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Commentary | 25 February 2020

Europe still needs INSTEX to help solve the Iran crisis

Europe Iran JCPOA Middle East Nuclear Security Nuclear Weapons Global Security

Over the last few months, the mission of INSTEX has grown significantly more complicated. Tensions between the United States and Iran have reached new highs following the assassination of Iranian Major General Qassem Soleimani, and European leaders have called for de-escalation as fears grow of direct conflict. Iran’s recent elections, marked by historically low turnout, have ushered in a more conservative parliament, sceptical of Western intentions. Already hamstrung by delays, the intended political function of INSTEX—to encourage Iran to remain in compliance with the Joint Comprehensive Plan of Action (JCPOA)—has been thrown further into doubt.

However, at a time when constructive diplomatic relations between Europe and Iran may prove instrumental in efforts to stave off a regional conflict, the speedy operationalisation of INSTEX remains an imperative—a point underscored by EU foreign policy chief Josep Borrell following his first trip to Tehran earlier this month.

INSTEX has quietly increased the tempo of its consultations with its Iranian counterpart, the Special Trade and Finance Instrument (STFI), in Tehran and other European capitals. The project was buoyed by the decision of six European countries–Belgium, the Netherlands, Sweden, Denmark, Finland, and Norway–to join the company as shareholders.

The new shareholders will provide further capital to enable INSTEX to grow its team and operational capacity. Having relied on support from staff at E3 foreign and economic ministries until late last year, INSTEX now has its own full-time staff members. The new hires have helped the company present itself more credibly with key stakeholders in Europe and Iran who now perceive the company to be a serious, long-term undertaking.

As has been reported, a first transaction was nearly completed on the eve of the December 6 meeting of the JCPOA Joint Commission. But rather than pursue quick wins, INSTEX and STFI are now resolved that the first transactions serve as a proof-of-concept for the operationalisation of the core service.

The core service INSTEX will offer, which can be referred to as a “cross-border clearing mechanism,” aims to eliminate the need for companies trading goods and services between Europe and Iran to make payments between the financial systems of the two jurisdictions. At a time when few European banks are willing to send or receive Iran-related payments, INSTEX can help make European trade with Iran both more reliable and affordable.

INSTEX has made progress in defining its onboarding procedures and compliance guidelines as part of an overall business model designed in collaboration with a wide range of stakeholders. The company is now in a position to ramp-up its engagement with potential clients this year, and there is a significant interest among European enterprises. Until now, such interest has been channelled through companies’ respective foreign ministries. Importantly, these companies are not only small and medium enterprises but also include major multinational companies with active sales or manufacturing business in Iran. The wide-range of interest is critical information for INSTEX as it begins its own proactive outreach.

INSTEX intends to be less expensive than all other payment solutions available to conduct trade with Iran. The significant transaction costs associated with foreign exchange conversions and wire transfers currently required to conduct trade between Europe and Iran have been a significant driver of the increased cost of imports, particularly humanitarian goods, adding to inflationary pressure in Iran and hardship for ordinary Iranians. The goal is to deliver a solution that facilitates trade at a meaningful scale to help ameliorate these conditions.

This has been the main point of scepticism about INSTEX—a severe imbalance in trade has been taken to mean that the value of Iranian exports to Iran will act as a ceiling for the value of trade that can be cleared through the mechanism. Here, those familiar with INSTEX express confidence. Working with E3 policymakers, INSTEX has identified a source for the required liquidity, allowing the mechanism to work without perfect balance in credits and liabilities.

There have also been longstanding concerns that the reimposition of countermeasures by the Financial Action Task Force (FATF) might interfere with the operationalisation of INSTEX. But given the robust due diligence framework established by INSTEX, Iran’s return to the so-called FATF “blacklist” is not expected to prevent the mechanism from maintaining the banking services necessary for its operation.

While the business case and operational model for INSTEX are clearer than ever before, the company continues to face political headwinds in Washington, European capitals, and Tehran. The first transaction is being pursued at precisely the moment when both the American government is doubling down on “maximum pressure” and European and Iranian governments are reconsidering their strategies in light of wider developments.

European governments have opted to trigger the JCPOA’s Dispute Resolution Mechanism (DRM) given growing concerns regarding Iran’s progressive steps to reduce its compliance with the agreement’s nuclear restrictions and the eroded credibility of the agreement’s credibility as a non-proliferation agreement. Triggering the DRM will no doubt complicate the overall political environment, particularly as UN and EU sanctions snapback remains a possibility should the subsequent negotiations fail to address concerns. But there remain several clear reasons why European and Iranian authorities should proceed with the operationalisation of INSTEX.

First, trade in food and medicine will remain permissible even if EU sanctions are reimposed as demonstrated by the perseverance of European economic operators active in the sale of food and medicine during the sanctions period of 2008-2016. There is a clear role for INSTEX to play in safeguarding and facilitating humanitarian trade even in a scenario where Europe-Iran diplomatic ties deteriorate considerably. In this sense, even if INSTEX fails to save the Iran nuclear deal, its innovative mechanism has a role to play as a tool for humane European foreign policy and the defence of European economic sovereignty.

Second, Iran has emerged as an epicentre of the global public health crisis caused by the spread of the COVID-19 coronavirus. Iranian authorities have already received support and diagnostic kits from the World Health Organization as they seek to contain the spread of the virus, which has so far killed at least sixteen people. Should the public health crisis in Iran intensify, further medication and equipment may be needed. Presently, the indirect effect of sanctions on humanitarian trade makes it difficult for Iranian authorities to source products from new suppliers—onerous due diligence requirements for humanitarian trade discourage financial institutions from onboarding new clients. Such restrictions may encumber Iran’s response to the coronavirus. INSTEX can be used to ensure Iran remains able to make payments to European suppliers and receive speedy and reliable deliveries of the equipment necessary to deal with the coronavirus outbreak.

Finally, as made clear in the aftermath of the assassination of Qassem Solaimani, tensions between the United States and Iran may yet lead to outright war. The Iranian escalatory steps that would contribute to the initiation of any such conflict would no doubt test European resolve to operationalise INSTEX as presently intended. However, in the context of war, Europe’s humanitarian obligations will be even more important. Facilitating the flow of food and medicine to the Iranian population will be crucial should Europe wish to reduce harm to the civilian population and present itself as a credible mediator between the United States and Iran. In this context, and given the existing pressures on humanitarian trade, an operational INSTEX would be a crucial tool for peace-minded European foreign policy. In short, further political and economic investment in the INSTEX project is consistent with European preparedness for such worst-case scenarios.

European policymakers have few tools with which to influence the direction of the brewing security, economic, and public health crises in the Middle East. Against this backdrop of uncertainty and instability, INSTEX deserves greater high-level political support as a key means by which Europe can reassert its credibility as the only major global actor whose economic operators are significantly invested in the economic and humanitarian wellbeing of the people of Iran and the wider Middle East.

The opinions articulated above represent the views of the authors, and do not necessarily reflect the position of the European Leadership Network (ELN) or any of the ELN’s members. The ELN’s aim is to encourage debates that will help develop Europe’s capacity to address pressing foreign, defence, and security challenges.

Image: Wikimedia, Mina Noei