The Great Trade Sneak Attack

In today’s newsletter, we will talk about the ingenious way in which the European Union is getting around U.S. sanctions on Iran.

But first, some background from the archives.

The Story

For the uninitiated, the Islamic Republic of Iran has been pursuing a very ambitious nuclear program over the past few decades. When other major world powers got wind of this development, they weren’t exactly pleased. Iranians were asked to hold back and they refused to comply. Obviously, the big boys retaliated and negotiations crumbled. Until in 2015, all parties finally reached a mutually acceptable agreement. They called it-The Joint Comprehensive Plan of Action (JCPOA).

Now it must be noted that the whole initiative was largely spearheaded by the Americans. More specifically, the Obama administration. Unfortunately, when Trump came to power, the US reneged on its promise and walked out of the deal. Since then, the US has been imposing crippling economic sanctions on Iran.

The premise is simple. The US government bans all foreign financial institutions from transacting with the Iranian central bank and this effectively chokes Iran’s primary trading activities. And so, since all official payments channels are now frozen, Iran’s economy suffers a major blow. They can no longer ship essential goods and services and have to resort to backchannels to meet their most basic needs.

While Trump scored brownie points with his voter base back in America, many other signatories of the JCPOA, primarily member nations of the European Union were seething. They wanted to keep trading with Iran and they were determined to find a way to get around US sanctions.

So in 2019, Germany, France, and the UK set up a trade channel that would let them trade with Iran without making cross-border transactions. Ergo, they could keep Iran happy without breaking U.S. sanctions and they called this system INSTEX — short for “Instrument in Support of Trade Exchanges.”

And here’s how this beautiful thing works.

Imagine there’s a company in Germany that wants to sell medical supplies to Iran. But if they transact with Iran directly, that would be problematic. So instead, the company sells the medical supplies to INSTEX.

And then it goes into waiting.

INSTEX takes the medical supplies and ships it to IRAN. But it can’t be a fair transaction unless INSTEX is paid in full. But if IRAN makes the payment, then that would have to be in contravention of US sanctions.

So, how do you get around this conundrum.?

Well… You go old school i.e you dip into the barter system (which btw does not violate US Sanctions).

In exchange for the medical supplies, Iran will offer INSTEX 20 barrels of oil. And it just so happens that there’s an energy company in France right now that wants to buy these juicy barrels. So INSTEX promptly forwards the oil supplies to the energy company and then makes a strange request.

Remember, our German company from earlier that hasn’t yet received its payment. INSTEX asks the energy company to make the payment directly to the German company so that money never leaves Europe. Meaning we are still fully compliant with all US restrictions and the EU has somehow managed to trade with Iran.

Like I told you, it’s wonderful.

But I know what you’re thinking. How will they match the amount? What if the value of the transactions are different?

Well right now, we are only talking about one transaction. So granted, it’ll be a bit challenging. But what if there are hundreds and hundreds of transactions. Then INSTEX could pool all the transactions and make the settlement at the end of a pre-defined time period, without a hitch. Many institutions do this. It’s no big deal.

Point of Interest: Iran has an entity similar to INSTEX called STFI. STFI would likewise match the transactions of the Iranian companies dealing with Europe, and get them to make payments to each other. This way, there’s no dollars involved, and no actual money flowing across the borders. Everybody’s happy.

And a year after being established, INSTEX finally completed its first transaction yesterday, delivering medical supplies from Europe to Iran.

And this was a landmark move.

Because despite the pandemic wreaking havoc in Iran and claiming 2800 lives, the U.S. has remained firm on its sanctions.

Until  INSTEX finally managed to get Iran some much-needed help. And a statement by Berlin on behalf of Germany, France, and the UK suggests there’s more to come.

“INSTEX serves the purpose of ensuring a long-term viable solution for lawful trade between Europe and Iran as part of ongoing efforts to maintain the JCPOA. Now that the first transaction is complete, INSTEX will work on further transactions with the Iranian mirror organization STFI and further develop the mechanism.”

Well, we think it’s great. But it’s safe to say the U.S. won’t share our sentiments. In any case, we’ll keep you updated on the latest developments.:)

Until then…

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