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July 19, 2019

Instex shows the EU is caught between the US and Russia

Instex, the special-purpose vehicle set up by France, Germany and the UK to sustain trade with Iran, was never intended to circumvent US sanctions but to sustain legitimate trade in non-sanctioned goods. The problem Instex was designed to address was one of overly compliant non-US banks. But the actual problem faced by trade with Iran is that the companies doing the importing and exporting are themselves afraid of being hit by US sanctions, and even less prepared to deal with them than banks which after all already have compliance departments. It is in this context, very well described by a recent LA Times backgrounder, that one needs to read the latest developments surrounding Instex.

Russia reiterated its interest in participating in Instex to clear trade with Iran. But as the FT reported this, it prompted a warning by Steven Mnuchin, US Treasury secretary, that breaching US sanctions would lead to exclusion from the dollar system. Mnuchin's warning is a shot across the bow of anyone attempting to bring Iranian oil trade within Instex' scope. Iran, of course, has been saying that without oil Instex is irrelevant. And Russia has indicated that they would work to facilitate Iran oil exports despite US sanctions. But the FT does not give any direct quotes of Russian officials saying Instex should clear oil transactions.

What Mnuchin is insinuating is the possibility that Instex itself might become a target of US sanctions if it clears oil-related transactions. The LA Times story cites two former US officials involved with Iran sanctions who make the point that previous administrations would work with firms to make non-sanctioned trade practically possible. But the current administration has adopted a policy of making life as hard for Instex as possible. We reported earlier on the idea that the US government actually hoped Instex would work to keep Iran within the nuclear deal as the US sanctions forced it into a renegotiation. But according to the LA Times' sources that faction of the US administration has lost the argument. 

Leaving aside the geopolitical impact of increased tensions around the Persian Gulf, what should concern the EU is not the economic impact of impaired trade with Iran. The inability of Instex to make a dent in the secondary sanctions should be a concern in the hypothetical case when the US imposes secondary sanctions on much more strategic trading partners of the EU, say for instance Russia. After all, the US Senate just passed a resolution condemning both Russian aggression in Ukraine, and the construction of the Nord Stream 2 gas pipeline, as threats to European security. Watch this space.

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July 19, 2019

Johnson’s two Brexit options

Perhaps the most telling of all Brexit news stories is this one according to which Remainers want to force the Queen to attend the next European Council in person in order to ask for a Brexit delay. Desperate times are calling for desperate measures. It is not going to happen, of course, but it is the thought that counts.

Yesterday the House of Commons passed another legally meaningless vote against a no-deal Brexit. We think the vote is useful in one respect only: it reminds us - if such a reminder were needed - of the reality of a government without a parliamentary majority. When Boris Johnson walks into Number 10 Downing Street next week, he will not have a stable parliamentary majority behind him. He does not need a majority to trigger a no-deal Brexit. That happens automatically. But he needs a majority to manage it.  

The situation leaves him with two choices. The first is early elections in which he campaigns on a Brexit-delivery theme - pitched against a second-referendum promise by Labour. 

The second is for him to seek an alternative deal - which can mean a longer transition period as a de facto alternative to the backstop, or a Northern-Ireland-only backstop. 

We are not sure the latter will work with the die-hard eurosceptics. This is why the probability of no-deal Brexit remains high. It was always thus. Then again, politics is the pursuit of shifting events and expectations.

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