Europe’s SPV will be a ‘Rare Victory’ only if Iran makes it so

Bourse and Bazaar | Esfandyar Batmanghelidj: In a recent speech, President Rouhani declared that Iran had achieved a “rare victory” insofar as Europe is seeking ways to sustain its trade with Iran in the face of US sanctions. While this may be true in a political sense, practically speaking, the President is declaring victory too soon. Iran should be doing much more to ensure Europe’s efforts result in solutions that can maximize the flow of trade while banking ties remain restricted.

As US sanctions are reimposed, European efforts to sustain trade center on the creation of a new “special purpose vehicle” (SPV) which will serve to reduce the reliance of Europe-Iran commerce on the international financial system. The SPV, which will be owned by a group of European states with strong commercial ties to Iran and will help coordinate the “netting” of Europe-Iran trade, minimizing the need for cross-border financial transactions. There seems to be serious political will. In an interview with the Financial Times, French economy minister Bruno Le Maire expressed his hope that the SPV would evolve into a “real intergovernmental institution that will serve as the financial instrument of Europe’s independence.” The new mechanism “should allow us to trade in any product, with any country, so long as it is in line with international law and Europe’s commitments.”

The necessary technical work is proving complex, but continues to move forward. While the SPV is expected to be legally registered in the next few weeks, it will take more time for the new entity to become fully operational. The Iranian government seems content to exercise “strategic patience” as it waits for the SPV to come online. But while this patience is commendable, Iran should be taking a much more active role in shaping the SPV to suit its needs.

There is a precedent for Iran to take a more active role in implementing new financial mechanisms. When the Joint Plan of Action (JPOA), the precursor to the JCPOA, was agreed on November 24, 2013, Iran received its first round of sanctions relief. This relief included the creation of a channel to facilitate humanitarian-related transactions including trade in food and  medicine at a time when strict banking sanctions remained in place.

The OFAC guidelines issued upon implementation of the JPOA outline that the “[foreign financial institutions] whose involvement is sought by Iran in hosting this new mechanism will be contacted directly by the USG and provided specific guidance.” What this means is that Iranian technical assistance was crucial in helping the United States identify the foreign banks that could facilitate humanitarian trade if given the proper assurances.

Today, same kind of Iranian input is necessary to ensure the European SPV is effective, particularly for the sake of sustaining humanitarian trade. There are two areas where Iran must play a more active role in advising its European partners on the structure and operation of the SPV.

First, Iran should ensure Europe to establishes multiple SPVs so that sanction-exempt humanitarian trade can be facilitated through a separate channel from sanctionable trade such as oil exports. Presently, only a single SPV is being considered by European governments. While facilitating all trade through a single entity is consistent with EU law, which does not see trade in food as different from trade in oil, for example, creating a single SPV will make the new mechanism more vulnerable to US sanctions. Given that in the short term, the SPV will be focused on humanitarian trade, it would be sensible to create a dedicated channel for these transactions. US officials have publicly promised they do not seek to inhibit humanitarian trade. Any mechanism focused exclusively on humanitarian trade is unlikely to be targeted by additional sanctions.

Second, the SPV will need to conduct due diligence on each of transactions it facilitates. This will be a costly and time-intensive process. In order to maximize the volume of trade that the SPV can facilitate, Iran should create tools that will make it easier for the managers of the SPV to conduct the necessary due diligence. For example, the SPV could be given access, via a portal administered by the Central Bank of Iran, to registration and ownership information of Iranian companies currently only available to Iranian banks. Iran could also nominate a list of well-established companies authorized to use the SPV, reducing the risk that the SPV will be overwhelmed with unprofessional requests or abused by untransparent actors.

If the SPV can be implemented successfully, it would indeed be a rare victory in which Iran’s trading relationships will become less vulnerable to US economic warfare. But this opportunity is as urgent as it is historic and, over the next few months, Iran must take a more active role in shaping the planned European mechanisms to ensure their optimal operation.

This article was originally published in Persian in Etemad Newspaper.