Germany, France and Britain have launched an EU-backed system to facilitate trade with Iran to help European businesses circumvent unilateral US sanctions on Iran.

The Instrument In Support Of Trade Exchanges (INSTEX) was registered after months of negotiations and technical talks in the wake of the Trump administration's unilateral exit last year from the 2015 Iran nuclear deal. That pact, agreed under former President Barack Obama, lifted international sanctions on Iran in exchange for Tehran imposing curbs on its nuclear program.

How does this work?

The new entity acts as a sort of euro-denominated clearing house for Iran to conduct trade with European companies. In effect, INSTEX works as a barter arrangement operating outside of the US-dominated global financial system. Trade is initially expected to focus on non-sanctionable essential goods such as humanitarian, medical and farm products. It is not expected to address oil-related transactions, which have dropped off since last year and are Iran's primary source of foreign currency.

Iran has effectively been cut off from the US dollar-dominated financial system

Read more: Iran sanctions: 5 things to know

Who is involved?

As the European signatories to the nuclear accord, Germany, France and Britain set up and will manage the clearing house. The entity is based in France with German governance and financial support from all three countries. The three countries have sought broader support for the mechanism from all 28 EU member states to show European good faith in implementing commitments under the nuclear accord and to present a united front against any retaliation from Washington.

Will it work?

There are still technical details to be worked out following the entity's official registration.

Theoretically, the payment channel would shield European companies from US sanction-related penalties. However, European companies and banks that do business with the US may still be hesitant to trade with Iran over concerns they could be hit with US penalties. Many European companies have already pulled out of Iran in response to US sanctions.

The entity is initially aimed at small and medium-sized European companies and trade volume is likely to remain small.

The payment vehicle's facilitation of trade in non-sanctionable essential products raises questions as to whether it will sufficiently benefit Iran's struggling economy and help it curb runaway inflation and currency devaluation.

US response

The United States has vowed to continue its "maximum pressure" campaign on Iran over its ballistic missile program and growing influence in the Middle East. The White House has warned European banks and firms that they could face stiff fines and penalties if they violate US sanctions. However, it is questionable whether Washington would directly target the European governments backing the new entity, a move that would strain ties with key allies and trigger financial turbulence.

US sanctions and who they target Iran US sanctions on Iran target Tehran's trade in gold and precious metals, block the sales of passenger jets and restrict Iran's purchase of US dollars, among other punitive measures. The US has also blocked Iran's key oil sales in a further tranche of sanctions, which came into force in November 2018.

US sanctions and who they target North Korea Impoverished North Korea is under a UN-backed embargo, but Washington also maintains an extensive regime of sanctions of its own. For example, the US strictly bans exporting weapons to the pariah state. Washington also uses its global clout to penalize non-US banks and companies that do business with Pyongyang.

US sanctions and who they target Syria Washington trade restrictions prevent the regime of President Bashar Assad from exporting Syrian oil to the US. All property and assets of the Syrian government in the US have been frozen. Americans, wherever in the world they might be, are banned from "new investment" in the war-torn country, according to the US Treasury.

US sanctions and who they target Russia The US blacklisted scores of high-ranking Russian officials and businessmen after the 2014 Crimea crisis, stopping them from traveling to the US and freezing their assets. The comprehensive sanctions list includes goods from the Russian-annexed region, such as wine. New sanctions imposed in the aftermath of the Skripal poisoning in March 2018 target sensitive national security and defense goods.

US sanctions and who they target Cuba American tourists began flocking to Cuba immediately after the Obama administration initiated a thaw in relations in 2016. Under Donald Trump, however, the White House reimposed travel restrictions for US citizens, making it much harder for Americans to travel to the island. At least one Obama-era concession is still in place, however: it is still legal to bring Cuban cigars and rum to the US. Author: Darko Janjevic



Iran's response

Tehran has grown frustrated with the slow European response to the reimposition of US sanctions, but has pledged to maintain its nuclear deal commitments so long as it receives the promised economic benefits.

"If we cannot sell our oil and we don't enjoy financial transactions, then I don't think keeping the deal will benefit us anymore," Ali Akbar Salehi, head of the Atomic Energy Organization of Iran, said earlier in January.

Iranian President Hassan Rouhani is under pressure from clerical and security hard-liners to exit a deal they opposed from the start. In the absence of economic benefits, questions remain about how long Iran's patience will last.

Iran is also looking to Russia and China, the other signatories to the nuclear accord, to maintain trade flows in defiance of the United States. Oil trade with China has dropped off in recent months, reaching a three-year low.

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