Sanctions Association:

Is INSTEX Feasible?

From the start, the idea of this mechanism has raised questions about its practicality for two main reasons:

Firstly, the imbalance between European exports to and imports from Iran – these are not always equal. In order for the INSTEX mirror-image process to work, the revenue generated by selling Iranian oil needs to match payments made European companies. However, with continued U.S. restrictions on the sale of Iranian oil, the influx of Iranian funds could become a challenge that ultimately leads to a deficit for Iran.

Transactions involving exports to and from Iran will not always match up perfectly, individually, or in aggregate. INSTEX will need to find a way to balance payments within both overall trade flow and at an operational level, so that payments can be settled appropriately.

Furthermore, considering that many buyers of Iranian oil are not European—e.g. China, India, Korea and Japan—it is not certain that those buyers would accept transferring payments to the new INSTEX SVP. Any agreement to that end could require complicated negotiations between several countries in which U.S.interference and influence could not be ignored.

Jan Verloop reminds us that: “Trade needs logistics. Given the regional and even global nature of present day trading channels, carving out Iran specific sub-sets may be rather difficult and costly.” He also adds that, “Making the system available for parties in China and Russia might well be key to its success.”

The second reason that INSTEX may be impractical is the long-arm reach of U.S. sanctions and their pervading international impact.The Trump Administration has made it clear that it will not hesitate to politically and financially pressure the E.U. if it believes U.S. sanctions against Iran have been circumvented in any way.

In a letter to the president of INSTEX dated May 7, 2019, obtained by Bloomberg, the U.S. Treasury Department undersecretary clearly states that, “Engaging in activities that run afoul of U.S. sanctions can result in severe consequences, including a loss of access to the U.S. financial system.”

Does INSTEXHave a Future?

As INSTEX currently only trades in those goods that are not prohibited by U.S. law, many experts believe that the mechanism will only serve as a replacement for correspondent banks that are unwilling to facilitate payments involving Iran.

According to Stuart Gamester, Sanctions Compliance Director at GlaxoSmithKline in London, at the moment, INSTEX “only provides a financial route where no other E.U. correspondent bank wants to be involved with Iran as they are being ‘scared off’ by the threat of not using the U.S. money markets”.

It also remains unclear if European, or even non-European companies and banks, especially those with an international reach, will be willing to use INSTEX to trade with Iran as many of their lucrative business opportunities lie within the American market.

Elika Eftekhari, President of Alamut Trade Partners and Director of Trade Compliance at the US-Iran Chamber of Commerce cautions us that, “ the U.S. casts a wide shadow over the global financial system, resulting in an inverse relationship between E.U. company size and interest in participating in INSTEX. Because INSTEX will appeal more to small-to-medium sized entities, which may have more informal internal compliance mechanisms than larger corporations, participation will need to be maintained under the strictest of protocols.”

Many experts concur with Ms. Eftekhari regarding INSTEX’s appeal (or lack thereof) to larger corporations.

Clay Stevenson, Founder of CHS Sanctions Advisory LLC and former Managing Director & Global Economic Sanctions Executive at Bank of America, agrees that “most companies who have significant U.S. market exposure will not want to place that at risk for the potential of smaller, less lucrative commerce with Iran.” He adds, however, that, “for companies who have little U.S. market exposure, this may result in a different calculus.”

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