INSTEX SAS Facilitating Trade With Iran

In 2019, France, Germany, and the United Kingdom (E3) established INSTEX SAS (Instrument for Supporting Trade Exchanges). This Special Purpose Vehicle (SPV) aims to enable legitimate trade between European businesses and Iran, bypassing US sanctions. INSTEX operates as a non-dollar, euro-denominated clearing house to avoid direct monetary transfers in US dollars. The initial shareholders contributed £3. INSTEX is based in France, headed by a German banker, and overseen by a UK-led supervisory board. Initially, it focuses on sectors such as pharmaceuticals, medical devices, and agri-food goods, which are not targeted by US sanctions.

In 2019, the international landscape witnessed a significant development with the creation of INSTEX SAS (Instrument for Supporting Trade Exchanges) by France, Germany, and the United Kingdom (E3). This Special Purpose Vehicle (SPV) emerged as a direct response to the re-imposition of US sanctions on Iran following the United States' withdrawal from the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran Nuclear Deal. The primary objective of INSTEX was to facilitate legitimate trade between European businesses and Iran, effectively bypassing the reach of US sanctions. This initiative underscored a growing divergence in foreign policy perspectives between the United States and key European powers regarding Iran, and presented novel challenges to the existing international economic and political order. INSTEX operated as a non-dollar, euro-denominated clearing house, designed to avoid direct monetary transfers in US dollars, thereby shielding transactions from US regulatory scrutiny. The initial shareholders contributed £3, symbolizing the political commitment of the E3 nations to the project. INSTEX is based in France, headed by a German banker, and overseen by a UK-led supervisory board. Initially, its scope was limited to sectors deemed less sensitive, such as pharmaceuticals, medical devices, and agri-food goods, areas ostensibly not directly targeted by US sanctions. This cautious approach reflected the inherent risks and complexities associated with challenging US economic dominance and navigating the intricate web of international sanctions regimes.

The Genesis of INSTEX: A Response to US Sanctions

The story of INSTEX is intricately linked to the 2015 JCPOA, a landmark agreement designed to prevent Iran from developing nuclear weapons. This accord, painstakingly negotiated between Iran and the P5+1 (the five permanent members of the United Nations Security Council – China, France, Russia, the United Kingdom, and the United States – plus Germany) along with the European Union, offered Iran significant sanctions relief in exchange for verifiable limitations on its nuclear program. The JCPOA was hailed as a major diplomatic achievement, representing a multilateral approach to addressing concerns about Iran's nuclear ambitions.

However, the JCPOA's future was thrown into doubt when, in May 2018, the United States, under the Trump administration, unilaterally withdrew from the agreement. This decision was based on the US administration's belief that the JCPOA was fundamentally flawed and did not adequately address concerns about Iran's ballistic missile program and its regional activities. Following its withdrawal, the US re-imposed a series of stringent sanctions on Iran, targeting its oil exports, financial sector, and other key industries. These sanctions had a devastating impact on the Iranian economy, leading to a sharp decline in GDP, increased inflation, and a significant reduction in living standards.

The US sanctions also had a chilling effect on European businesses that had been trading with Iran. Despite the EU's commitment to upholding the JCPOA, many European companies found themselves unable to continue their operations in Iran due to the risk of being penalized by the US. The US sanctions regime included provisions that allowed the US to impose secondary sanctions on foreign companies that did business with Iran, effectively forcing them to choose between accessing the US market and trading with Iran.

It was in this context that France, Germany, and the United Kingdom decided to establish INSTEX. The E3 nations believed that preserving the JCPOA was crucial for regional stability and preventing Iran from resuming its nuclear program. They also recognized the importance of protecting European economic interests and upholding the principle of international agreements. INSTEX was therefore conceived as a mechanism to facilitate legitimate trade with Iran, allowing European businesses to continue their operations without directly violating US sanctions.

The Mechanics of INSTEX: A Non-Dollar Clearing House

INSTEX operates as a Special Purpose Vehicle (SPV), a legal entity created for a specific purpose, in this case, to facilitate trade with Iran. The SPV structure is designed to isolate financial risk and protect the parent companies (in this case, the E3 nations) from potential liabilities. INSTEX is registered in France, with headquarters in Paris. It is headed by a German banker, highlighting the shared responsibility and commitment of the E3 nations. A UK-led supervisory board oversees the operations of INSTEX, ensuring compliance with relevant regulations and guidelines.

The key feature of INSTEX is that it operates as a non-dollar, euro-denominated clearing house. This means that transactions are conducted in euros and do not involve direct transfers of US dollars. The aim is to avoid the reach of US sanctions, which are primarily enforced through the US dollar-dominated global financial system.

The process works as follows:

1. A European company that wants to export goods to Iran first registers with INSTEX.
2. The European company then sells its goods to an Iranian buyer, who pays for the goods in Iranian rials.
3. The Iranian buyer deposits the rials into an account held by an Iranian entity affiliated with INSTEX.
4. On the other side, a European company that wants to import goods from Iran registers with INSTEX.
5. The European company purchases goods from an Iranian seller, who is paid in rials from the account held by the Iranian entity affiliated with INSTEX.
6. INSTEX then clears the transactions, ensuring that the European exporter is paid in euros and the Iranian seller receives rials.

In essence, INSTEX acts as a barter system, matching European exports to Iran with European imports from Iran. No money actually flows between Europe and Iran. Instead, the transactions are settled through a clearing mechanism that operates outside the US financial system.

Initially, INSTEX focused on sectors deemed less sensitive, such as pharmaceuticals, medical devices, and agri-food goods. These sectors are ostensibly not directly targeted by US sanctions, although in practice, the US sanctions regime has made it difficult for Iran to import even essential goods. The E3 nations adopted a cautious approach, seeking to avoid direct confrontation with the US and to demonstrate that INSTEX was intended for humanitarian purposes.

Key Actors and Their Motivations

The creation and operation of INSTEX involved a complex interplay of actors, each with their own motivations and interests.

• France, Germany, and the United Kingdom (E3): The E3 nations were the driving force behind INSTEX. Their primary motivation was to preserve the JCPOA and prevent Iran from resuming its nuclear program. They also sought to protect European economic interests and uphold the principle of international agreements. The E3 nations believed that the US withdrawal from the JCPOA was a mistake and that a multilateral approach was the best way to address concerns about Iran's nuclear ambitions. They were also concerned about the potential for instability in the Middle East if the JCPOA collapsed.
• Iran: Iran's primary motivation was to benefit from the economic relief promised under the JCPOA. Iran had complied with the terms of the agreement, significantly reducing its nuclear program, and expected to see a corresponding improvement in its economy. The re-imposition of US sanctions undermined these expectations and led to growing frustration in Iran. Iran viewed INSTEX as a way to circumvent the US sanctions and access international markets. However, Iran also expressed concerns about the limited scope of INSTEX and the slow pace of its implementation.
• United States: The United States, under the Trump administration, viewed Iran as a major threat to regional and international security. The US believed that Iran was developing nuclear weapons, supporting terrorism, and destabilizing the Middle East. The US sanctions were intended to pressure Iran to change its behavior and to prevent it from acquiring nuclear weapons. The US opposed INSTEX, viewing it as a challenge to its sanctions regime and a way for Iran to circumvent US pressure. The US warned European companies that they would face penalties if they used INSTEX to trade with Iran.
• European Union (EU): The European Union as a whole supported the JCPOA and sought ways to maintain trade with Iran despite US sanctions. The EU viewed the JCPOA as a crucial element of its foreign policy and believed that it was essential to prevent Iran from developing nuclear weapons. The EU also had significant economic interests in Iran and sought to protect European businesses from the impact of US sanctions. The EU provided political and financial support to INSTEX, but its ability to directly counter US sanctions was limited.

Legal and Historical Context

The creation of INSTEX raised important legal questions about the extraterritorial application of US law and the limits of national sovereignty. The US sanctions regime included provisions that allowed the US to impose secondary sanctions on foreign companies that did business with Iran, even if those companies were not based in the US and their activities did not violate US law. This extraterritorial application of US law was a source of friction between the US and other countries, particularly the EU.

The EU has a history of resisting the extraterritorial application of US law. In 1996, the EU adopted the Blocking Statute, which was intended to nullify the effect of US sanctions in Europe and allow European companies to recover damages arising from such sanctions. The Blocking Statute was updated in 2018 in response to the re-imposition of US sanctions on Iran. However, the effectiveness of the Blocking Statute has been limited, as many European companies have been reluctant to use it due to concerns about the potential for retaliation from the US.

INSTEX can be seen as another attempt by the EU to counter the extraterritorial application of US law and to protect European businesses from the impact of US sanctions. However, INSTEX is a more targeted and sophisticated mechanism than the Blocking Statute. It is designed to facilitate trade with Iran without directly violating US sanctions, by operating as a non-dollar clearing house.

Broader Implications and Challenges

The creation of INSTEX had significant broader implications for international relations, transatlantic relations, and the global economic order.

• Political Implications: INSTEX increased tensions between the US and Europe over foreign policy towards Iran. The US viewed INSTEX as a challenge to its sanctions regime and a sign that Europe was not fully committed to containing Iran. Europe, on the other hand, viewed the US sanctions as an overreach of US power and a violation of international norms. This divergence in foreign policy perspectives strained transatlantic relations and undermined the traditional alliance between the US and Europe.
• Diplomatic Implications: INSTEX presented a challenge to the international rules-based order. The US sanctions regime was based on the principle of extraterritoriality, which allows the US to impose its laws on foreign companies and individuals. This principle is controversial and has been challenged by other countries, particularly the EU. INSTEX was an attempt to circumvent the US sanctions regime and to uphold the principle of national sovereignty.
• Legal Implications: INSTEX raised questions about the legality and enforceability of US sanctions and the extraterritorial application of US law. The EU argued that the US sanctions were illegal under international law and that the US was exceeding its jurisdiction by imposing sanctions on foreign companies that did not have a direct connection to the US. The US, on the other hand, argued that its sanctions were justified by its national security interests and that it had the right to impose sanctions on any country that threatened those interests.
• Economic Implications: INSTEX had the potential to disrupt international trade and to impact European businesses trading with Iran. The US sanctions had already had a significant impact on the Iranian economy, and INSTEX was intended to mitigate some of those effects. However, the effectiveness of INSTEX was limited by its narrow scope and the reluctance of many European companies to use it. The US sanctions regime also created uncertainty and risk for European businesses, making them hesitant to invest in Iran.
• Security Implications: The tensions between Iran and the US had the potential to escalate into a military conflict. The US had a significant military presence in the Middle East, and Iran had threatened to retaliate against US interests if it was attacked. The collapse of the JCPOA could have led to Iran resuming its nuclear program, which would have further increased tensions in the region. INSTEX was intended to prevent the collapse of the JCPOA and to reduce the risk of military conflict.
• Humanitarian Implications: The US sanctions had a significant impact on the Iranian population, particularly access to essential goods and medicines. The sanctions made it difficult for Iran to import these goods, leading to shortages and price increases. INSTEX was intended to facilitate the import of essential goods into Iran, but its effectiveness in addressing the humanitarian crisis was limited.

Despite the initial optimism surrounding INSTEX, the mechanism faced numerous challenges and limitations. The US government actively discouraged European companies from using INSTEX, threatening them with secondary sanctions. This created a climate of fear and uncertainty, making many companies reluctant to engage with the mechanism. Furthermore, the cumbersome and complex nature of INSTEX transactions, coupled with the limited scope of permitted trade, further hampered its effectiveness.

The Future of INSTEX and the Iran Nuclear Deal

The future of INSTEX and its effectiveness in facilitating trade with Iran depended on several factors, including the US policy towards Iran, the willingness of European companies to use INSTEX, and Iran's compliance with the JCPOA.

The election of Joe Biden as US president in 2020 raised hopes that the US might rejoin the JCPOA and ease sanctions on Iran. However, negotiations between the US and Iran to revive the JCPOA have been protracted and difficult. The US has demanded that Iran return to full compliance with the JCPOA before it lifts sanctions, while Iran has demanded that the US lift sanctions first.

Even if the US rejoins the JCPOA, the future of INSTEX remains uncertain. The US may insist on changes to the JCPOA that would limit the scope of INSTEX or impose additional restrictions on trade with Iran. European companies may also remain hesitant to use INSTEX, even if the US lifts sanctions, due to concerns about the potential for future sanctions.

Iran's compliance with the JCPOA is also a key factor in the future of INSTEX. If Iran violates the terms of the JCPOA, the US and other countries may reimpose sanctions, making it even more difficult for INSTEX to operate.

Ultimately, the success of INSTEX depends on a complex interplay of political, economic, and legal factors. The mechanism represents a bold attempt by Europe to assert its independence from the US and to uphold the principle of international agreements. However, its effectiveness is limited by the power of the US sanctions regime and the complex geopolitical dynamics of the Middle East.

INSTEX also underscored the growing divergence in foreign policy perspectives between the United States and key European powers. While the US pursued a strategy of maximum pressure on Iran through sanctions, the E3 nations favored a diplomatic approach and sought to preserve the JCPOA. This divergence in perspectives strained transatlantic relations and raised questions about the future of the transatlantic alliance. The creation of INSTEX served as a stark reminder of the challenges facing the international community in a world where unilateral actions by powerful states can undermine multilateral agreements and disrupt the global economic order. The long-term impact of INSTEX on international trade and diplomacy remains to be seen, but its emergence as a response to US sanctions on Iran marked a significant moment in the evolving landscape of international relations.