Instrument in Support of Trade Exchanges (INSTEX)

The Instrument in Support of Trade Exchanges (INSTEX) was established to facilitate trade between Europe and Iran following the reinstatement of sanctions against Iran by the US. In the year and a half since its founding, more countries have expressed interest in the mechanism, despite an overall lack of trade activity. Legitimate questions have been raised about the viability of INSTEX, and during a recent ACAMS webinar on sanctions effectiveness I was asked for guidance on this very topic, which I will cover in this blog.

What Is INSTEX and Why Was It Created?

INSTEX was incorporated in France in January 2019 as a collaboration between the governments of France, Germany and the UK (the E3) to facilitate legitimate trade with Iran. It is a Special Purpose Vehicle (SPV) and its purpose is limited to humanitarian efforts, such as the purchase of medicine or food. In an effort to avoid any possible repercussions caused by US sanctions against Iran, no transactions would be carried out using the US dollar or via the Society for Worldwide Interbank Financial Telecommunication (SWIFT).

As a counterpoint, a similar entity entitled Special Trade and Finance Instrument (STFI) was established in Iran to effectively ‘mirror’ any transactions from INSTEX under the same restrictions and to facilitate legitimate trade with European market participants, to which INSTEX has been made widely available. As of July 2020, INSTEX has seven sovereign owners, following the additions of Belgium, Denmark, Netherlands and Norway – with Russia having also expressed an interest in gaining access.

Initial Transaction

The first recorded instance of activity between INSTEX and STFI just occurred in March 2020 when the E3 facilitated the export of medical goods from Europe to Iran to support their response to the COVID-19 pandemic. This initial transaction utilising INSTEX took place a full 15 months after the structure was created. It would appear that, despite everyone’s best intentions and endeavours, this trade route has not been well used although the reasons for the delay are not entirely clear.

Now that the first transaction is complete, INSTEX and STFI intend to work on more transactions and enhance the mechanism. INSTEX’s aim was to provide a sustainable, long-term solution for legitimate trade between Europe and Iran as part of the continued efforts to preserve the Joint Comprehensive Plan of Action (JCPOA), also referred to as the Iran Nuclear Deal.

Why the JCPOA Agreement Is Important

The JCPOA is an agreement which was reached in July 2015 after many years of negotiations between China, France, Russia, the UK and the US (who are the five permanent members (P5) of the United Nations Security Council) plus Germany (P5+1) and Iran. The European Union (EU) was also included and the plan was to restrict the possibility of Iran becoming a nuclear power, focusing on their nuclear enrichment and reprocessing capabilities being diverted away from potential arms manufacture. In turn, US trade restrictions would partially be lifted to facilitate Iran trading oil, thus generating billions of dollars in revenue which their cash starved economy was desperately in need of.

Fast forward to May 2018.  The US withdrew from the JCPOA and the waters have become muddied somewhat, amidst threats of potential counter measures against Iran and the EU by the US. Shortly thereafter, the European Commission made its intentions clear in relation to implementing a ‘blocking statute’ which would make US sanctions against Iran illegal in Europe and effectively remove the requirement for European citizens and companies to comply with them. The commission also instructed the European Investment Bank to facilitate European companies’ investment in Iran.

And so to the question posed during the aforementioned ACAMS webinar on sanctions: what advice can be given to Canadian and US business operators on this issue?

What Should Businesses Be Aware Of?

Simply put, INSTEX and STFI were created to circumvent US sanctions in a legal manner for legitimate ends. That said, there is no clear evidence or statement that trade in food or medicines with Iran is prohibited by US sanctions;  however it would appear that everyone is, or was, ‘running scared’ of falling foul of Uncle Sam. The creation of the trade mechanism was driven in no small part by EU political machinations and the collective desire to keep the Iranians at the negotiating table to stop, or at least slow, their ability to develop usable nuclear missiles.

As INSTEX is primarily a European initiative, and the US position is unlikely to change anytime soon – and certainly not before Tuesday, November 3 – I can see no obvious mechanism by which North American business operators can benefit directly from this channel. When one considers the current ‘unprecedented times’ we find ourselves in, it is more than somewhat disappointing to see the collateral damage being caused.

Similarly, guidance from the UK Government is unchanged since 5 November 2015. Their commitment remains “to fully support expanding our trade relationship with Iran and encourages UK businesses to take advantage of the commercial opportunities that arise.” The differences in approach have been unchanged since commencing.

Doing the Right Thing Whilst Staying on the Legal Side of Guidance

Compliance with the letter, and also the spirit, of sanctions restrictions is paramount if you want to avoid significant penalties, regardless of your political leanings. Ironically, it would appear to be easier to circumvent sanctions illegally, rather than legally, especially when looking at the motives of ‘bad actors’. Big industry has also allegedly dipped its toe in these murky waters, seemingly without any retribution.

For as long as INSTEX is used to facilitate trade of food and essential medicines with Iran, it is unlikely to be met with any significant disapproval since US sanctions permit these categories of trade due to their humanitarian nature. Businesses may well be reluctant to engage in any other kind of commerce for fear of potential backlash or the jeopardy this may place on existing commerce with the US. The lack of trade since the inception of INSTEX 18 months ago may well be an indicator of its future viability despite the interest it has garnered from other countries.

Webinar recording: Sanctions Effectiveness – Combining Multiple Factors to Identify Inherent Risk