INSTEX appeal: Seeking a route to trade with Iran

Can the new financial mechanism help companies avoid the problems of US sanctions?

After France, Germany, and the UK announced the creation of INSTEX SAS (Instrument for Supporting Trade Exchanges) in January, some worry it may create as many problems as it seeks to solve.

INSTEX is a special-purpose vehicle (SPV) aimed at facilitating legitimate trade between European economic operators and Iran that tries to mitigate the impact of the US’s reimposition of sanctions on Iran following the American withdrawal from the Joint Comprehensive Plan of Action (JCPOA, also informally known as the Iran nuclear deal).

For finance professionals, the new vehicle presents a thorny problem: Any firm using the INSTEX for business interactions with Iran runs the risk of being cut adrift from the US financial system should the US decide to impose secondary sanctions for Iran trade, according to Maya Lester, QC, barrister at Brick Court Chambers in London and co-author of the website EU Sanctions.

“Anyone trading in Iran may be concerned that if they engage in the particular conduct the US has sanctioned, and banks are fearful of the possible consequences if they help even with trade that the EU has said can safely proceed,” she said. “Hence the SPV, which tries to find a payment route for the most urgently needed goods. The devil will be in the detail, which has not yet been worked out; INSTEX has just been registered but is not operational.”

From the accounting perspective, future questions about the SPV will likely focus on possible delays to cash flow, which could increase the need to borrow for working capital purposes, meaning additional administration, which could also increase costs and reduce efficiency. However, the fact that the SPV is currently far from being operational suggests that accountants can remain relaxed at this stage.

But what is INSTEX? What is its precise purpose? Who is behind it? Where will it be based? What do accountants need to be thinking about? These are all relatively easy questions to answer. Much of the factual information was contained in the official announcement made on 31 January by what is being referred to as the E3 group of foreign ministers, from France, Germany, and the UK.

The E3 reaffirmed that their efforts to preserve the economic provisions of the JCPOA are conditional upon Iran’s full implementation of its nuclear-related commitments, including full and timely co-operation with the International Atomic Energy Agency.

INSTEX aims to support legitimate European trade with Iran, focusing initially on the sectors that are most essential to the Iranian population, such as pharmaceuticals, medical devices, and agricultural and food products.

“Iran will need to lodge money in Europe with INSTEX — presumably from the sale of oil — which can then be used to pay European companies for goods exported to Iran. While oil and pharmaceuticals would cross borders, money would not,” Lord Lamont of Lerwick, the UK trade envoy to Iran, said in a statement.

He pointed out that this leaves open the question as to how a British company legitimately exporting pharmaceuticals or food to Iran and receiving payment at INSTEX can then repatriate that payment to a UK clearing bank. “Based on what we currently know, this problem has not yet been solved,” he said.

Returning to the theme of operationalisation referred to by Lester, the official bulletin announcing INSTEX said that this will follow a step-by-step approach. According to the announcement, “The E3 together with INSTEX will continue to work on concrete and operational details to define the way the company will operate. The E3 will also work with Iran to create the effective and transparent corresponding operational entity that is required.”

Ellie Geranmayeh, senior policy fellow and deputy director of the Middle East and North Africa programme at the European Council on Foreign Relations, said in a blog entry following the announcement that speedy implementation will be required but that it is hard to tell how much trade will flow through the mechanism. Ideally, normal correspondent banking channels should continue to facilitate a large portion of Europe-Iran humanitarian trade, she wrote.

Geranmayeh said that both Iran and the E3 should expect a teething period while the mechanism adjusts to best serve commercial actors. For European treasury managers and compliance officers tasked with finding workable financial channels with Iran, complexity has long been the norm. If the INSTEX channel proves reliable, companies are likely to use its services.

Brian O’Toole, a nonresident senior fellow with the Atlantic Council’s global business and economics programme, said that the symbolism of registration in France and co-ownership by the three major European powers is significant in giving comfort to would-be exporters to Iran that they will not face US sanctions for conducting humanitarian-style trade.

“It’s clear from the European announcement that there was no real market in the EU, especially from Europe’s financial institutions, to take on the risk of being sanctioned by the United States,” he said.

Sunny Mann, trade partner at law firm Baker McKenzie in London, cautioned against overestimating its impact. “From a business perspective such a move may ultimately not end up having a significant impact even if the EU manages to work out the technical and legal means to make the SPV operational,” he said.

“Most big companies have US business interests (such as operations in and sales into the US) and are unlikely to want to antagonise the US by using the SPV, which means that its commercial impact might be limited in practice,” he added.

Brian Bollen is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at