Britain, France, and Germany launched a special trade channel in January that aims to facilitate European business with Iran in a manner not susceptible to U.S. sanctions. The channel has not been used much, for fear of U.S. sanctions and other corporate risk. However, there is a growing likelihood that the EU could use this trade channel, or develop one like it, to circumvent U.S. sanctions against Russia.
The Instrument in Support of Trade Exchanges (INSTEX) for promoting trade with Iran was the European response to the U.S.’s withdrawal from the 2015 nuclear agreement with Iran. The instrument uses a barter system to provide Iran financial inducements to ensure that it does not also exit the nuclear deal. But INSTEX faces significant obstacles, such as mandatory reporting on Iran-related transactions for any company listed on the U.S. stock exchange.
The EU’s use of the INSTEX or a similar mechanism may now also be used to circumvent U.S. bilateral and secondary sanctions on Russia. The flashpoint will likely be Nord Stream 2, a natural gas pipeline project criticized by both the Trump administration and many U.S. legislators that would deliver Russian natural gas to Germany directly via the Baltic Sea.
While the United States and EU coordinated on most Ukraine-related sanctions on Russia, U.S. sanctions against Russia in the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA) has resulted in a divergence of views and approaches. CAATSA dramatically strengthened the U.S. sanctions architecture, mandating secondary sanctions against anyone that does business with a sanctioned entity. This put European companies with considerable Russia exposure in the crosshairs.
The friction over Russia sanctions came into sharp relief in April 2018, when the Trump administration sanctioned Russian oligarch Oleg Deripaska and his businesses. This included EN+ Group, a major energy-related company, and United Rusal Group, the world’s second largest aluminum company. The move not only increased costs for alumina and aluminum processing plants in the EU, but almost 75,000 workers across Europe faced unemployment.
Ultimately, the U.S. lifted the sanctions against EN+ and Rusal in December 2018. The deal placed both companies under different ownership and prevented serious damage to the European aluminum industry.
Potential CAATSA sanctions stemming from Nord Stream 2 means that another crisis may be looming. Reports suggest that some entities in the EU are already considering the possibility of expanding INSTEX to dodge U.S. sanctions against Russia.
The administration should make it explicitly clear that any form of barter or exchange involving any sanctioned entity or sanctionable offense through INSTEX will result in a U.S. response. What is needed instead is a way to ensure alternate sources of natural gas for Europe to obviate the need for Russian energy. This would yield the desired impact of depriving Russia, while ensuring that American allies continue to get what they need.
Matthew Zweig is a senior fellow at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.