouhani, Macron described the INSTEX as positive, a mechanism that will eventually facilitate and increase Iran-Europe trade.

U.S. was initially part of the JCPOA signatories during former president Barrack Obama’s administration.  But after Donald Trump’s election in 2016, he acted according to one of his campaign pledges and exited from JCPOA in May 2018, imposing “maximum pressure” sanctions on Iran along with secondary sanctions that not only prohibit American companies, and citizens but also effect foreign entities and individuals.

The secondary sanctions show power of U.S. hegemony to legally and factually control financial transaction system. If a company doesn’t operate in U.S. market, either its banks do, or its insurance companies or its reinsurance companies backing the insurance company.

To complement INSTEX, Tehran officially registered the Special Trade and Finance Institute (STFI) just two months after INSTEX was setup. With board of directors of representatives of legal entities, including Refah Kargaran Bank, Agriculture Bank of Iran, Bank Pasargad, and Fardis Gostar Kish Informatics Services Company. STFI announced it provides payment settlement services to legal and natural importers/exporters as well as domestic and foreign banks. The company’s objective was to build relations with its European counterpart and monetary channels in other countries.

It was unclear what role did STFI play in the first INSTEX transaction in March.

Survival of JCPOA

The survival of the nuclear deal has been subject to tit-for-tat policies followed on both sides, and its future hinges on multilateral negotiations and diplomacy.

On January 5, Iran took a fifth and last step in reducing its commitments under JCPOA and said it would no longer observe any operational limitations on its nuclear program concerning the capacity and the level of uranium enrichment, as well as the volume of stockpiled uranium or research and development.

Despite Iran’s fifth step, EU foreign ministers vowed in January to preserve the nuclear deal by ignoring Trump’s call for them to quit the landmark 2015 agreement. EU Foreign Policy Chief Josep Borrel said that the EU is committed to preserving the JCPOA adding that “it is to our interest” to preserve JCPOA “as far as we can.” Borrel was addressing a news conference after a meeting with the EU foreign ministers, where they discussed the situation in Iran, Iraq, and Libya.

The IAEA’s 35-national board of governors passed a resolution in June, calling on Iran to cooperate fully with it and let the agency access two locations inside the country.

In a reaction to the approval of this anti-Iran resolution by the IAEA, the Iranian parliament in June urged the government to reconsider the implementation of the Additional Protocols of Non-Proliferation Treaty (NPT).

The parliamentary National Security and Foreign Policy Commission (NSFPC) decided to stop Iran’s “voluntary” implementation of Additional Protocol to the NPT, reported Fars news agency quoting Sara Fallahi, a member of the commission. Fallahi added that such an approval “can also effect the future of the Iranian nuclear deal.”

On the fifth anniversary of the signing of JCPOA on July 14 the Foreign Ministry tweeted that Iran remains committed to diplomatic engagement despite the setbacks reiterating that Iran “has been and will be a trusted partner to its neighbor & beyond.” According to the tweet “JCPOA is the product of Iran’s openness to engagement, but U.S. reckless exit from the deal has wreaked havoc on this multilateral accomplishment.”

Meanwhile, Iran’s Ambassador to Moscow, Kazem Jalali, expressed hope on July 13 that there is still a chance to save the nuclear deal which he described as a “win-win” situation, reported IRNA. He expressed hope that “there is still chance to save the JCPOA and political and practical action of the remaining parties are required.” Jalili noted that Russia and China have proven “politically” and “practically” that they are determined to preserve the deal.

A Chinese Foreign Ministry spokesperson, Hua Chunying, announced Tuesday (July 14) China’s firm support for JCPOA marking the nuclear deal’s fifth anniversary, reports China Daily. Earlier on June 7, Chinese Foreign Minister Wang Yi sent a letter to the UN Secretary-General and UNSC, elaborating China’s position in support of JCPOA.

Arms embargo

The U.S. Secretary of State Mike Pompeo called on the UN Security Council on June 30 meeting held via video link to extend the arms embargo on Iran beyond the October 18, 2020 expiry date set out under the JCPOA.

The arms embargo applies to Iran’s imports and exports of most kinds of weapons, including aircraft and tanks. Some limits on missile and nuclear technology will remain in place for a few more years, reports the New York Times.

The Trump administration had threatened that if the arms embargo is not extended, the U.S. will try to invoke a “snapback” provision of JCPOA to reimpose former (pre-JCPOA) UN sanctions on Iran, a move that is deemed invalid and illegal.

“Having quit the JCPOA, the U.S. is no longer a participant and has no right to trigger a snapback at the UN,” said Zhang Jun the UN ambassador from China.

During a telephone conversation between Rouhani and Russian President Vladimir Putin, both parties slammed the U.S. for seeking to extend an arms ban against Tehran, calling for efforts to confront Washington’s “unilateralism”.

Representatives from Britain, France and Germany voiced their unease at both the extension of the arms embargo and flatly opposed to the U.S. triggering snapback mechanism.

Head of the Center for Geopolitical Studies of Russia Leonid Ivashov said on Saturday that the U.S. insistence for extending Iran’s arms embargo is against the nuclear deal and is part of the U.S. plan for selling more weapons to the region.

While Europe is running out of time to save JCPOA, Trump’s move to extend arms embargo has set the stage for a clash with its allies and is another vivid example of U.S. isolation on the Iran issue.