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.