New EU trade mechanism Instex offers hope as sanctions-hit Iran battles coronavirus

New EU trade mechanism Instex offers hope as sanctions-hit Iran battles coronavirus
The recent launch of the EU's Iran-trading mechanism, Instex, offers hope to Tehran at a time when economic deadlock and the Covid-19 outbreak threaten to wreak havoc.
5 min read
08 April, 2020
The Islamic republic is battling one of the world's deadliest coronavirus outbreaks. [Getty]
As Iran struggles to manage a health crisis created by the Covid-19 pandemic, Germany, France and the UK recently utilised a newly created trading mechanism to export medical gear to the country. 

Established in January 2019, the system is called the Instrument in Support of Trade Exchanges (Instex) and had been envisioned as a euro-dominated clearing house to bypass US sanctions and continue trade on a barter basis with Iran.  

Confirming that the goods had reached their destination, the German Foreign Ministry announced: "France, Germany and the United Kingdom confirm that [the Instrument In Support Of Trade Exchanges, or Instex] has successfully concluded its first transaction, facilitating the export of medical goods from Europe to Iran. These goods are now in Iran." 

Given that the mechanism has remained dormant since its creation, this recent transaction has been an unexpected development. The Instex trade facility had never taken off for a variety of reasons. 

First, when it was spearheaded by leading countries in the European Union (EU), the main aim was to salvage the 2015 Iran nuclear deal - the Joint Comprehensive Plan of Action (JCPOA) side-lined by Washington - by continuing trade links with Iran. Initially though, Instex was to be utilised only for non-sanctionable, essential items for humanitarian purposes 

But this never happened, and the system never became operational even though the team was expanded and a managing director was appointed. Independent from the SWIFT financial transaction system used worldwide, Instex was headquartered in Paris with Germany responsible for management and Britain co-heading the supervisory board. 

Read more: Medics and martyrdom: Iran's dying doctors 

Second, six more European powers - Belgium, Denmark, Finland, Netherlands, Norway and Sweden - signed up to Instex in December 2019, but this move caused no breakthrough.  

The main impediment was that European banks and firms dealing with Iran could still face penalties. And now even though Instex has gone operational, it is just on a government level and will be used only to facilitate humanitarian supplies.  

Third, it is only because of the health emergency disaster in Iran that the Instex payment channels have been finally activated, so this could turn out to be a temporary arrangement.  

For now, Washington has had no objections and the State Department spokesperson has said: "The US has no issues with humanitarian trade so long as it is conducted with strong due diligence measures to prevent the Iranian regime from hijacking the aid for itself". 

Read more: How has coronavirus impacted conflicts in the Middle East? 

However, continuing a 'maximum pressure' policy against Iran, Washington has not scaled down restrictions on trade with Tehran. Thus, the facility has been utilised due to the ongoing coronavirus pandemic and the future of Instex remains unclear.

Finally, the purpose of this trade mechanism was to reduce the transaction costs between Iranian importers and European exporters by making payments on their behalf while its Iranian counterpart, STFI, pays the Iranian side. In order to become an established trade mechanism, further transactions would be required to make Instex fully functional and a profitable venture. 

If US-Iran tensions reduce, it is possible that EU companies start trading with Iran on a low scale, as the German foreign ministry statement also noted: "Instex and its Iranian counterpart STFI will work on more transactions and enhancing the mechanism."  

Established in January 2019, the Instrument in Support of Trade Exchanges (Instex) had been envisioned as a euro-dominated clearing house to bypass US sanctions and continue trade on a barter basis with Iran

Until this happens, the European trade facility is not likely to provide Tehran with any lasting economic gains unless it can enable European companies to do business in Iran. From this angle, the mechanism is not fulfilling the purpose for which it was originally created. 

Iran was already on the verge of economic collapse due to US economic sanctions when the virus struck, and it was not able to impose a lockdown in its cities. Consequently, the country turned into the first regional epicentre and the virus spread to many other states. Since the end of February 2020, the situation is critical and it is likely to continue until June. 

Read more: For Syrian chemical attack victims, OPCW report blaming Assad is too little, too late 

According to various projections, 0.5 million to 1.5 million people could die due to the outbreak in Iran, while a Brookings Institution study calculated that 30 percent of the entire population could get infected in the worst-case scenario. Meanwhile, Iran's health infrastructure is badly stretched, patients lack medicines and ventilators while doctors lack protective gear and masks. 

With sanctions imposed on its central bank, Iran could not purchase ventilators or other equipment used in intensive care units. Unfortunately, ever since the JCPOA was set aside by Washington, most of the big multinational concerns left Iran, including companies like Siemens which manufactures ventilators.

Read more: Middle East regimes are freeing inmates as coronavirus
spreads. But political prisoners remain behind bars

Fighting a pandemic with insufficient resources is impossible. For the first time in sixty years, Tehran approached the International Monetary Fund (IMF) for a $5 billion loan in emergency funding to battle the coronavirus outbreak. 

The Iranian Foreign Minister Mohammad Javad Zarif also appealed in a Telegram post that: "These days the world is combatting a common challenge. In order for the world to return to life as previously, we must believe that the entire planet is a battlefield and anywhere we fail the whole world fails." 

Supporting Iran's request to the IMF, the EU has offered $21.8 million in humanitarian aid to Iran. In addition, Washington has  offered humanitarian assistance to Tehran. Some new sanctions were announced last month but medicines and medical supplies have been exempted after a revision of the guidelines to allow for medical and agricultural trade with Iran's Central Bank. 

Before the contagion, some sectors like Iran's airlines, hotels and tourism had survived but now even these sources of revenue have dwindled as the deadly disease takes its toll around the world. In the airline sector only, three trillion rials ( $71.4 million) in losses were incurred by mid-March. 

Weathering these condition is not going to be easy, and as Alireza Arahimi from the Iran Chamber of Commerce said: "If we don't get over it [the crisis] quickly, we'll be witnessing a sharp hike in unemployment and inflation." Meanwhile, even the oil trade with China is at a three-year low 

Unless there is more global sympathy for Iran's predicament and sanctions are relaxed, Tehran's economic deadlock and war with Covid-19 will wreak havoc simultaneously.  

Nevertheless, the Instex launch can be said to be the first sign of hope for Iran, especially since there may be prospects of more transactions with Europe.

Sabena Siddiqui is a foreign affairs journalist, lawyer and geopolitical analyst specialising in modern China, the Belt and Road Initiative, Middle East and South Asia. 

Follow her on Twitter: @sabena_siddiqi