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.