First Shipments Made Under Europe’s INSTEX Mechanism

In a joint statement at the end of January 2019, the foreign ministers of France, Germany and the United Kingdom (known as the “E3”) announced the creation of the Instrument in Support of Trade Exchanges (INSTEX), in an effort to preserve the JCPOA. INSTEX is a special purpose vehicle aimed at facilitating non-dollar trade between European companies and Iran. Five other countries, Belgium, Denmark, Finland, Netherlands, and Sweden, later joined the mechanism in November 2019.

The creation of INSTEX was essential for trade to remain possible between EU and Iran, particularly because SWIFT, the main international payment system, suspended access for Iranian banks at the end of October 2018 in response to U.S. pressure.

INSTEX is somewhat of a barter system that allows companies in the EU to avoid the U.S. financial system altogether in their business with Iran by eliminating payments through third parties. In this system, a European company buying from an Iranian company will be matched with another European company selling to an Iranian company. The European buyer will pay the European seller, thereby completely avoiding any cross-border payments. Of course, this is only possible if the Iranian seller on the other side of the first transaction can also be paid by the Iranian buyer on the other side of the second transaction. That is why Iran had to establish a domestic special purpose vehicle counterpart to INSTEX called the Special Trade and Finance Institute (STFI). The STFI mechanism was developed after technical and expert negotiations between representatives of Iran and the E3.

After months of preparation and negotiation, the E3 announced that the first INSTEX transaction was concluded on March 31, 2020 and that these goods are now in Iran. The statement did not exactly describe the goods or the parties involved in the transaction. However, the statement did announce that this first transaction covered medical equipment used to combat the COVID-19 outbreak in Iran.

Originally, INSTEX was conceived as a way to help match Iranian oil and gas exports, vital to the Iranian economy, against purchases of EU goods. However, those ambitions were toned down presumably as a result of strong pressure from Washington. It appears that for now, in the few participating European countries, INSTEX will work with smaller companies that are not engaged in business with the U.S. Even then, its operation initially is limited to exports of food and medicine, which are excluded from U.S. sanctions. Nevertheless, theoretically, it could grow to bring in other countries and its operation could be extended to trade in goods other than food and medicine.

By Amin Bahrami, Legal Fellow