EU to launch mechanism to bypass US sanctions on Iran

The European Union will set up a payment mechanism to secure trade with Iran and defy US sanctions after Washington pulled out of the landmark nuclear deal.

The proposal of a financial instrument has been a key element in the EU’s strategy to keep Iran from quitting the 2015 nuclear agreement, which was signed to constrain the country’s nuclear activities in exchange for sanctions relief.

The new institution, named INSTEX – Instrument In Support Of Trade Exchanges – will allow trade between the EU and Iran without relying on direct financial transactions. It is a project of the governments of France, Germany and Britain and will receive the formal endorsement of all 28 EU members.

The administration of US President Donald Trump has been closely eyeing European efforts to establish the financial mechanism and warned any attempt to evade its “maximum pressure” campaign on Iran would be subject to stiff penalties.

The mechanism is the first concrete step by the EU to counter Trump’s unilateral decision to withdraw from the nuclear deal in May.

Too little too late?

INSTEX will initially be used for non-sanctionable trade including humanitarian goods such as medicine, food and medical devices. Some have questioned whether it will prove effective. 

“If [the mechanism] will permanently be restricted to solely humanitarian trade, it will be apparent that Europe will have failed to live up to its end of the bargain for Iran,” political analyst Mohammad Ali Shabani told Al Jazeera.

Foad Izadi, a professor at the University of Tehran, offered a similar analysis. 

“I don’t think the EU is either willing or able to stand up to Trump’s threat,“ he said. “The EU is not taking the nuclear deal seriously and it’s not taking any action to prove to Iran otherwise… People are running out of patience.”

According to Esfandyar Batmanghelidj, founder of a Europe-Iran business forum, the role of new payment channel should not be undermined given the pivotal role that medicines play as a trade category between Europe and Iran.

In 2017, the export of drugs from Europe to Iran totalled $884m compared with $194m from China and $52m from India, according to UN data.

As Batmanghelidj pointed out, even if limited, the mechanism could eventually pave the way for further advancement.

“The value of it is to give the EU an opportunity to learn how to operate properly, and then create [a mechanism] for more strategic sectors. It could turn into a pilot that the US would find difficult to target with political legitimacy given its humanitarian focus,” said Batmanghelidj.

“What seems a limitation, could turn into a strength.”

Opportunity for EU

The set up of INSTEX is not only a matter of Iran-EU relations but also embodies a new approach by the bloc towards US policies, according to Batmanghelidj.

INSTEX “becomes an opportunity when it’s understood as an experiment and as part of a bigger project to strengthen EU economic power,” he said.

“What is relevant in this case is to see that the EU is doing something despite the position of the US, and in opposition to the US. This is something new.”

Witnessing the effect of US secondary sanctions on non-US firms, EU leaders are becoming more aware of the necessity to strengthen the eurozone, as German Chancellor Angela Merkel stated in her speech in Davos at the recent World Economic Forum.

“This [mechanism] is at most going to be a baby step towards international financial structures that would give the EU more independence,” said Henry Farrell, a professor of political science at George Washington University, in a social media post.

In the meantime, Iranians are waiting for their European partners to salvage the nuclear deal. But as Ali Akbar Salehi, the head of the Atomic Energy Organization of Iran, recently warned, the EU needs to step up “before it is too late”.

“We [Iran] will be losing trust and once the trust is lost, everybody will be a loser in the game,” Salehi said.