US sanctions and new economic uncertainties for Iran

Spearhead Analysis – 16.04.2019

By Hira A. Shafi
Senior Research Analyst, Spearhead Research

The US scrapped the Iran deal in May 2018 and re-imposed sanctions on Iran in progressive stages. The recent designation of the IRGC as a terrorist organization is expected to add on to Iran’s economic woes.

The European states have largely denounced the current US administrations pressure against the Iran deal, and have made various attempts to assuage the deal. One such measure entails carving out an alternate payment mechanism with Iran to circumvent US sanctions. On January 31, 2019- Britain, France and Germany announced a new payment mechanism known as the Instrument in Support of Trade Exchanges (INSTEX). The aim of the INSTEX is to allow European countries and other third parties to continue doing business with Iran. Initially the INSTEX is expected to carry out trade in pharmaceutical, medical devices and agri-food sectors.

However, the Iranians are still debating the efficacy of this EU led initiative. According to one segment- Iranian oil revenues will be directly deposited into the INSTEX, which will allow Europe to oversee and control Iranian income and thus adversely impact state sovereignty. It is also stated that though the INSTEX is providing some relief to Iran, it still violates the economic freedom promised to Iran under the nuclear deal. There is also a belief that the EU may gain leverage over Iran in re-negotiating terms with Iran in addressing the issue of ballistic missiles, alleged Iranian political clout across the Middle East and possibly negotiate the FATF requirements with Iran- before the INSTEX is fully implemented.

Iran on its part has also recently carved out a mechanism similar to the EU’s INSTEX trade channel called the Special Trade and Finance Institute (STFI)- the details of this mechanism are yet to be released.

It is yet to be seen how the various political pressures will enable EU and Iran to work out an alternate mechanism- and how effective this mechanism would be in circumventing US sanctions.

There is an ongoing debate on the legality of extraterritorial US sanctions, some are of the view that these sanctions violate the essence of international law. Thus, in the wake of US re-imposing its sanctions on Iran, EU re-instated its 1996 blocking statute, which makes it illegal for EU companies to comply with specified extraterritorial U.S. sanctions. The blocking statute attempts to provide legal cover to EU businesses from getting impacted by US sanctions. Despite these initiatives, it is reported that major EU, Russian and Chinese companies have become skeptical about carrying out businesses in Iran. The Trump administration has also warned the EU against trying to sidestep sanctions on Iran. The US State Department also recently stated that it was closely following reports on the European alternate payment mechanism. The depths of the US clout over the global economy was highlighted when the Belgian company SWIFT removed Iranian banks from its systems, reportedly, as a result of fears of US sanctions.

The counter measures by the regional players -in the wake of the recent moves by the US- is also a developing matter. It is believed that Russia’s main priority regarding Iran will be to ensure regional stability. India is likely to be concerned regarding its investments in Chabahar and its energy ties with Iran. China is also likely to carve out policies keeping in view the overall stability of the BRI. For now, it is assessed that initiatives such as the INSTEX may not have a huge instant impact in circumventing the US sanctions. However, if other countries also join in to carve out US independent financial systems, the clout of the US policies on global economy may subdue in the long run.