Opinion: will a new financial channel between Europe and Iran persuade Donald Trump to return to the Iran Deal?

When Donald Trump quit the Iran Deal last year, he probably did not expect that the US’s former strategic allies in the Middle East would join Iran’s front within a year. Last month saw the arrival of INSTEX, a special financial channel between Europe and Iran. It is intended to be the European-managed operational institution which will facilitate trade between Iran and Europe in retaliation for US sanctions.

The birth of INSTEX

The establishment of INSTEX was due to US’s withdrawal from the Iran Deal. Last May, after months of warnings during his presidency and promises on the election campaign, Trump eventually signed the order for the US to quit the Iran Deal. This action was unexpected for Iran, as President Hassan Rouhani and his Minister of Foreign Affairs, Javad Zarif, had claimed that Trump would not do it because of its costs, in fact they perceived it as a bluff. Nonetheless, it happened. This decision was also surprising for Europe. Despite this shock, Britain, Germany, France and other European countries, promised that they would preserve the Iran Deal.

From RTÉ 1's Nine News, Donald Trump warns firms about trading with Iran

After Trump’s withdrawal, cracks began to develop in the peace between Iran, Europe, and the US. On the one hand, Trump escalated restrictive measures and confrontational behaviours against Iran. Economically, this included re-imposing severe economic sanctions. Politically, it came with support for radical Iranian opposition groups such as MEK—formerly registered in the US’s list of terrorist group—and Pahlavi—the prince of the former King of Iran—promising overthrow of Iran’s regime.

On the other hand, despite their political un-trust and ideological disagreements, Europe and Iran both saw the "Iran Deal without the US" as a new political and economic opportunity to strengthen their mutual ties. Politically, it was a mechanism for maintaining peace between them. Economically, it was a way of surviving mutual trades, including oil sale for Iran and foreign investment chance for European companies.

However, Trump’s administration did not tolerate the growing relationships between Europe and Iran. In the framework of post-withdrawal sanctions on Iran, they warned and threatened European companies who were engaged in financial transactions with Iran, especially in the oil trade.

INSTEX is is a limited indirect channel that facilitates certain transactions between Iran and Europe

This was a major problem for both Iran and Europe. In Iran, the diminishing activities of European companies, investments and transactions caused crippling effects on the country's economy. The most obvious indication of this was the Iranian currency falling four times in value during 2018. In Europe, the problem was about transferring money to Iran in exchange for oil and products.

But the threat also presented an opportunity. European and Iranian leaders came up with the idea of introducing a bypass of trade and transaction with Iran. This was the beginning of INSTEX, which previously was being discussed as a special purpose vehicle between Iran and Europe.

What is INSTEX?

A new financial channel, INSTEX seems to be a raw but helpful initiative. It is a limited indirect channel that facilitates certain transactions between Iran and Europe. As DW reports, it is aimed initially at facilitating the trade of "non-sanctionable essential goods such as humanitarian, medical and farm products". It is not formally set up to facilitate oil trade, but it has the potential to make oil trade possible, if both parties decide. While the centre of this institution is based in France, with Germany governing and managing it, INSTEX also seeks broader support from all 28 EU member states.

From RTÉ Radio 1's Morning Ireland, Paola Rivetti from DCU on the sanctions being reimposed on Iran as a result of the US withdrawal from a 2015 nuclear deal

What is INSTEX’s importance?

Beyond issues of feasibility and workability, the new initiative is of political and economic importance. It reduces the economic concerns of the Iranian government for the short term, as it makes minimum trade with Europe possible again. Whereas Iranian diplomats did not express much excitement about the introduction of INSTEX, they are politically happy, with a MP calling it a victory over US policies.

The moderate President and the liberal-oriented reformist camp in Iran see INSTEX as the fruit of Iran’s smart diplomacy in changing international coalitions and isolating the US. This interpretation does not seem to be untrue, as even the CIA director acknowledged Iran’s adherence to the Joint Comprehensive Plan of Action (JCPOA) which has been in place. Additionally, Iranian economic experts say that INSTEX will have some "psychological effects" on the market’s behaviour and will impede the complete fall of Iran’s economy. 

Reactions to INSTEX

What are the potential effects of INSTEX on interactions between the US, Europe and Iran? Vice President of the EU Commission Federica Mogherini said that the EU is fully behind INSTEX, while the introductory statement of the INSTEX promises "commitment to pursue the further development of INSTEX".

The more important query is about the effectiveness of this institution in moderating the US’s stance against Iran and bringing it back to JCPOA. However, the US has reacted aggressively to the new development. As soon as the news about INSTEX was released, the US embassy in Germany stated that "entities that continue to engage in sanctionable activity involving Iran risk severe consequences".

For Iran, INSTEX is the last hope to remain in the JCPOA. Otherwise, Iranian leaders may have to quit the Deal and look forward to the next US election for Trump’s successor.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ