Exchange Platform for Iran Trade with Questions

Published: 01 March 2019

Tehran welcomes registration, but hardliners are strongly critical

The main reason for the sharp decline in trade between Iran and the European Union (EU) are US sanctions, which were fully reinstated in November 2018. As a result, Iran finds itself in its most difficult economic position since the founding of the Islamic Republic, although the Iranian government is not to blame, President Hassan Rouhani declared at the end of January.

The economic crisis is causing the volume of Iranian imports, especially capital goods, to shrink. In addition, imports are being severely hampered by the refusal of Western banks to do business with Iran. Many foreign companies have completely or partially withdrawn from Iran, fearing possible punitive measures from the US.

The US government threatens foreign companies doing business with Iran with, among other things, denial of access to the US financial system and exclusion from business relations with US companies or “US persons”. Differentiation between Iran business activities, which are still permissible under US law, and dealings which are actually subject to US sanctions, is for the most part avoided in Washington.

EU signatories of nuclear treaty set up special purpose vehicle

The “Special Purpose Vehicle” (SPV), now established in private law and operating under the official title “Instrument for Supporting Trade Exchanges” (INSTEX), can neither protect against possible US sanctions nor eliminate the weak import demand caused by the crisis. However, INSTEX as an exchange wants to eliminate or at least alleviate problems with payment processing.

The formation of the SPV was delayed by months, in part because no EU country initially agreed to house the company’s registered office. INSTEX is not an EU institution, but so far only the three EU countries that co-signed the Joint Comprehensive Plan of Action (JCPOA) with Iran in mid-2015 (Germany, France and the UK) are involved. The company is based in Paris.

Per Fischer, a 69-year-old former Commerzbank manager, has been appointed Managing Director of INSTEX for an initial period of six months. The INSTEX Supervisory Board consists of Miguel Berger (Department Head at the Federal Foreign Office), Maurice Gourdault-Montagne (French Ambassador to Beijing) and Sir Simon McDonald (Permanent Under-Secretary at the British Foreign Office).

INSTEX to start with humanitarian goods

INSTEX wants to support trade between Europe and Iran which is permitted under EU and UN law. This also includes promoting trade involving US sanctions against European companies (secondary sanctions). According to the official announcement of the three INSTEX founders, however, the SPV will initially concentrate on facilitating the delivery of humanitarian goods. This limited focus minimizes the risk of US sanctions.


US exports of humanitarian goods to Iran 2015-2018 (in US$ millions)

SITC Denomination 2015 2016 2017 2018 (January to October)
Total 175 41 59 57
0 Food and live animals 102 16 25 11
1 Beverages and tobacco 0 0 0 0
54 Medical and pharmaceutical products 24 14 20 11
741.83 Sterilizers 27 53 588 3
774 Medical, Electrodiagnostic and radiological apparatuses 16 4 7 17
785.31 Wheelchairs 0 0 0 0
872 Other instruments, apparatus and devices for medical etc. Purposes 27 6 4 11
899.6 Orthopedic technology, prostheses etc. 7 2 2 7

Source: U.S. Department of Commerce


US sanctions law allows American and foreign companies to supply agricultural products, medicine and medical equipment to Iran under certain restrictions. The regulations are listed in the “Iranian Transactions and Sanctions Regulations (Section 560.530)”. In 2018, the USA exported humanitarian goods to Iran with an estimated value of US$ 60 million to US$ 70 million.


EU exports of humanitarian goods to Iran 2015-2018 (in EUR millions)

SITC Denomination 2015 2016 2017 2018 (January to November)
Total 1.981 2.077 1.898 1.484
0 Food and live animals 587 504 429 293
1 Beverages and tobacco 53 72 54 44
54 Medical and pharmaceutical products 872 920 835 731
741.83 Sterilizers 6 6 6 3
774 Medical, Electrodiagnostic and radiological apparatuses 136 183 168 120
785.31 Wheelchairs 1 0 1 1
872 Other instruments, apparatus and devices for medical etc. Purposes 184 218 230 154
899.6 Orthopedic technology, prostheses etc. 142 172 174 137

Source: Eurostat


To the extent that the requirements of the “General Licenses” for exports of “Agricultural Commodities, Medicine, and Medical Devices” are fulfilled, a separate “Specific License” from the appropriate US authority (Office of Foreign Assets Control/OFAC) is not required. However, there is a list of agricultural products, medicines and medical equipment not covered by the General Licenses. Furthermore, no persons, institutions or companies subject to US sanctions are allowed to sell humanitarian goods to Iran.

Missing oil exports limit potential trade volume

In addition to the (initial) restriction to trade only humanitarian goods, INSTEX also will not meet Iranian expectations regarding the export of Iranian oil to Europe for the present time. Italy and Greece have received waivers from the USA until April 2019 for the import of limited quantities of Iranian oil. But neither EU country has made use of the waivers, and it is not expected that the exemptions will be extended beyond April.

Since the SPV wants to offset claims by European companies selling to Iran with payments from European companies importing from Iran, the absence of Iranian oil exports to Europe is a serious handicap. Until the reactivation of US sanctions against Iranian oil exports in November 2018, oil accounted for almost 90% of all Iranian exports to the EU. Without oil, EU imports from Iran could fall to below EUR 1 billion in 2019, down from EUR 10.1 billion in 2017 and EUR 9.5 billion in 2018.

Iranian exports to the EU of only EUR 1 billion would not even suffice to finance the EU’s humanitarian supplies. Over the last five years, the EU28 group exported an average of EUR 2 billion worth of food, medicine and medical equipment to Iran.

Banking cooperation is crucial

INSTEX wants to offer a solution for the currently largely blocked (direct) payment traffic between Iran and Europe. But even the SPV cannot do that without the cooperation of European banks. But there is currently no indication that banks in Germany, for example, would be prepared to support the settlement of Iranian business organized by INSTEX.

For the banks, it is irrelevant whether a payment comes directly from Iran or as an indirect payment via a non-Iranian bank – neither is accepted. Before the reactivation of US sanctions, there were some regional credit institutions in Germany that accepted payments from Iran via banks domiciled in Germany but controlled by Iran.

The concept of the SPV is that European importers of Iranian goods do not pay their Iranian suppliers directly but instead settle their liabilities by paying European companies exporting to Iran. For example, a European importer of Iranian pistachios would pay a European machinery exporter. German banks presumably would refuse such a transfer if the original purpose of the payment (the Iran export) is known. In general, businesses are obligated to correctly state the reason for payment in the case of bank transfers.

Corresponding infrastructure in Iran and FATF standards required

The functioning of the SPV requires an organization on the Iranian side which will settle the claims and obligations of Iranian exporters and importers through payments in rials. The Iranian buyer of the German machines would then have to pay the pistachio exporter. According to information from Tehran, the Iranian central bank has not yet set up a corresponding organization, though INSTEX declares that it will cooperate with Iran to establish one.

It will also be necessary for Iran to fully implement laws aimed at preventing money laundering and terrorist financing, a topic that has been subject to controversy since several months. Parliament has passed the relevant regulations, but the Guardian Council, which is responsible for examining the constitutionality of legislative initiatives, has so far approved only two of the four bills. The two laws in dispute between Parliament and the Guardian Council are now in the Expediency Discernment Council.

In October 2018, the Financial Action Task Force (FATF), the international organization for combating money laundering and terrorist financing, granted Iran a further extension until February 2019 to implement laws and regulations in accordance with FATF standards. Originally this was to have taken place at the beginning of 2018. INSTEX obviously wants to take action only if Iran fully complies with the FATF requirements. INSTEX has stated that it is working according to the highest international standards in the fight against money laundering and terrorist financing.

Consultations on the functioning of the exchange

So far, INSTEX has not yet decided exclusively on internal organizational processes and many legal matters. INSTEX is holding talks with company representatives and trade associations about the possible practical design of the exchange. Important topics might include payment security and questions of liability.

Iran shows muted optimism, but also sharp criticism – Washington remains calm

With an exchange market that does not initially allow Iranian oil exports and only wants to handle humanitarian supplies, Iran’s demands have not been met. Nevertheless, the Iranian government is cautiously optimistic. Iran’s deputy foreign minister, Abbas Araqchi, explains that the new mechanism will ultimately take over payment processing for all trade between Iran and Europe and that it is in Iran’s interest for non-European companies to also gain access. INSTEX is promising this in the long term. Araqchi expects INSTEX to become active in one to two months. However, this view is not shared by the European side, which believes that it will probably take longer.

The Iranian Parliament had threatened earlier to take countermeasures if the EU did not establish the announced exchange. Now, Parliament spokesman Ali Larijani says that presently INSTEX cannot be discussed positively or negatively, as the practical results have yet to be evaluated.

However, there is sharp criticism from the government and even more clearly from the conservative camp against the INSTEX demand that the FATF standards be fully implemented before the exchange is activated. Iran’s Foreign Ministry stated that linking INSTEX to FATF compliance was completely unacceptable. Hardliners are accusing blackmail.

Washington does not seem to fear that INSTEX could impair the American “strategy of maximum economic pressure”. If, however, the special-purpose company expands its activities beyond humanitarian trade, massive counter-reactions by the Trump administration are expected.

Iran trade without a special purpose vehicle

Public discussion often gives the impression that trade with Iran would come to almost a complete standstill without the SPV. INSTEX might facilitate additional business, but it must be assumed that INSTEX’s activities probably would play a subordinate role compared to continuing trade outside the SPV.

Generally, payments for Europe’s current exports to Iran are processed via third countries. It is plausible that, if INSTEX were successfully activated, companies would give up their (often costly) third-country transfers and instead pay through INSTEX.