Iran recently breached a central provision of the 2015 agreement to curb its nuclear enrichment (the Joint Comprehensive Plan of Action) by accumulating more enriched uranium than allowed under the deal. The breach came after—but not entirely because—European nations failed to assure Tehran that they could circumvent the sanctions reimposed by President Donald Trump. European efforts, however sustained and well-intentioned, were not adequate to satisfy Iran's concerns. After months of back and forth, France, Germany, and the United Kingdom, the three key European signatories of the 2015 agreement, had finally managed to make operational a special purpose vehicle for facilitating trade between them and Iran.
At this point, it seems difficult but not impossible that in its current form this new vehicle will play a determining role in salvaging the nuclear accord. Some commentators interpreted Iran's decision to resume enrichment as a signal that the Europeans still had time to make such arrangements, and negotiations between the two sides are still ongoing.
The special purpose vehicle, called the Instrument in Support of Trade Exchanges (INSTEX), is designed to circumvent US sanctions on Iran. It also eliminates the need to use the banking platform SWIFT (Society for Worldwide Interbank Financial Telecommunication), which had sharply curtailed the international activities of Iranian banks. China, Russia, and several other European countries may also use this instrument in the future. But INSTEX will likely be mainly a symbolic gesture, exerting a negligible effect on Iran's very difficult economic situation. The Europeans have tried hard to make INSTEX function as an expression of goodwill that may moderate Iran's response to the United States leaving the nuclear agreement.
How does INSTEX work? As Barry Eichengreen has noted, it is similar to the European Payments Union, which operated after World War II to facilitate Europe's economic recovery. INSTEX allows trade with Iran and non-US trading partners without any direct financial transfers between them. European exporters (company A) can sell goods to Iran and get a credit for it with INSTEX. At the same time, a European importer (company B) can purchase goods from Iran and make a payment to INSTEX, which subsequently can net out the payment from B and its liability to A. At the same time, Iran has set up a counterpart facility—Special Trade and Finance Institute (STFI)—that will net out the transactions of Iranian importers and exporters. For INSTEX and STFI to operate effectively, reliable compliance mechanisms are essential, especially to safeguard against money laundering and financing of terrorism.
INSTEX will not materially help Iran's very challenging economic situation for several reasons. First, INSTEX would not cover goods that are under US sanctions, especially oil and oil products, by far Iran's major exports to Europe. Iran's exports of oil alone have dropped from a high of about 2.8 million barrels a day after the nuclear agreement to 500,000 to 600,000 barrels a day in May 2019. By excluding oil and oil products, INSTEX is much more limited than the Oil-for-Food Programme, which was set up in 1995 by the United Nations for Iraq. Second, it is not clear how willing European corporations will be to use this facility and risk losing trade with the United States by dealing with Iran. And third, putting in place reliable compliance mechanisms, especially those that are consistent with regulations of the Financial Action Task Force, will prove to be difficult.
One can speculate that the introduction of INSTEX may help persuade Iran to slow its exit from the nuclear agreement, for now. This assumes that Iran agrees to accept the confines of the current INSTEX provisions. Iranians clearly expect that INSTEX will be expanded as part of any progress on defusing nuclear tensions. While implicitly welcoming INSTEX, the governor of the Central Bank of Iran has noted that the durability of this framework would depend on shifting it from a construct determined by US sanctions to one covering trade in all goods allowed under the nuclear agreement. He has also asked that Europe extend a credit line to Iran, to be repaid by future oil exports by Iran. Without substantial change in its framework, INSTEX will not emerge as a viable vehicle for saving the nuclear agreement. The work of INSTEX is also contingent on the United States not imposing sanctions on INSTEX or, what is more likely, on its Iranian counterpart, STFI.