Iran overspill

The stand-off between Iran and much of the ‘western’ world continues, with the US Treasury stepping up pressure on several Iranian banks and cutting off their dollar supplies in recent months. Giovanni Bracale, President of IM Progetti Advisors & Partners in Rome, gives his take on why Iran can”t be dictated to.


We are all familiar with the stand-off between the US and Iran in recent years and the ‘nuclear question’. The pressure against the present government in Iran has sharply intensified in the last 12 months with Iran’s Bank Sepah and Bank Saderat being put on the blacklist of the US Treasury.

Accordingly Saderat cannot transact anything in US dollars, however they can (and do) effect and receive payments in other currencies.

In December 2006, the UN Security Council passed Resolution 1737, requiring states to take a number of actions to deny Iran access to the materials and services that support its nuclear and ballistic missile capabilities.

Under the resolution, all governments were obligated to take a number of steps to combat Iran’s proliferation activities. Among other things, the resolution requires states to deny Iran any financial assistance, or the transfer of any financial resources or services, related to the supply, sale, transfer, manufacture, or use of prohibited items associated with Iran’s nuclear and missile programmes.

It also contains an annex listing entities and individuals responsible for these programmes, and required states to freeze their assets and those of entities owned or controlled by them.

In January 2007 Bank Sepah and Bank Sepah International plc were designated by the US Treasury as “supporters of WMD proliferation” and blacklisted by the US Treasury immediately.  After that time they could not transact anything whatsoever in US dollars.

On March 24, 2007 Bank Sepah and Bank Sepah International plc were designated as “entities involved in nuclear or ballistic missile activities” in UN Security Council Resolution 1747.

At that time, they became subject to the provisions of UN Security Council Resolution 1737: that is, their assets were frozen immediately.  Since that date, neither Bank Sepah nor Bank Sepah International plc has been able to undertake any new business.

However, the Iranian regulatory authorities, the UK Treasury, and regulatory bodies across Europe have all granted licences for payments to be made and received in respect of contracts which were in place prior to March 24. Such payments can be made in any currency except US dollars.

Neither Saderat, Sepah, or any of the other Iranian banks has (so far) has had UN sanctions imposed against them. Thus, in theory, the other Iranian banks can still effect payments – with Saderat being excluded from access to US dollar payments.

However, the US under-secretary for terrorism and financial intelligence, Stuart Levey, has been on an anti-Iran ‘world tour’, bringing pressure to bear on banks across the world (particularly those with US holdings) and persuading them not to transact any business with Iranian banks at all.

Europeans suffering

The impact for European exporters is dramatic and the advantage for Asian exporters immense. The Swiss banks were the first to cut relationships, and at present only Zurcher Kantonal Bank is partially active in Iran, mostly because it doesn’t have interests in the US market, as for instance UBS/SBS and Credit Suisse have.

Some Benelux banks have also recently refrained to carry out further business and this includes Fortis Bank, which had become most active in advising and confirming Iranian letters of credit (LCs).

And, just recently, Deutsche Bank and Commerzbank have decided to close the door on Iranian business.

We are experiencing a particularly heavy situation in Italy, where the assets of the Iranian embassy in Rome were seized at end of last year for some weeks, generating a sharp reduction in levels of commerce with Iran – Italy was until then the second most active commercial partner of Iran. The three major Italian banks do not want even to hear about Iran at present and worse is yet to come, I believe.

Especially Italy

The strongest handicap is being borne by Italian exporters, I believe, mostly for the reasons mentioned above and for the complete lack of help from the Italian government, especially the Berlusconi administration. This was totally unable to combine the protection of a consolidated relationship with the acceptance of international pressures.

This naivety created conditions for encouraging US lawyers seeking the seizure of Iranian funds. Tehran, apart from other reactions, has subsequently reduced imports from Italy by 80%.

Moreover, owing to Italy’s overexposure with Iran, Italian exporters are paying a higher cost than other European counterparts in cases where there is a financial counterpart willing to grant a silent confirmation.

And in Italy there is only one Iranian bank, a full branch of Bank Sepah, at present under administration of the Bank of Italy and under condition of absolute default, their funds being inaccessible.

Germans too

For German exporters, the situation is only slightly better, since there are more than a dozen Iranian banks in Germany, all around the country, with substantial deposits still available.

Therefore German exporters have the relief of a silent confirmation of a bank that, even if a full branch of the issuing bank, is at least based in Germany but could become vulnerable in Germany in the case of default.

Being full branches, and not independent local banks, even if Iranian-owned (as only EIH is in Germany), in the case of total deadlock the full branches cannot avoid becoming insolvent.

More immune for British

France and the UK are not so involved with Iran as Italy and Germany, and the latter traditionally is more oriented to business with other areas of the Middle East such as the UAE, Oman, Saudi Arabia, and so on.

UK exporters are lucky to have easier access to many international banks through the London market, such as Persia or Saderat International (the result of merging Iran Overseas Investment Bank PLC and the local subsidiary of Bank Saderat), apart from the presence of other branches in London.

London offices of such banks are still utilised as reimbursing banks, even if the funds of Saderat and Melli are becoming more exposed to US or UN sanctions.

French rebuffed

France has been more involved than the UK in exporting to Iran. Some 15 years ago it tried to replace Iraq with Iran as a rich market for its technology and defence products, but Iran still remembered the support given to Saddam during the long Iran-Iraq War.

France had sold 50 Mirage fighters to Iraq (unpaid for) and also leased five Super Etendard aircraft with Exocet missiles during the Iran-Iraq War which were used to attack Iran’s Abadan oil refinery.

Therefore, in spite of Coface putting in place a record export credit cover of US$4bn for Iran, of which US$600mn was utilised by Italian exporters, mostly managed by BNP and Société Générale, the rebound for French industry was not terrific, and only Schneider still ranks among most important exporters through Telemecanique.

Anyhow, directly or indirectly, a French beneficiary of an LC from Iran has the advantage of obtaining a ‘discrete’ silent confirmation through Coface/the banks. In a major case the Paris government does not refrain from giving what I would call a ‘foggy’s financial support coordinated by the finance ministry and foreign affairs ministry jointly.

As far as cost of covers are concerned, apart from the few export credit agencies still granting cover at an average cost of around 1.75% per year, the market still provides rare opportunities of silent confirmation at the average cost of not less than 7%, which is exactly my forecast contained within an article in GTR a year and a half year ago (GTR, Jan/Feb 2006, p71).

What is important for exporters is not to look at the cost only but to the specific waiting period before the claim of the guarantee and the condition precedent of the contract.

Suffering bazaar

The restrictions in normal money transfers and the decision of many banks in Europe, including important Swiss and UK banks, to stop all payments regarding Iran are also generating difficulties for the most influential lobby in Iran, the bazaar, or marketplace, of Tehran.

Up to now these continued by using the accounts of relatives and trustees living in Germany, UK and Austria but every day there are problems in refuelling these accounts. The number of international transactions related to the bazaar have diminished from 1,500 per day to a few hundred.

Meanwhile, European exporters of plant and equipment see sharply reduced chances of accessing medium-term export credit facilities and this gives to Chinese contractors an unexpected space for manoeuvre in Iran.

Also, exporters run the risk that some payments to beneficiaries of Iranian LCs may go wrong.

It really now becomes a matter for the specialists to make sure that a delivery to Iran will be punctually paid. Besides, it is very complicated to force the issuing bank to honour a commitment if they assume they had already paid, and this has happened hundreds of times already in the last two months.

Silent war

This silent war against Iran aims to obtain what the pressures and efforts of the International Atomic Energy Agency’s Mohamed El Baradei failed to obtain.

Whereas Iranians are masters of delaying negotiations when convenient and have used foreign ambassadors as toys for millennia, we should consider Iran’s history and traditional standing in the region. It is a proud country, not easily dictated to.

How then can Iranians tolerate Pakistan having atomic weapons – a country that until 1947 did not even exist.

It is difficult therefore, purely from a historical perspective, to convince any government in Tehran that Iran has to assume a low profile in the region. Washington should try to understand this situation better.

Anyhow, I believe that the only way out from this stand-off is a secret consensus based on tolerance of a reduced nuclear activity in Iran against some support for the solution of the Iraqi problem.

As a member of the Coalition Provisional Government in Baghdad three years ago I always anticipated such a solution and now this is taking more and more of a concrete shape.