The European SPV: An Adequate Response to U.S. Sanctions?


In May 2018, President Trump withdrew the U.S. from the Joint Comprehensive Plan of Action (JCPOA), the landmark accord signed by Iran and the P5+1 (the five permanent members of the U.N. Security Council and Germany).  The JCPOA, a hallmark of the Obama Administration’s foreign policy agenda, imposed restrictions on the Iranian nuclear program in exchange for Iran’s re-entry into the international economy.  Perhaps the most important concession granted to the Iranians in the JCPOA was the lifting of U.S. secondary sanctions.  These sanctions prevented Iran from trading with much of the world out of fear of U.S. retaliation.  When given the opportunity to trade with Iran or the U.S. almost any company would choose the U.S., which is the world’s largest economy.  As a result, the lifting of sanctions provided a lifeline for the Iranian economy.

The U.S.’s withdrawal from the JCPOA has thrown the future of the accord into doubt.  Iran has agreed to honor the terms of the agreement, as long as the other signatories of the accord continue to provide the economic incentives for it to do so.  In other words, Iran is insistent that, for it to keep its side of the bargain, it needs to see the other signatories of the accord working to mitigate the harmful impacts of re-imposed sanctions.

One of the most problematic issues that foreign companies face when evading U.S. secondary sanctions is the predominance of the U.S. dollarThe U.S. dollar serves as the de facto currency of international trade.  As a result, when the U.S. imposes secondary sanctions on a country, that country is not only prevented from trading with the U.S., but also from trading with the U.S. dollar.  This prevents the sanctioned country from carrying out ordinary commercial activities with the global economy, which primarily trades in U.S. dollars.

One of the key measures Germany, France and the U.K., also known as the E3, have recently taken to maintain the JCPOA and keep Iran beholden to the accord is the development of the special-purpose vehicle (SPV) to bypass U.S. secondary sanctions.  The goal of the SPV is to facilitate non-dollar denominated trade with Iran.  The E3’s announcement on January 31 introduced the new SPV as the Instrument in Support of Trade Exchanges (“INSTEX”).  INSTEX will initially focus on sectors most essential to the Iranian population such as medical devices and food.  This is sensible because the most essential sectors of the economy are exempted from U.S. sanctions due to their humanitarian nature.  However, the E3 has divulged few details on how INSTEX will actually work.  There are many financial details which must be sorted out before INSTEX can become operational.

Despite the lack of provided details on how INSTEX will function, it is clear that it will facilitate European-Iranian trade while decreasing the need for traditional currency transactions between the parties.  This will further insulate their commercial activities from the reach of U.S. sanctions.  The simple way for INSTEX to accomplish this will be by allowing European exporters to receive payments from Iranian customers via Iranian funds that are already in Europe.  This way, Iranians will be able to pay Europeans in euros, which they already have in Europe and vice-versa.  This will insulate the transaction from the reach of the U.S. Treasury.  However, one of the big challenges that INSTEX must resolve is how to ensure that there are sufficient Iranian funds in Europe to cover the debts owed to European exporters.

Although INSTEX will begin slowly, and although it will only have the participation of a few European countries, the fact that multiple European governments are willing to take a risk on it, despite the threat of U.S. secondary sanctions, demonstrates its effectualness.  Secondary sanctions are only effective if other countries will agree to abide by them and cease trading with the sanctioned country.  If these secondary sanctions are challenged by enough U.S. allies, the balance of power may shift and the U.S. may accede to an easing or nullification of the sanctions.  Therefore, INSTEX only needs to prove that it can be an effective mechanism to skirt U.S. sanctions, even in limited circumstances.  However, if the E3 can convince other large economies such as Japan, South Korea, and other major European countries, to utilize INSTEX , it may create even more diplomatic pressure that could cause the U.S. to ease or end the sanctions.

So far, the U.S. has dismissed the European efforts to establish INSTEX as a vehicle for circumventing U.S. sanctions.  However, this attitude is improper.  The U.S. should never treat any attempts to chip away at the primacy of the U.S. dollar in international trade lightly.  Former Secretary of the Treasury Jack Lew warned that the U.S. must not take its central role in the global economy for granted.  The U.S. benefits greatly, both economically and diplomatically, from this reality.  However, if the use of the U.S. dollar becomes too burdensome for companies because of sanctions, they will inevitably begin to conduct business in other currencies, despite the difficulties arising from such a decision.  This will weaken the U.S.’s global geo-strategic position and its influence both in economic and diplomatic matters.


Mayer is currently a 2L at Columbia Law School. He earned his BA from the University of Maryland, Baltimore County where he majored in economics.