It's too early to say whether the attempt in Europe to circumvent US sanctions will protect European-Iranian economic ties, but the US should support it to demonstrate that their beef is with the Iranian government, not its people.
Since US President Donald Trump entered the Oval Office, his administration’s stance on the Joint Comprehensive Plan of Action (JCPOA) has been a source of tension between Washington and the European Union (EU). The US administration sees the JCPOA as a product of naive thinking on the part of Trump’s predecessor and an enabler of “malicious” Iranian conduct in the Middle East that has jeopardised the security of Washington’s regional allies. France, Germany, and the United Kingdom—collectively known as the E3, view the nuclear accord as advancing Europe’s vital security and trade interests.
There is no question that Trump’s decision to pull the US out of the Iranian nuclear deal—itself the biggest challenge to the JCPOA’s legitimacy since its passage in 2015—has strained Brussels-Washington relations. Such tension in the Transatlantic partnership over Iran has built up against the backdrop of major EU-US disagreements on other global security and trade issues including the Paris Agreement on climate change, the Intermediate-Range Nuclear Forces Treaty, and tariffs.
For America’s close allies in Western Europe, preserving the Iranian nuclear deal is a top foreign policy priority. To prevent Iran from leaving the JCPOA, the accord’s three EU signatories—France, Germany, and the United Kingdom, known as the so-called E3—unveiled the “special purpose vehicle” (SPV) late last month. Also known as the “Instrument in Support of Trade Exchanges” (INSTEX), the SPV will enable the E3 and Iran to trade while circumventing US sanctions.
Even though this trade channel will only permit the E3 to sell non-sanctionable goods (food, medicine, medical equipment, farm products, etc.) to Iran, the JCPOA’s EU signatories believe that INSTEX is a vital step in European efforts to thwart Tehran from walking away from the accord.
The European Union’s High Representative of the European Union for Foreign Affairs and Security Policy Federica Mogherini hailed the trade channel’s formation. She maintained that the SPV “will provide economic operators with the necessary framework to pursue legitimate trade with Iran.”
In light of the International Atomic Energy Agency’s recent assessment that Iran is in compliance with the accord, officials in Tehran are pointing out that the US (not Iran) violated the JCPOA by re-imposing sanctions on the Islamic Republic in 2018.
Iran is stressing that it will not remain a party to the deal if the country does not reap the economic gains that the accord promised. Realistically, given the Trump administration’s re-imposition of sanctions on Tehran, it is extremely difficult to imagine Iran receiving such economic benefits from the JCPOA.
The critical question is whether this new mechanism for trade with Europe can give Tehran enough reason to conclude that the benefits of staying in the deal outweigh the costs in the forms of Iranian sovereignty over its nuclear program.
The extent to which INSTEX can bring European firms in/back to Iran is difficult to predict. In all probability, the SPV will not provide European’s largest companies with adequate assurance. Put simply, the risk of violating Washington’s sanctions remains high, and so do the stakes regarding losing access to America’s market and major financial institutions.
Smaller European firms that lack more significant exposure to Washington’s sanctions will probably use the mechanism for doing business with the Iranians.
While the E3 will be busy convincing Tehran that the SPV will provide average Iranians on the street with necessary goods to improve daily life amid a time of economic hardship, neo-conservative voices in Washington are already voicing their staunch opposition to INSTEX.
Focused on applying “maximum pressure” on the Islamic Republic, will the US administration see the SPV enabling the Europeans and Iranians to retain a significant volume of trade that weakens the effectiveness of Washington’s sanctions? Perhaps. But the US administration’s response has thus far been somewhat muted.
The State Department stated that it does “not expect the SPV will in any way impact our maximum economic pressure campaign” against Tehran. Although the Trump administration previously cautioned EU members from taking any action last year that would have skirted US sanctions, the White House was addressing another proposed trade channel that would have been far wider in scope than the recently established INSTEX.
The ideal scenario for the E3 would entail the White House supporting the SPV to strengthen its assertions that US sanctions on the Islamic Republic are intended to target the country’s regime, not ordinary citizens, given that the new trade payment mechanism is strictly limit to basic goods such as medicine.
But with hawkish elements in the administration, it is also possible that the US leadership will see the need to “neutralize this trade channel before it becomes the camel’s nose under the tent” as Mark Dubowitz advocated shortly after London, Paris, and Berlin unveiled INSTEX.
Ultimately, it is too early to tell how INSTEX will impact European-Iranian economic ties, the Tehran regime’s perceptions of Iranian interests vis-a-vis the JCPOA, or EU-US relations. Although the SPV is now an officially registered entity, its technical details are yet to be figured out, and it will take a few months before the mechanism becomes operational.
Despite such open questions, there is a bigger point that can already be taken away based on the mere unveiling of INSTEX: The E3’s efforts to pursue trade relations with Iran in ways that avoid confrontation with Washington are illustrative of a number of European states’ agreement that such measures are important for protecting EU members’ interests from Washington’s sanctions against Tehran. Such moves must also be seen within the context of the EU’s plans to strengthen the euro’s role in the world while challenging the dollar’s dominance and decrease Europe’s military dependence on the United States through the German-French Aachen treaty.
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