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While we’ve previously written about the uncertainties of international trade involving Iran, we’re currently monitoring a new wrinkle.

On January 31, 2019, the Foreign Ministers of France, Germany, and the UK announced the creation of INSTEX (Instrument in Support of Trade Exchanges), a special purpose vehicle (SPV) designed to facilitate European trade with Iran. The SPV is expected to begin operating within the next few months.

The move comes in response to the 2018 re-imposition of US sanctions on Iran by the Trump administration, following its withdrawal of the US from the Iran Nuclear Deal (JCPOA – Joint Compressive Plan of Action). At the time of the Trump administration’s withdrawal, the leaders of France, Germany, and the UK broke with the US, affirming that the UN Security Council resolution endorsing the JCPOA remained a “binding international legal framework.” The European Union also updated it’s blocking statute, prohibiting EU companies from compliance with the sanctions, and declining to recognize any court verdicts which could result in penalties due to their violation.

 

 INSTEX is intended as mechanism to facilitate the sale of non-sanctioned goods (initially medicines, medical devices, and food) from European companies to Iran. While in theory, these exchanges could have taken place without an institution like INSTEX, the commercial banks which typically facilitate financial flows between Iran and Europe could have themselves been subject to sanctions if they dealt in US dollars or maintained operations in the US. INSTEX addresses that risk by functioning as a clearing house for barter transactions, eliminating the need for dollars. While large multinationals are still unlikely to risk US ire by participating in trades via INSTEX, smaller European companies may find it easier to engage in trades they could not have previously arranged.

However, outside of the EU, the INSTEX announcement has sparked frustration. The Trump administration has been less than pleased; US ambassador to Germany, Richard Grenell, called the mechanism disrespectful, and warned that “bypassing American sanctions is not advisable.” On the Iranian side, several leaders were frustrated by the exclusion of oil and gas revenues from the exchange, which they argue limits its utility to Iran.

Ultimately, it still remains to be seen if there will be sufficient interest in INSTEX to allow it to function effectively. With Iran’s continued participation in the JCPOA an open question, the success or failure of INSTEX could be an important bellwether for the health of the deal. As negotiations over its operational details continue, we’ll be keeping a close eye on future developments.

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