There are growing doubts about Europe's planned SPV to support Iran trade. These doubts reflect both the delayed launch of the SPV and disappointment that the mechanism will not initially facilitate exports of Iranian oil to Europe. The continent now risks launching the SPV in an environment ready to reject it. But has the potential value of the SPV been properly examined?
Even if the mechanism does not support oil exports, the SPV can be a useful tool to help Iran mitigate the impact of sanctions. It is clear that the rising cost of importing European food and medicine is contributing to inflation, causing pain for households across Iran. A humanitarian SPV (H-SPV) could help Iran fight inflation and stablize the economy from its foundations.
According to data from the Central Bank of Iran, the year-on-year increase in the consumer price index in Aban (23 October-21 November) was 39.9 percent. This increase was driven by year-on-year rises in categories including food (59.9 percent), tobacco (150.8 percent), clothing (48.5 percent), and household goods (83.1 percent). The increase in the health category, which includes medicine, was a significant 19.6 percent.
These categories represent the daily needs of Iran’s households. They are also, broadly speaking, categories which do not fall under the restrictions of US secondary sanctions. Therefore, the H-SPV would be well suited to support Europe-Iran trade related to these elements of the consumer basket.
While Iran does manufacture many of these goods domestically, overall consumption still relies on a significant volume of imports of food and medicine from the European Union. In 2017, Iran faced a trade deficit with the European Union of just under EUR 1 billion in the food, medicine, clothing, and furniture categories, based on imports of EUR 1.3 billion and exports of approximately EUR 300 million. Importantly, this figure does not include Iranian imports from Switzerland, another major trading partner in these categories.
This trade imbalance has a direct impact on inflation in three ways. First, the euro is a strong currency and the rapid devaluation of the rial has made imports considerably more expensive over the last year. Second, purchasing European goods generally involves higher transaction costs for Iranian importers related to the restrictions on banking channels between Europe and Iran. Finally, Europe is the only source for a many of these imports, particularly medicines, meaning that a fall any drop in imports will have a direct a impact on overall supply, pushing prices higher. All three phenomena can be seen in the Iranian market today.
Given these challenges, the H-SPV can help alleviate inflationary pressures by empowering European and Iranian policymakers to better manage foreign exchange risks, reduce transaction costs, and address the trade deficit, particularly around key items within the consumer basket. First, in the area of foreign exchange, the SPV could reduce pressure on the Central Bank of Iran to source and allocate euros for importers of essential goods. Presently, delays in the allocation of foreign exchange are leading to payment issues on the part of Iranian importers of both food commodities and pharmaceuticals.
Cargo ships carrying grain are remaining anchored off of Iran’s coast for as many as sixty days, incurring demurrage costs. If the SPV oversees a ledger of trade between Europe and Iran, a role which some have compared with that of a “clearing house,” it would be able to coordinate euro-denominated payments by European importers on behalf of Iranian importers. In turn, Iranian importers would make rial-denominated payments on behalf of the European importers to their counterparties in Iran. Through such a mechanism, there would be no need for the Central Bank of Iran to source and allocate Euros for the purchase by the Iranian importer, as funds already in Europe would be used to make the payment. Reducing demand for euro allocations among Iranian importers should help the CBI more effectively operate the NIMA system thereby reducing the significant inflationary pressures arising from foreign exchange markets.
Second, payment coordination by the SPV would also help eliminate the additional transaction costs currently incurred when arranging cross-border financial transactions between Europe and Iran. Due to the higher compliance risks associated with accepting Iranian-origin funds, the few European banks that do continue to transact with Iran impose fees on clients of up to three percent of the total transaction amount. Some routine and low-risk trade currently facilitated by the few correspondent banking channels that remain between Europe and Iran could be shifted to the SPV, reducing the compliance costs associated with cross-border transactions that can depress export volumes.
The H-SPV could be a European version of the sarafi system that helped Iran conduct trade in the previous sanctions period. Finally, the SPV will only truly succeed if it is launched alongside an effort to shrink Iran’s trade deficit with Europe by increasing Iran’s non-oil exports. The fundamental problem faced by Iranian importers is access to the euros. In this case, in the face of reduced of oil sales, foreign finance, and foreign direct investment, Iran’s exports to Europe will remain the only reliable source of euros for the Central Bank of Iran.
Iran’s growing exports of saffron, which have risen from EUR 24 million in 2000 to EUR 67 million in 2017, help illustrate that Iranian suppliers can achieve significant growth in the European market, boosting euro revenues. But in many categories, Iranian exporters have lost market share in Europe over the last two decades, losing at least EUR 250 million in potential export revenue that could have helped closed the non-oil trade deficit.
Generally, Iran could become a reliable supplier of food ingredients and herbal medicine to Europe, but it will require an effort from both sides to facilitate the growth. Organizing relevant delegations in both directions to expand commercial ties in these sectors would be an important step. November’s Iran-EU seminar on agricultural trade is an example of one such collaboration.
As the government seeks to tackle inflation, it should take seriously the role that the H-SPV could play—a mechanism to fight inflation that cannot be sanctioned by the US because of its humanitarian focus. That is something worth welcoming.