Short for "Instrument in Support of Trade Exchanges", the special purpose vehicle will allow European businesses to trade with Iran, despite strict US sanctions.
According to media reports, INSTEX will be based in Paris and managed by German banking expert Per Fischer who is also a former Commerzbank manager. The UK will head the supervisory board, Otaghonline reported.
Although the European side intends to use the channel initially only to sell food, medicine and medical devices to Iran, it will be expanded in the future, according to Financial Tribune.
Twelve groups of merchandise that can be traded through the newly-unveiled transactions channel, according to Baeidinejad, include agricultural products such as soybeans, corn, fruits and vegetables; pesticides, fertilizers and seeds; animal feed like press cake and fodder; milk powder and raw materials; pharmaceutical raw material; different types of medications for special diseases; different types of medical equipment; operating room equipment and medical equipment, including those used for radiation therapy to treat cancer, as well as human and animal vaccines.
Noting that Iran spends up to €8 billion to import these products annually, the ambassador said the country is now facing numerous challenges in purchasing these products due to problems related with financial transactions.
"Despite the claims of American officials [that trading in "humanitarian" goods with Iran has not been sanctioned], the international banking system is reluctant to take the risk of money transfer for Iran to buy food and medicine,” he said.
INSTEX was registered after months of negotiations and technical talks in the wake of the US administration's unilateral exit last year from the 2015 Iran nuclear deal. That pact, agreed under former president, Barack Obama, lifted international sanctions on Iran in exchange for Tehran imposing curbs on its nuclear program.
How INSTEX Works
The new entity, according to DW, acts as a euro-denominated clearinghouse for Iran to conduct trade with European companies. In effect, INSTEX works as a barter arrangement operating outside the US-dominated global financial system.
Trade is initially expected to focus on non-sanctionable essential goods such as humanitarian, medical and farm products. It is not expected to address oil-related transactions, which have dropped off since last year and are Iran's primary source of foreign currency.
Germany, France and Britain have helped set up and manage the clearinghouse. The three countries have sought broader support for the mechanism from all 28 EU member states to show European good faith in implementing commitments under the nuclear accord and to present a united front against any retaliation from Washington.
There are still technical details to be worked out following the entity's official registration.
Theoretically, the payment channel would shield European companies from US sanction-related penalties. However, European companies and banks that do business with the US may still be hesitant to trade with Iran over concerns they could be hit with US penalties. Many European companies have already pulled out of Iran in response to US sanctions.
The entity is initially aimed at European small- and medium-sized enterprises and trade volume is not expected to be significant.
The payment vehicle's facilitation of trade in non-sanctionable essential products raises questions as to whether it will sufficiently benefit Iran's struggling economy and help it curb runaway inflation and currency devaluation.
US Response
The United States has vowed to continue its "maximum pressure" campaign on Iran over its ballistic missile program and growing influence in the Middle East.
The White House has warned European banks and firms that they could face stiff fines and penalties if they violate US sanctions.
However, it is questionable whether Washington would directly target the European governments backing the new entity, a move that would strain ties with key allies and trigger financial turbulence.
Iran's Response
Tehran has grown frustrated with the slow European response to the reimposition of US sanctions, but has pledged to maintain its nuclear deal commitments as long as it receives the promised economic benefits.
"If we cannot sell our oil and we don't enjoy financial transactions, then I don't think keeping the deal will benefit us anymore," Ali Akbar Salehi, the head of the Atomic Energy Organization of Iran, said in January.
In the absence of economic benefits, questions remain about how long Iran's patience will last.
Iran is also looking to Russia and China, other signatories to the nuclear accord, to maintain trade flows in defiance of the United States. Oil trade with China has dropped off in recent months, reaching a three-year low.