In a joint statement, six European countries, the Netherlands, Belgium, Denmark, Sweden, Finland, and Norway, announced accession to the trade exchange mechanism known as Instrument in Support of Trade Exchange (INSTEX ) , alongside France, the UK, and Germany.
INSTEX, which is a mechanism for supporting commercial activities, has been set up by the European Troika – France, Germany and the UK – following the decision of US President Donald Trump to pull out of the nuclear deal signed with Iran in 2015. It is worth noting that this mechanism is designed to work outside the existing global financial system as an alternative financial mechanism in order for European firms to avoid being hit with US sanctions. Since the launch of INSTEX on January 31, 2019, the European Troika has been wanting to obtain an official approval for this mechanism from the 28 countries comprising the European Union (EU) . Although there has been no supportive response, the aforesaid six countries joined INSTEX on November 19 and enhanced the position of the founding countries to move ahead with this mechanism.
Joining INSTEX at this time is largely symbolic. INSTEX has not entered into force so far. The United States’ harsh position remains unchanged. It still warns firms which conduct dealings with Iran of being hit with sanctions.
But what has motivated the six EU countries to join INSTEX? What are the reasons and implications of them joining INSTEX at this time? What do the nine EU countries aim to achieve from activating INESTEX which represents a complete divergence from the US position? Can INSTEX include transactions that go beyond food and medicine? Can what is happening in regards to INSTEX be nothing but a diplomatic de-escalation by the European Union after Iran’s violations and reduction of commitments under the nuclear deal?
I- Motives for Joining INSTEX and the Positions of the Concerned Parties
1- The Motivations of the Six European Countries
Finland, the Netherlands, Belgium, Norway, Sweden and Denmark affirmed in their joint statement after joining INSTEX, their support for the European Troika in their efforts to convince Iran of the EU’s commitment to the “nuclear agreement” and the facilitation of trade between Europe and Iran. The six EU countries joining INESTEX, indicates a strengthening of this mechanism and a demonstration of European efforts to facilitate trade with Iran, as well as an explicit expression of the EU’s continued commitment to the Joint Comprehensive Plan of Action (JCPOA).
In addition to the foregoing, the EU as a decision-making power aims to strengthen itself by coordinating efforts and unifying member countries so that it can honor its commitments and pledges. By doing this, the EU will also enable its member countries to achieve their interests even if they contradict those of more influential powers in the world such as the United States, Russia, and China.
2- The European Troika
The European Troika welcomed the six countries’ accession to INSTEX, as it expressed the EU’s seriousness and commitment to the nuclear deal with Iran. They also called on Iran to resume honoring its commitments under the nuclear deal, asserting the necessity of adhering to the terms of the deal and easing tensions in the Arabian Gulf region and the Middle East.
Despite Iran’s initial welcoming of INSTEX, Iranian officials have expressed their frustration towards the EU’s slow-paced response. Following the six European countries joining INSTEX, Iranian public opinion was divided between those expressing gratitude for European efforts and intentions and those believing that INSTEX would achieve not any results on the ground as this mechanism has not been translated into economic transactions that could ease US sanctions.
4- The United States
The US administration continues to crack down on any firm or organization which breaches US sanctions. Although the United States did not officially declare that it opposes the accession of the six European countries and their support for INSTEX, some US officials did express their irritation at the decision and its timing, which coincided with the Iranian government’s repression of popular protests inside Iran.
II- Implications and Would-be Consequences
The European Troika and the six European countries joining INSTEX seek to achieve several aims, particularly saving the nuclear deal. But they also have political and security objectives such as maintaining their national security and the security of their allies in the region. Yet there is a desire of the troika to display independence and refuse submission to the policies of the US administration, which perhaps – according to the viewpoint of many European countries – were ignorant of the EU’s political and economic positions.
The six European countries joining INSTEX highlights the widening differences between US and EU policy. But it also indicates divisions that exist within Europe as only a small number of countries support INSTEX. The Scandinavian and Western European countries support INSTEX as opposed to the Eastern European countries which do not want to anger the US administration.
The European-European division also appears in the refusal of the southern European countries, such as Italy, Greece, and Spain, to join INSTEX. These countries have significant trade exchanges with Iran. The more important divergence could be noticed in the remarks of the EU and European governments’ representatives who are not committed to the decisions of the European Union. For example, during a ministerial meeting between Iran, EU representatives and the European Troika, the EU foreign policy chief pointed to the export of Iranian gas and oil to Europe would be carried out through INSTEX, unfollowing the US administration’s withdrawal from the nuclear deal last year. In the meantime, the European Troika’s officials, or those of any other European country, have not commented so far on including the sale of oil in any proposed financial exchange mechanism with Iran.
A realistic look at the decision of the six European countries to join INSTEX indicates that this move to side with the European Troika is a stern European message to the US due to its heedlessness towards the EU and its role. However, INSTEX and its operation will involve tremendous complexities. The major European firms and banks will not endanger their interests with the United States. The implications of being expelled from the US market are much more severe than possible losses if economic dealings are stopped with Iran.
In addition, it is likely that the European channel will not be fit for major commercial transactions from and to Iran, let alone pumping investments inside Iran if we take into account the US sanctions, which not only target financial transfers, but also goods and commodities and their movements.
The United States, since the establishment of INSTEX, has been continuing with its maximum pressure strategy on Iran, without being affected by this European financial mechanism.
The US position remains unchanged after the accession of the six other countries. The divergence between the United States and the Western European countries on the Iranian nuclear deal as well as US unilateral sanctions imposed on Tehran have deepened the rift and widened the gap in the policies between them. But the US seems to be more capable of imposing its policies on international firms given the size of its economy and the interests of major global firms in operating in the US market.
On the other side, activating INSTEX requires concessions from the Iranian side and its adherence to international agreements that combat corruption and money laundering. All these agreements and their terms are rejected by the IRGC as it seeks to protect its suspicious activities overseas. It exerts pressure on the Expediency Discernment Council within the Iranian political system to prevent it from approving these agreements.
If we suppose that Iran agrees to INSTEX and its terms following the accession of the six European countries in addition to the pressure of the European Troika, this financial mechanism will be confined to facilitating the trade of essential commodities which the Iranian government does not rely on to ease the impact of US sanctions. The inclusion of oil is surely not on the cards as EU member states are unable to resist US sanctions and force private companies working under its auspices not to comply with these sanctions.
Iranian experts have asserted that INSTEX, despite reflecting the EU’s desire to ease tensions with Iran, does not give Iran any privilege at all. Therefore, it cannot be relied on from the point of view of their government. The accession of the six European countries to INSTEX is not so meaningful to the Iranians unless there is trade exchange and unless it is officially activated to go beyond the exchange of food and medicine to include the oil sector and its exports. Some Iranian experts look at INSTEX and the accession of the six European countries with suspicion as they consider this move as further evidence of European procrastination and European-American collusion in order to calm the Iranian side for the time being, forcing it to accept a new nuclear deal.
III- Future Scenarios
1- Partial Activation
This scenario means activating INSTEX to include only essential goods that are not subject to US sanctions, mainly food and medicine. The mechanism may become operational and perhaps European and Iranian efforts will follow through. But indications suggest that the mechanism will not include significant transactions for the Iranian economy. The mechanism needs a period of time to gain confidence, and only small and medium-sized enterprises that have no interests in the US market and therefore can not be subject to US sanctions will operate within its framework.
The factors which support this scenario include the fact that food and medicine don’t fall within the scope of US sanctions and the EU is seeking to play a prominent role in reaching a peaceful solution to salvage the nuclear deal and reduce tensions in the region. This is in addition to rendering diplomatic efforts successful by partially activating the mechanism, demonstrating the European commitment towards Iran and reiterating the independence of its role away from US policy.
On the other side, there are several factors which go against this scenario. They include Iran’s non-reliance on the commercial transactions of food and medicine in confronting US sanctions. Hence, Iran could show an unwillingness to approve the mechanism’s complementary portions and conditions. Also, the hesitation of many European countries, and small and medium-sized enterprises working under their auspices, to join INSTEX, in order not to raise the irritation of the United States, maybe one of the factors which hinders this scenario.
2- Accession Without Activation
This scenario means continuing to ease tensions with Iran without activating INSTEX, while urging other European countries to join the mechanism and show their commitment towards Iran.
There are several factors making this scenario likely, including: the slow pace of European measures, the inability of the EU to force European firms to abide by the terms of the nuclear deal in fear of being hit with US sanctions, the economic complexities resulting from implementing INSTEX as it is based on the barter system, and the Iranian side’s unwillingness to accept European terms by signing the agreements complementing the INSTEX due to a lack of trust in the European role in confronting US sanctions and curbing their negative implications.
If this scenario happens, it will aim to maintain strong European-US relations despite the Europeans expressing their frustration at the US for marginalizing the role of the EU. This is in addition to continuing pressure on Iran to ensure that it will abide by its nuclear commitments and force it in the short run to negotiate and sign a new deal.
On the other side, there are factors making this scenario unlikely. They include the continuation of Iranian escalation represented in reducing its nuclear commitments or perhaps Iran’s approval of the agreements complementing INSTEX, and establishing an Iranian mechanism parallel to the activation of INSTEX. Also, this could be added to the European small and medium-sized enterprises’ willingness to conduct trade deals with Iran. Based on the indicators of both scenarios, the second scenario is likelier, especially in the short run. But the first scenario could be likely in the medium and long run if the factors motivating its occurrence do exist.