The big squeeze
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The big squeeze

The US push to shut off Iran from international capital has taken its toll – with European banks among the victims

By Angus McDowall

The US push to shut off Iran from international capital has taken its toll – with European banks among the victims


A US-driven financial squeeze on Iran has pushed almost all major international banks to abandon their work with the country, which now struggles to gain access to world financial markets. This pressure has added to the troubles of an already fraught Iranian economy, which suffers high inflation, under employment and low private-sector investment. Meanwhile, European banks are growing frustrated at the methods US Treasury department officials have employed to cut their ties with Tehran.

The US wants to use economic pressure to force Iran into abandoning uranium enrichment, the element of its nuclear programme that could most easily be adapted to build atomic weapons. Two sets of UN sanctions were imposed on Iran in December and March, but these are limited to prohibitions on importing nuclear goods and deals with a few individuals and companies. Instead, it is using domestic sanctions law to press banks away from Iran.

 “US sanctions legislation applying only to US companies and nationals has been used threateningly against banks whose headquarters are not in the US but have large US operations or US executives,” says an analyst who focuses mostly on Iran-UK trade. “This has essentially closed the market.”

The US Treasury department, working mostly through the Office of Foreign Asset Control, has waged an intensive campaign to cut Iran off from world financial markets. US officials have called and met international banking executives, saying their US operations and US nationals working for them could be hit by lawsuits. Early this year, it asked the justice department to probe several major US and European companies for suspected sanctions violation.

Conspiracy of silence

No major bank has publicly attributed its drawdown in Iran to US pressure, instead blaming higher administrative costs or increased political risk. In private, several bankers spoke about threatening calls from the US Treasury department, which convinced their firms to quit Iran. Early this year, the British Bankers’ Association told the UK government it was concerned that lawful business was being hit too.

“The pressure is effective and it is there,” says a Europe-based banker with two decades of experience following Iran. “We were called and clearly told that if we didn’t change our mind on Iran, we’d better think twice about our US operations.”

Banks are not only worried about legal action. The large number of regulations they must follow – including national laws as well as EU regulations and UN sanctions – makes compliance a difficult process to manage, driving up administrative costs. Financiers are also worried that Iranian customers might struggle to pay because of hard currency shortages or that a spiralling crisis could lead the Iranian government to repudiate foreign debt.

The squeeze is clearly working. Participants at a recent London conference on investment in Iran said afterwards that most European banks have stopped funding any Iranian transactions. In 2006, Swiss banks UBS and Credit Suisse said they would not take new Iranian business, starting a rush of international finance out of Tehran. Deutsche Bank, Commerzbank, Standard Chartered, Fortis Bank and ABN Amro are all closed to new Iranian business, as are Dresdner Kleinwort and Calyon. HSBC and BNP Paribas both say their businesses in Iran are small and decreasing. 

In Japan, Bank of Tokyo Mitsubishi UFJ, Mizuho and Sumitomo Mitsui have also quit the market and refuse to finance oil purchases in any currency other than the dollar – all as a result of US pressure. Some bankers also suggest that money is harder to move through Dubai, which has become the main transit route for Iranian cash. 

“It’s difficult to use the banking system to make payments to or from Iran, to obtain or open letters of credit and to obtain financing for Iran,” says the trade analyst. In consequence, trade has become far more complicated. Importers in Tehran say paying for goods and bringing them through western customs takes longer and is more expensive. Sometimes they use foreign intermediaries who demand high fees. 

Finding alternatives

As this pressure takes hold, Iran is looking elsewhere for trade and financial services. European exports to Iran have fallen over the past year, while Chinese exports are growing rapidly. “How successful Iran has been at replacing lost finance is difficult to say,” says Richard Fox of Fitch Ratings. “Obviously, there’s the potential for replacing credit lines from European banks to Asia, but I suspect there’s been a net loss.” 

Bank for International Settlements (BIS) data shows that exposure for Iran dropped by $2.5 billion – around 10% – between December and March, a significant, but not huge fall.

There is also a shift towards smaller, more specialized firms in London and Switzerland as well as the Persian Gulf and Asia. “We see our business grow considerably,” says Norbert Eisenmenger, manager of international trade finance at Europaische-Iranische Handelsbank, an Iranian-owned firm based in Germany. “We are feeling every day that business is concentrated on us and a few others. But we get the lion’s share.”

“The whole sanctions cloud is one of many things having a detrimental effect on Iran’s economy, which isn’t doing as well as it might be,” says Fitch’s Fox. “Inflation is high and not improving, and the government is spending too freely on things like subsidies. High oil revenues are masking lots of problems, but also making the country vulnerable if the oil price falls.”

The government role

Iranian governments started trying to liberalize the country’s economy in the mid 1990s because the centrally planned model they adopted after the revolution restricted growth and was too dependent on oil exports. But while president Mahmoud Ahmadinejad insists he is committed to economic reform, his populist ideas have pushed the restructuring programme into reverse.

The economy is still about 80% state owned, with lavish subsidies for fuel and agriculture making deep cuts in the public purse. Those foreign companies willing to risk sanctions and navigate finance restrictions have also been worried by government interference in some major investment projects. The poor climate has also pushed Iranian private companies to speculate in property development or move their money abroad rather than grow their businesses with fresh investment.

The difficulties have been underscored by personnel changes in the top ranks of economic policy-making. Ebrahim Sheibani, a central bank governor who is thought to have resisted the president’s ad hoc approach to economic policy, is only the latest official to quit. His resignation this summer followed the sacking of a top budget official who supported liberalization and was replaced, like many other officials over the past two years, by a ranking revolutionary guardsman. 

“It is very difficult to untangle the effects of sanctions from other changes in Iran’s economy,” says the trade analyst. “Reorganization by the present government has had a chaotic effect.”

On the street, this impact is most readily felt on inflation and employment. Government figures put price increases at around 13%, but most independent analyses, which use a different weighting system, have them hovering around the 20% mark. The skittishness extends to petrol, which has been rationed since June to reduce a massive import bill that covers some 40% of local consumption.

It is unclear if these woes will push Iran closer to a deal. The reverses suffered last December by Ahmadinejad’s allies in local elections were blamed on his economic performance, and their more moderate opponents hope to win the parliamentary elections early next year. Such success could strengthen Akbar Hashemi Rafsanjani, a former president who wields considerable backroom influence and seeks to open the economy to the outside world. 

So far, economic crisis has been averted by high oil revenues buoyed by runaway energy prices. But sanctions could change all this. According to one banker, Iran is already struggling to receive payment for oil sales because of restrictions on dollar clearing, while in the longer term it cannot adequately renew its oil and gas facilities. With few major international contractors willing to bid on big projects in Iran, the country faces accelerated oil field depletion that could reduce future oil exports.

Tehran’s strategy has been to shunt more work towards companies with less international experience, particularly those from China, as well as to domestic contractors. However, their limited size and experience could raise project costs and severely delay some schemes. During the 1980-88 Iran-Iraq war, the Islamic republic learnt to fall back on its own resources. Its rulers must now determine whether Iranians have the gumption to face the world alone again. 

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