Issue 85 | April 2019 | INSTEX, meet STFI
INSTEX, meet STFI: Iran’s finance chiefs make a constructive start to the New Year.
There has been universal
frustration with the pace of European progress to rebuild the financial
relationships that were damaged by the US withdrawal from the nuclear deal. But
the Iranian New Year kicked off with a more positive tone. The Special Trade
and Finance Institute (SFTI), set up by the Central Bank of Iran, mirrors
Europe’s own Special Purpose Vehicle for facilitating Iran-Europe trade. Practical
steps remain for both sides to persuade businesses to make use of it.
Iran marked the New Year with a bold statement of intent for its
engagement with the global economy.
The Central Bank of Iran (CBI) officially established a payments mechanism to
match and work with the Europe Union’s Special Purpose Vehicle for facilitating
cross-border payments. The new mechanism, labelled the Special Trade and
Finance Institute (STFI) was announced on the last working day of the Iranian
calendar year.
Earlier in the month, Per Fischer, the German CEO of INSTEX - the European
mechanism for financing trade with Iran - visited Tehran to meet with regulatory
bodies, banks and businesses. The trip was part of an effort to clarify
the ambiguities still surrounding the payment mechanism and what is required
from Iranian entities to make it work. Despite long-standing frustration from
many in Iran over the pace of progress, there is a general recognition that the
INSTEX and STFI represent a legitimate lifeline for Iran and its partners in
the JCPOA nuclear deal to maintain their terms of engagement without the United
States. The statement was clear: there is will and a legal framework to finance
legitimate trade between Europe and Iran, outside the reach of the US financial
authorities.
Some critics lament the INSTEX’s inability to persuade large European enterprises
to take part – they have missed the point. Multinational corporations
like Total, Peugeot and Boeing are not the core target group. Rather, it is Small
and Medium Sized Enterprises (SMEs) from across the European Union, with a low
level of exposure to the US market that are key to the success of the
initiative. These are the enterprises with most to gain from the opportunities
in the Iranian market. From the Iranian perspective, the same enterprises could
prove crucial vehicles for knowledge transfer and innovation in strategic
Iranian industries.
Many dismiss the new mechanism as only fit for humanitarian and medical
supplies, but this too is an underestimation. The INSTEX is restricted
to what it terms ‘legitimate trade’. This refers to the EU legal definition,
not that of the US, and is broader than food and pharmaceuticals, covering a
range of goods that fall outside the more clearly proscribed categories of oil
and defence.
With the mood in Iran growing more constructive towards the payment
mechanism, there are practical steps that must be taken on the Iranian and
European sides to make it work. Many European SMEs have reported
difficulties in dealing with Export Credit Agencies (ECAs), for example. These
agencies play a critical role in international trade by providing conditional
loans and insurance on cross-border transactions to limit the risk. They are
especially important in trade and investment with regions where banking
operations are more constrained. Some have argued that the INSTEX and STFI’s
remit should be expanded to play a role in export credit, or at least to
develop a stronger relationship with ECAs and to provide legal and political
risk advice to support the process.
Iran could also expand the size of its potential market if it could
lower the other costs of doing business. Companies that might engage
with the payment mechanism are still put off from Iranian transactions by the
poor enforcement of the rule of law, the lack of transparency of business ownership,
and unreliable banking and financial service providers. The Iranian financial
authorities could provide greater assurances that banks adhere to international
best practices and more advice to businesses looking to navigate the Iranian
market.
In a more complex marketplace, Iranian enterprises may also have to look
a little harder and think a little more creatively to find investors and
business partners. Willing businesses may be distributed across the
European market. Indeed, to the extent Iranian entities can identify the goods
and technology they require in smaller European economies, they are less likely
to attract the scrutiny of US authorities. Already in Iran, innovations in cryptocurrencies
are becoming increasingly mainstream in facilitating service exports - in
particular in the tourism sector to circumvent the problems with dealing with
Iranian banks.
If European SMEs are the core target group for now, the future of
INSTEX and STFI lies beyond Europe’s borders in Iran’s major oil consuming
countries. Iranian crude shipments are still averaging between 1.1 and
1.3 million barrels per day, according to tanker data and industry sources, and
South Korean diplomats visited Washington this month to negotiate an extension
to their waiver from sanctions on Iranian oil purchases. Iran’s oil exports
create an imbalance of payments that is unsustainable under financial
sanctions, but if the INSTEX mechanism could be extended to Iran’s trading
partners, such as India, as is currently being mooted by some, there are long
term trading opportunities for Iran to exploit.
Much was made of President Rouhani’s state visit to Iraq last month,
which he said heralded a new era in trade cooperation. The Governor of
the Central Bank of Iran suggested Iran’s new trade strategy was successfully
eliminating the US dollar from regional and international transactions. Observers
may suspect a degree of exaggeration in this statement, but it is true of
Iran’s banks that they are increasingly sophisticated and experienced in
navigating the financial complexities of US sanctions. Unlike the pre-JCPOA
financial sanctions regime, Iran’s potential trading partners from Europe to
East Asia are sympathetic towards Iran’s current position and this creates the
space for smart financial solutions for legitimate trade to be successful. At
the start of this new Persian year of 1398, there is a greater sense of hope that
the JCPOA as provide route to Iran’s economic future.
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