Special Financial Channel for Europe; A Cure After Sohrab's Death

Finally, after nearly eight months of activity, the special financial channel for Europe known as "INSTEX" has officially started operations with the announcement of the German Foreign Minister. This term is short for the mechanism to support trade exchanges and facilitate payment mechanisms that allow companies and economic institutions to engage in legitimate trade with Iran without being exposed to U.S. sanctions. The details and all aspects of this channel are still unclear, and its implementation stages are being finalized. As previously reported by some Western media, Paris will host this channel, a German figure will lead it, and the UK, France, and Germany will be shareholders. Initially, INSTEX will only cover food, pharmaceutical, and medical exchanges that are not directly under U.S. unilateral sanctions. The German Foreign Minister has clarified that INSTEX currently includes transactions that are not under U.S. sanctions. According to official documents published by the European Troika, this financial channel will operate within the framework of UN and EU financial regulations, anti-money laundering (AML), and counter-terrorism financing (CFT) laws. This channel acts as a financial intermediary where the importer of Iranian goods in Europe pays their debt to INSTEX, which then provides it to the exporter of goods to Iran. In fact, it will be a settlement and payment mechanism for purchasing goods and services that operates in a barter-like manner. Therefore, no money is transferred to Iran, and essentially no financial transactions take place. In reality, the three countries of Britain, France, and Germany have created a financial fund for the Iranian government in Europe, allowing importers and exporters to organize their trade without the need to open letters of credit or any type of banking exchange. Iranian companies will also face a similar mechanism in Tehran, where transactions in rials will occur under the mediation of the Iranian government and the supervision of the three European countries. In the future, a procedure will be developed for non-European countries to use this channel as well. The Islamic Republic government has welcomed this European initiative but has deemed it insufficient and has called for the acceleration of complementary actions to maintain the balance between the commitments and benefits of the JCPOA for Iran. From the Iranian government's perspective, INSTEX is still not at a stage that meets Iran's expectations, but in the difficult conditions created by U.S. unilateral sanctions, it is considered a loophole for the government, and from this angle, it has minimal expectations. The challenges of this financial initiative will be examined, as there are ambiguities regarding its effectiveness. Its limited capacities raise serious doubts about its ability to circumvent U.S. sanctions and provide artificial respiration to save the half-dead JCPOA. The indifference of the market, which has not led to a significant reduction in the rial's value against the free dollar, is enlightening in this regard. The delay in executing INSTEX has not only not been implemented yet, but even the overall details and all its aspects have not been clarified and are still being drafted. At best, it requires several months for the first phase to be implemented. Thus, it is unlikely to become operational before the end of the U.S. government's exemption regarding the purchase of fossil energy from Iran. The limitation to humanitarian goods means that after the initial phase is implemented, INSTEX will only cover pharmaceutical, food, and hygiene products. According to Hamid Baeidinejad, Iran's ambassador in London, these goods will include categories such as "various agricultural and food products, pesticides, fertilizers, and seeds, animal feed" and "raw materials for medicines, various generic drugs, drugs for specific diseases, various medical equipment, advanced surgical devices in operating rooms, and various human and animal vaccines." Oil, gas, chemicals, industrial equipment, spare parts, capital goods, and generally items that are under U.S. unilateral sanctions will not be included in the first phase of the special financial channel, and thus the financial problems of the government, especially the significant decrease in revenues, will remain in effect for at least a six-month period. The trade balance between Iran and the Eurozone has been negative. Although this balance reached 21 billion euros in 2017, a 53% increase compared to the previous year, it is still less than the 26 billion figure of 2011. However, most of Europe's imports from Iran have been related to fossil energy. Last year, the trade balance deficit was around one billion dollars, even without restrictions on the export of oil, gas, and petrochemical products. Now, given that the implementation of INSTEX has effectively been postponed until after the end of the U.S. exemption for oil purchases, and it is unlikely to cover products subject to U.S. primary sanctions anytime soon, the trade balance deficit will significantly increase. Since the logic of INSTEX's operation is based on barter, it is practically impossible to supply all the goods desired by Iranian companies, and there is limited capacity for imports from European companies. Vulnerability to U.S. sanctions arises because European governments do not have control over the companies of their member states, and the operation of the financial channel is based on their willingness and consent. The risk for European companies that wish to operate in the U.S. market is high and will be over-calculated. It is unlikely that the information of companies and commercial institutions using this channel will remain hidden from the U.S. government and the heavy sanctions apparatus against Iran. They can subject these companies to sanctions. However, the items mentioned in the first phase are not subject to U.S. primary sanctions, and only their financial exchange faces challenges, although the U.S. government has considered a mechanism for humanitarian goods, and even during sanctions, purchases of agricultural products like soybeans and medical equipment have continued. However, when it comes to goods subject to sanctions, using this channel does not create deterrence against penalties. The volume of trade between Europe and the U.S., especially the use of its networks and financial resources, is on average more than 40 times that of Iran. Economic logic dictates caution in this regard, unless small enterprises that are not present in the U.S. market use this channel, which cannot meet Iran's needs. Delays and increased financial costs are inevitable with INSTEX, no matter how well it is technically laid out. In precise terms, commercial transactions will face excessive delays, ultimately increasing the costs of financial exchanges, and even first-tier banks may show reluctance to participate in this process. Increased exchange costs will raise inflation in Iran and exacerbate the economic crisis in the country. The founders of INSTEX have stated that compliance with FATF is one of the operational principles of this financial channel. However, it is unclear whether Iran's removal from the FATF blacklist is a prerequisite for the implementation of the mentioned financial channel, but this issue has overshadowed the atmosphere. Given the difficult conditions of the Islamic Republic and the expected approval of the four FATF agreements in the final step by the Islamic Republic, this challenge is unlikely to create specific problems in the end. Disagreements in missile and regional policy areas have led the European Union to express its serious concern over the Islamic Republic's missile program, particularly the development of ballistic missile capabilities. They have also issued warnings regarding Iran's military involvement in Syria and its financial, military, and informational support for non-state actors in countries like Syria and Lebanon. The heavy shadow of these issues, which are not directly related to INSTEX, has called into question its effectiveness. The Iranian government has so far resisted de-escalation in these areas with Europe. The continuation of this approach could bring Europe closer to the U.S. Therefore, considering the aforementioned challenges, the effectiveness of INSTEX for Iran is seriously questioned, and at best, it can only address a limited portion of the Islamic Republic's expectations and Iran's economic needs. Thus, the government may not withstand the external pressures at the beginning of 1398 (2019) and INSTEX may turn out to be a cure after Sohrab's death. However, given the difficult conditions that the Islamic Republic faces due to the heavy pressure from the U.S. government, even this capacity, within the framework of minimal engagement, will ultimately be positively evaluated in the government's practical policy and is unlikely to lead to the Islamic Republic's exit from the JCPOA.