SPV to have little impact on Iran’s oil trade

Baku, Azerbaijan, Feb.11

By Leman Zeynalova – Trend:

The special purpose vehicle (SPV) created by the E3 (France, Germany, UK) to facilitate financial transactions with Iran is politically significant, but will have little impact on oil trade between the two markets, Trend reports with reference to Fitch Solutions Macro Research (a unit of Fitch Group).

“The SPV - Instex - is a limited liability company, jointly held by the French, German and UK governments. Although the technical nuances are still being hashed out, it will essentially operate as a barter system, with sales and purchases of goods and services transacted via a credit account. This will shield trade from the US authorities and so protect companies against sanctions,” reads a report from Fitch Solutions.

The company says that Instex is symbolically important, reaffirming the EU's commitment to the Iranian nuclear accord in the face of the US' withdrawal.

“It forms part of a broader raft of measures being enacted by the bloc, to protect its economic interests in Iran and to ensure that the Iranian economy continues to benefit from the deal. These measures have included the SPV, an update to the Blocking Statute and an extension of the European Investment Bank's mandate to include financing activities in Iran. All of these measures have had value politically, but functionally their impact has been negligible to date.”

Instex is not yet operational and has a number of technical and legal hurdles still to cross, according to Fitch Solutions.

“When it does begin operations, it will initially focus on the trade of humanitarian goods - such as food and medicine - which are not subject to sanctions but which many financial institutions are nevertheless unwilling to handle. Ultimately, the plan is to scale up its us e, to extend to other, sanctionable transactions. This will hinge on the level of uptake by EU companies and so will depend on commercial and not political rationale.”

Oil companies and trading houses in the EU tend to have significant exposure to the US and are unlikely to tap the SPV, regardless of its effectiveness in evading sanctions, the company believes.

“In some cases, companies hold equity states in US projects or trade directly into the US domestic market. All have some level of USD exposure, given the reliance of oil companies on debt financing, the dominance of US capital markets and the dollar-denominated global trade in oil.”

Fitch Solutions believes that the risks to these companies from sanctions are significant and the potential rewards unclear.

“In addition, Instex addresses only the difficulties related to settling transactions, it doesn't deal with the other obstacles to trade, such as access to shipping and insurance. A number of companies in the region have previously stated that they would not continue to trade with Iran, even were waivers to be granted, due to the murky and overlapping nature of US sanctions: a waiver to import oil does not protect a company from sanctions on the banking, shipping or insurance sectors.”

On Jan. 31, three European countries – France, Germany and the UK (shortened as E3) – officially announced the creation of the Instrument in Support of Trade Exchanges (INSTEX), a special purpose vehicle, to allow them bypass US sanctions on trade with Iran. INSTEX facilitates non-dollar trade with Iran, allowing European companies to trade with the Islamic Republic without being hit by the sanctions.

US President Donald Trump declared Washington’s withdrawal from the nuclear deal with Iran in May 2018. Trump also announced the restoration of all sanctions against Iran, including secondary ones against other countries doing business with Iran. The United States re-introduced part of the sanctions against Iran on August 7, 2018, while the second batch of the sanctions came into effect on Nov.5, 2018.

The US government has agreed to let eight countries, including South Korea and Japan, as well as India, keep buying Iranian oil after it reimposes sanctions on Tehran. The waivers have been granted for six months.

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Follow the author on Twitter: @Lyaman_Zeyn

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