October 05, 2018
by Warren L. Nelson
The Big Five—the major powers that signed the nuclear deal with Iran minus the United States—have agreed to set up a special payment mechanism to bypass the American financial system and allow trade with Iran to continue.
But the “special purpose vehicle,” announced September 24 by Federica Mogherini, the foreign policy chief of the European Union, doesn’t yet exist. Mogherini merely said it would be set up and that the Big Five countries—Britain, France, Germany, Russia and China—would soon get together to decide what the special purpose vehicle (SPV) would actually be.
Even if it does materialize in the end, there were major problems—limitations—that meant it might not amount to much.
First, the special purpose vehicle would be a payment mechanism to allow payments to be made for exports from Iran and imports by Iran. But such trade is of secondary concern to Iran. What it wants is primarily foreign investment, and the special purpose vehicle would do nothing to promote investment in Iran.
Second, while the vehicle would bypass US banking rules banning payments to and from Iran, it would not bypass US sanctions on doing business with Iran. Major international firms, like Total of France and Siemens of Germany, do much of their business in and with the United States. They are fearful of losing access to that market. A new payment mechanism doesn’t address that issue at all and is therefore irrelevant to any firm that does major business with the US.
Third, while Mogherini emphasized the new SPV would cover oil purchases by EU states, tankers that carry oil need insurance and most re-insurance involves the United States. If tankers lack insurance, they won’t sail to Iran. Just three days after Mogherini announced the plan for the SPV, Vitol, the largest independent energy trader in the world, announced it would cease doing business with Iran November 4, the date US sanctions on Iranian oil trades go into effect. That was a clear statement of no-confidence in Mogherini’s SPV.
The special purpose vehicle will only benefit small firms that do no business in the United States and therefore do not fear Trumpian wrath. Their challenge is simply finding a way to make payments to Iran and get payments from Iran. The special purpose vehicle will address that problem and allow them to continue selling their products to Iran—if Iran wishes to continue buying from them.
The Big Five countries have been meeting and trying to figure out what to do since July 6. It took almost three months just to come up with the concept of creating a special payments mechanism, something that was already widely identified as a need. But the new decision has no meat on its bones. Mogherini told the UN General Assembly, “Now, another meeting of technical experts from member states will be convened to take this work forward and operationalize the special purpose vehicle at the technical level.”
She explained, “In practical terms, this will mean that EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue trade with Iran, in accordance with European Union law, and could be opened to other partners in the world. You will get more technical information about that, as the technical work continues in the coming days.”
The special purpose vehicle, as modestly described, will serve as a financial clearing house for transactions with Iran. The goal is to avoid involving commercial banks or the central banks of European countries who have made clear to the EU that they will not do any business with Iran because they fear US sanctions impeding their financial operations.
The SPV has utility, but very limited utility. While it will help Iran to keep hand-woven carpets moving to Europe and to import European products made by firms that very few people have ever heard of, it won’t do anything to bring large-scale investment and modern technology into Iran to develop the economy.
Some commentators in Europe have said it is mainly a sop for small and medium-sized businesses in Europe that have major political pull in their countries, especially Germany, but aren’t all that important for Iran.