New Treasury U-Turn Measures May Have Significant Impact on Iran

By Victor Comras

US Iran sanctions policy is again front and center with the Treasury Department’s announcement, November 6th, cutting off “U-Turn” privileges under general license for all transactions involving Iran’s financial institutions. This measure could have a significant impact on Iran, and those international banks that continue to do business as usual with her. The new measure, along with the sharp decline in oil prices, certainly will make doing business with Iran riskier, and less attractive.

Previously, the no-U-Turn policy vis a vis Iran was applicable only to those specific transactions involving designated Iranian entities such as Bank Saderat and Iranian state-owned banks Melli, Mellat, Sepah, Future Bank and the Export Development Bank of Iran. U.S. financial institutions could still process funds transfers for the direct or indirect benefit of Iranian banks, other than for those designated, provided the payments were initiated offshore by a non-Iranian, non-U.S. financial institution and only passed through the U.S. financial system en route to another offshore, non-Iranian, non-U.S. financial institution. That left enough wiggle-room in the system for many banks to circumvent the intended controls when it came to doing business with Iran.

These new measures should be seen as sending a clear message to the international financial community that the US will continue to use the various tools in our domestic arsenal to pressure Iran into compliance with international non proliferation and counter-terrorism norms, and that we intend, also, to use our financial influence to gain the cooperation of the international banking community in seeking these objectives.

Coming just after the elections, one must also assume that the policy was cleared with, and approved by, President-Elect Obama’s advisors, and that it will be maintained, and built upon, in the new Administration. During the campaign, Obama indicated on several occasions that he would work to strengthen the sanctions on Iran, including working to bring greater international participation and implementation of such sanctions measures.

So, the question now, is just what impact are these measures likely to have on doing business with Iran?

Iran had become quite adept at side-stepping the full impact of the previous US sanctions measures directed against them. Helped by the high price of oil, and loopholes in the US measures, they were able to use intermediaries, many of which were located in neighboring Gulf states, through which they could conduct their business. But, this may now be turning around.

Dubai, which handles an estimated 60% of Iran’s merchandise trade and hosts nearly 10,000 Iranian owned firms, is beginning to tighten up, and is beginning to show some reticence in serving as a foil for Iran trade. A recent article in the Economist reports that it is becoming increasingly difficult for Iranian businesses to handle their transactions via Dubai, since fewer banks there are willing to process transactions and open accounts for them. There has also been a perceptible shift away from Iran, the article reports, as Dubai, and other Gulf states seek to more closely align themselves to Saudi Arabia and the West.

The reaction from Europe to these new measures has been muted. European leaders are still largely preoccupied with the world financial crisis and remain indecisive concerning any new financial measures to be taken vis a vis Iran. Investment in Iran still looks attractive to many European businesses and investors, and the world economic downturn will make it even more difficult for European firms to voluntarily withdraw from the Iranian market. Nevertheless, French President Sarkozy and British Prime Minister Gordon Brown are continuing to push for a concerted European move to place greater economic pressure on Iran. They continue to be resisted, in this effort, by German Chancellor Angela Merkel and her allies in Italy and Austria. Merkel maintains that the question of sanctions on Iran should be handled in the UN Security Council, where, she knows full well, China and Russia, will maintain the status quo.

Reports indicated that Javier Solana has again renewed his offer for further talks with Iran’s chief nuclear negotiator, Saeed Jalili.

Europe banks and firms have reportedly already cut back somewhat their direct financial and business dealings with Iran, and have become more cautious when it comes to engaging in new business or financial relationships. Yet, many European firms are still active in Tehran, or have set up special arrangements to deal with Iran through Dubai or other third locations. The boardrooms of these firms will now begin to re-assess the cost/benefit/risk equations associated with these activities. They are likely now to hesitate when it comes to new business, and to wait and see what will actual happen when the new Administration takes office. The major question they will pose is whether the Treasury Department will actually take any real action to make an example out of one or more overseas banks that knowingly,or unwittingly violates these new No-U-turn regulatory prohibitions.

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