European countries set up trade channel with Iran to bypass US sanctions

The three signatories of the 2015 Iran nuclear deal have been working for months to establish a measure allowing payments between Europe and Iran to continue, in the wake of the US withdrawal from the agreement in May.

Now the European countries have officially established that channel, in a move likely to displease Washington.

German Foreign Minister Heiko Maas, French Foreign Minister Jean-Yves Le Drian and British Foreign Secretary Jeremy Hunt announced the "special purpose vehicle," known as the Instrument in Support of Trade Exchanges (INSTEX), at a meeting of EU foreign and defense ministers in Bucharest, Romania.

The INSTEX channel will be used by Europe to sell only food, medicine and medical equipment to Iran, with the possibility of expanding in the future, German broadcaster NDR reported.

"We have been looking for ways to obtain this agreement because we are firmly convinced that it serves our strategic security interests in Europe," Maas said during a press briefing in Brussels earlier in the day.

"We do not want Iran to get out of this agreement and back into uranium enrichment. This has to do with our security interests in Europe," he said.

Maas said that Germany was "working very closely" with France, Britain and the European Union to "implement this special-purpose vehicle."

According to a report by NDR, INSTEX will be based in Paris and managed by a German banking expert. A supervisory board will be run out of the UK.

The announcement comes just over three years after the Iran nuclear deal came into effect, limiting the country's nuclear program in return for sanctions relief.

But the Obama-era agreement was torn apart in May last year after long-time critic US President Donald Trump announced his country would be quitting the deal -- much to the dismay of European partners.

Shortly after, the US reimposed sanctions against Iran and Trump warned countries against doing business with it.

The US State Department said on Thursday that it was "closely following" reports on the mechanism.

"As the president has made clear, entities that continue to engage in sanctionable activity involving Iran risk severe consequences that could include losing access to the U.S. financial system and the ability to do business with the United States or U.S. companies," a State Department spokesperson said.

The US withdrawal and ensuing sanctions have hit the Iranian economy hard, with the collapse of the rial leading to widespread shortages -- including medical medical supplies and equipment.

The European channel is likely to ease relations between Europe and Iran, which had become strained recently amid Iran's ballistic missile program and attacks against Iranian dissidents in Europe.

How willing European companies will be to take up the new payment channel remains to be seen, with many larger businesses already cutting back or eliminating links with Iran for fear of US sanctions.