Issue 84 | March 2019 | INSTEX - Finding a way forward with Iranian trade

INSTEX – Finding a way forward with Iranian trade
After a month of heated debate over the future of the JCPOA and the integrity of the EU’s new payment mechanism – the INSTEX, the sudden resignation and reinstatement of Iran’s Foreign Minister exposed the polarised vision at the top of Iran’s politics of the country’s place in the global economy. In this newsletter, we address some of the main criticisms aimed at the INSTEX, which is the key to Iran’s economic engagement with the outside world.
Stock markets plunged
in February upon the Foreign Minister Mohammad Javad Zarif’s resignation from
the government.
Mr Zarif posted his resignation on social media, causing a
political maelstrom, and ultimately forcing the Supreme Leader to effectively
“back him or sack him” in the role. The seasoned cabinet minister felt
undermined by interference from other senior figures in the country’s foreign
policy, and resigned following a visit from the Syrian President, Bashar Assad,
to which he was conspicuously uninvited. The Tehran stock exchange dropped
promptly 2000 points on the back of the announcement, with markets fearing a
shift in the balance of power towards the administration’s hard liners. Calm
was restored when President Rouhani rejected Mr Zarif’s resignation – which was
not formerly submitted in the form of a letter – following an endorsement from
the Supreme Leader. Some commentators have suggested the row has left Mr Zarif
in a stronger position and emboldened in his constructive approach to the
JCPOA.
The political drama
surrounding Mr Zarif coincided with fiery debate over the future of the nuclear
deal.
The European Union’s announcement of its new special purpose vehicle
for trade with Iran, the INSTEX, elicited a wide range of responses in Iran.
From cautious endorsements to fierce rebuttals, politicians and policymakers
have been grappling with the technicalities and principles of the new
mechanism. Verity Iran is an advocate of the opportunities the INSTEX can offer
Iranian businesses. In this newsletter, we set out some of the most prominent
critiques that have been aimed at it and offer a perspective in defence of the
INSTEX.
Critique 1: “The
INSTEX is not powerful enough to foil US sanctions.”
Germany’s Ambassador to Iran sought to clarify the INSTEX’s
purpose in a public announcement, recently. He stated that the INSTEX is not
intended to circumvent US sanctions, per se, but to make legal transactions
possible. The EU stands by the principle that entities not proscribed by the EU
or UN as terrorist or criminal organisations should not be blocked from
engaging with European trade or financial partners. The extra-territoriality of
US sanctions means they currently are, and the INSTEX is designed to resolve
that. In doing so, its goal is to create a sustainable mechanism for Iran to
continue trading with the outside world under US sanctions.
Over time, we may also see the INSTEX usher in and
legitimise a wider international willingness to seek innovative solutions to
Iran’s lack of access to the US dollar. France, Germany and the UK are not the
only countries around the world looking at such measures. Last month Turkish
and Iranian authorities met to discuss how an Islamic banking system might help
maintain trade relations. Iran and India have established a sophisticated
payment mechanism whereby Iran’s oil revenues are parked in rupees in five
banks across India, for the purchase of rupee denominated goods. Iran also has
a track record of such engagements in Russia and China.
Critique 2:
“Businesses are too fearful of US sanctions, the INSTEX will not fix that.”
There is a general consensus in the business community that
major corporates, with a big international footprint and a direct stake in the
US economy will be highly reluctant to use the EU payment mechanisms, for fear
of sanctions exposure in the US. However, small and medium sized enterprises
may see more of an opportunity and a smaller downside risk. The INSTEX may
prove viable for such traders, so it is far too early to write off its chances.
Access to Iranian oil and gas exports as well as the lure of Iran’s large
consumer market could prove compelling for companies with a relatively low
exposure to the US market.
Critique 3: “Barter
systems do not work in today’s complex, global economy.”
At the height of sanctions pressure, prior to the JCPOA,
Iran sought out similar barter-style trading mechanisms as a means to non-US
dollar trading, but enjoyed only limited success. Inefficiencies, a lack of
leverage in negotiations and a high-functioning enforcement programme amongst
the US and its allies, saw Iran stack up large deposits overseas – for example
in China and India – that were theoretically available but practically
inaccessible. On this evidence, the sceptics have a point.
But it remains to be seen whether the more recent sanctions
“snap-back” carries the same suffocating weight as the previous regime. This
time the measures are unilateral and do not enjoy the same level of
international buy-in, which was previously used to great effect as leverage on
trade and financial partners around the world. Many international partners, not
least the EU, have wilfully objected to and stepped out of line with the US
approach.
This might provide greater flexibility for Iran’s main
trading partners to find creative solutions to make barter work more
efficiently. The commercial opportunities are large enough to attract
entrepreneurs interested in making the new process work more smoothly. Some
commentators look to oil swaps as a useful framework, others look to new
digital platforms to improve market awareness and product matching.
Critique 4: “The
Europeans are using the INSTEX as a political lever to force through domestic
policy changes and humiliate Iran”
Influential opponents to the JCPOA process have cried foul
at what they interpret as unreasonable conditions attached to the INSTEX. The
EU3’s statement suggested an expectation that Iran will address issues of
non-compliance with UN financial standards. The suggestion has clashed loudly
with an internal debate in Iran regarding the passing of anti-money laundering
and terrorist financing legislation to bring it into line with international
standards developed by the Financial Action Task Force (FATF). Those opposed to
the FATF legislation have attempted to paint the EU’s stance as political
opportunism.
So, why does the EU have something to say about a domestic
legislative process in Iran? Well, because this is what businesses seeking
low-risk, legitimate trade with Iran demand. The EU’s primary concern is the
viability of the payment mechanism. Its officials recognise that the quality of
assurances that they and the Iranian authorities can make to businesses about
the legality of their transactions are critical in building good faith. The
sustainability of the INSTEX relies on its adherence to UN trading standards,
which include the FATF regulations, meaning the INSTEX mirror-entities in
Tehran as well as Paris must adhere to exactly the same standards.
Indeed, the Iran-China Chamber of commerce made it clear
that the demands go further than European entities. Chinese businesses are
awaiting Iran’s FATF compliance before moving forward with transactions. The
FATF recently granted a four month extension, until June, to comply with the
action plan but the process remains stalled in the Expediency Council. If Iran
fails to meet this deadline, it will return to the FATF blacklist and mean much
greater difficulty in interacting with foreign financial entities. For all the
criticism of the EU’s commitment to making the INSTEX work, such a failure to
place domestic affairs in order at home could suffocate the initiative at
birth.
Comments
Post a Comment