The INSTEX Project: Why Did Europe’s Ambitious Financial Vehicle Fail, and What Next?
The landmark nuclear deal, the Joint Comprehensive Plan of Action, came to a dramatic close a couple of months ago. Now the dust has settled, it seems appropriate to review an under-reported piece of the saga, the INSTEX program. This article will offer a brief post-mortem analysis of this unique initiative, before segueing into a discussion of Europe’s prospects for further economic independence, and whether it is worth these powers exploring similar programs in the future.
In March 2023, after just one transaction, the Instrument in Support of Trade Exchanges, or ‘INSTEX’, was dissolved by its European creators. This bold new trading program had consisted of a financial vehicle corporation designed to shield Iran from US sanctions and take the first small step in challenging a US-centred global economic system.
As per the JCPOA 2016, France, Germany, the UK and the EU had pledged to relieve sanctions on Iran in exchange for Iran’s cooperation with various restrictions on its nuclear program. When the US under the Trump administration suddenly shifted to a hardline approach towards their Middle Eastern rival and withdrew from the JCPOA, the remaining European signatories were left scrambling to fulfil their obligations to Iran by ensuring continued sanctions relief. Thus, the aim of the INSTEX corporation was to enable monetary transactions between Europe and Iran that did not utilise SWIFT (an international payment system vulnerable to US pressure) or the US Dollar. It was established 31 January 2019, a month after its official announcement.
Initial outlook for the INSTEX company seemed promising. There was no formal financial structures that facilitated trade between Europe and Iran that could be relied upon for mediation uninterrupted by sanctions (SWIFT barred various major Iranian banks from March 2012 as part of an EU sanctions program prior to the signing of the JCPOA) – the establishment of such an institution would be both more effective for companies trading with Iran and incentivise further trade. Furthermore, the EU high representative and the foreign ministers of France, Germany and the UK had issued a statement prior to the official announcement of INSTEX in November 2018 pledging to maintain “effective financial channels with Iran” as well as to ensure the “continuation of Iran’s export of oil and gas.”
These strong initial sentiments soon waned, however. President Trump’s sanctions on oil finally came into place in May 2019, and European companies had no choice but to comply. The remit of INSTEX crucially only extended to non-sanctionable goods and could not facilitate the buying of Iranian oil by European companies. The promise of the INSTEX initiative lay in the long-term consequences of an established European trading regime with Iran that was invulnerable to US interference, but the Iranians wanted immediate economic reassurance, and this was something it could not provide.
The failure of the program has been blamed conversely on a lack of will in both the European and Iranian camps. For Europe’s part, INSTEX was always treated as more of a symbolic placatory measure than as a serious prospect in respect to fulfilling their economic duties to Iran. Experts noted that investment into the program was significantly lower than what was needed to solve the issue of the trade imbalance between the two parties. Europe exported way more than it imported, and thus euro capital was needed to bridge the gap. This never materialised. The seed funding figures betray this lack of economic commitment on behalf of all nations that joined the program – the UK, France and Germany all committed merely €1 million at the beginning of the project, there is little information about future investment and the extent of euro liquidity made available. Furthermore, without legal protection and underwriting, European banks did not see the upside in risking sanctions exposure. Supreme Leader Ali Khamenei described the Europeans’ behaviour post US-withdrawal from the JCPOA as “a knife in the back.”
Nor did Iran resolve to put in meaningful work to make the new measures work. The Europeans’ laissez-faire attitude was mirrored by their Iranian counterparts. Months after its creation, the Iranian ambassador to the UN aptly dubbed INSTEX “a beautiful car without fuel.”
Both the Europeans and Iran have lost out massively as a result of INSTEX’s failure. Iran have taken for granted a significant gesture of goodwill by Europe, and European powers in turn have failed to capitalise on an opportunity that could have greatly enhanced their economic independence and global clout. Since the installation of President Trump’s unprecedented tariff program, it is clear we have transitioned into a global order where economic bargaining power is used more freely and wantonly than ever before. If European powers want a say in how the West deals with high-risk states such as Iran, it may be sensible to pursue alternatives to INSTEX. These would have the identical goal of counteracting US sanctions when there is disagreement over the wisdom of said measures.
In regard to future efforts in this vein, European powers can pursue more general de-dollarisation measures to ensure that they can make strategic decisions at their own discretion. Academics have noted that switching to SDR-based international payments is an achievable goal backed by existing regulatory and practical infrastructure. An SDR can be described as a token entitling the owner to the weighted average of five major currencies (USD, EUR, GBP, JPY and CNY), these can be traded in stablecoins (a cryptocurrency that is backed by an asset – the aforementioned currencies in this case). Key issues to such a process, like blockchain security and regulation, are rapidly being solved by industry forerunners, and soon the only barrier to its establishment will be cooperation and trust.
Therefore, it seems sensible to say that working on making non-dollar international settlements commonplace in European business should be a national security priority for these nations – realising this aim in full could avoid a repeat of the disastrous and ineffective INSTEX, and ensure Europe is never again caught between obeying US sanctions and placating high-risk nation states.
It should not have taken a diplomatic crisis for European powers to conclude that a mechanism such as INSTEX was necessary, nor should the fate of such an effort have been tied to the continued cooperation of a country such as Iran. It is also important to add that future efforts should not be driven by anti-American sentiment, but by a desire to empower Europe to take bold diplomatic decisions without fear of the economic consequences. Those with faith in the European countries’ tact and wisdom in the face of unprecedented geopolitical developments will welcome such a development.
Image courtesy of Hamed Jafarnejad via Wikimedia, ©2018. Some rights reserved.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the wider St Andrews Foreign Affairs Review team.
