Abhijit Iyer-Mitra
In January, INSTEX (Instrument in Support of Trade Exchanges) was launched by the European Big 3 (France, Germany, and the United Kingdom). Projected by many to be the first serious challenge to the US Dollar since the 1944 Bretton-Woods agreements and institutions made the USD the dominant currency. Ton December 2, six more states joined the INSTEX — Belgium, Denmark, Finland, the Netherlands, Norway and Sweden. Yet despite all the hype, the INSTEX will remain an inconsequential ‘also ran’ that'll silently wrap up in a few years.
As an Iranian pointed out, the INSTEX “does not guarantee oil purchase from Iran. It’s only about food, medicine and medical supplies, and it is not a financial channel, it is an accounting company!” This actually sums up the INSTEX very well. Iran has two main sources of revenue — oil and taxes on services accounting for almost 75 per cent of revenue.
The third channel — a particularly useful one, was Iran's massive human development and its diaspora, which used to remit money back. However, this can no longer be measured accurately given that for over a decade now, due to repeated sanctions, the remittances are done in cash. For example, in 2017, when I bought a carpet in Isfahan, the credit card details were transmitted to Dubai, charged in Dubai, with the carpet vendor being paid in cash (presumably through hawala channels) within three days.
What the INSTEX does is that it solves this third stream, reducing commissions, save for bank fees, given that the INSTEX also bypasses the SWIFT transfers. However what one should note is that family cash transfers and transfer of funds for food, medical and other humanitarian purchases had never been sanctioned in the first place. It is just that banks were unwilling to do so given US sanctions and out of abundant caution chose not to get caught up in anything remotely Iran-related. What this means is the INSTEX answers a need that didn’t actually exist, because banks will anyway not utilise options already available to them out of fear.
This is also the case with European companies. In high likelihood, any European company with a presence in Iran also has a presence in the US, and in all likelihood, the US will be a much more important source of revenue and a far more important market. Forced to choose between the two, no company would choose Iran. Of course given how interconnected markets are, it is highly likely that most European products have a significant US component that would prevent their export to Iran, even if the parent company wanted.
For example, new Airbus aircraft that Iran desperately needs only come with US engines. Even Rolls Royce, a British engine option's (as opposed to US majors General Electric as well as Pratt and Whitney) aircraft engine division, is partially based in the US or has significant parts from US suppliers. Consequently, even if Airbus wants, it cannot do business with Iran as its US parts suppliers would be barred from supplying.
What also needs to be understood here is the inefficiency of the Iranian economy and the liquidity situation. The previous set of sanctions under Obama (before the JCPOA was signed) allowed India to buy Iranian crude. Given how reduced Iran's selling options were, it gave India (and China) the ability to fleece Iran, down to below market prices for crude. This was in a sense genius, because it made secondary sanctions compliance by India a win-win situation for India, because it got what it wanted much cheaper and could announce it was complying with international sanctions.
However, even though it provided some liquidity to the Iranian economy (which has always been in the throes of a liquidity crisis as people only invest in food and buildings given the unpredictability of Iran's financial instruments) , it was liquidity in lieu of profitability. Iran's oil extraction technology is obsolete and makes it uncompetitive. The inefficiency can be gauged form the fact that the government subsidises the oil and gas sector to the tune of $84 billion.
The belief was a sanctions-free Iran would rapidly modernise its ONG sector to become competitive. However, stealth ownership by the IRGC of several Iranian oil assets meant that most western majors refused to provide modern technology. Now with US sanctions what little hope was there has also been dashed.
In short, the INSTEX is just an acronym, nothing more. One reason for its growing popularity is that the cost of joining it is zero, given it is a mere virtue signalling exercise in defiance. It can't solve Iran's own economic inefficiency, it can't facilitate any meaningful commercial exchanges and it can't resolve Iran's acute liquidity crisis.
Abhijit Iyer-Mitra is a defence economist and senior fellow at Institute of Peace and Conflict Studies, New Delhi. Twitter: @iyervval. Views are personal.
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