Foreign banks pull out of Iran, choking economic lifeline

Down to a TrickleU.S.-dollar-denominated loans and deposits to Iran from banks, amounts outstandingSource: Bank for International Settlements
.billion1996’97’98’992000’01’02’03’04’05’06’07’08’09’10’11’12’13’14’15’16’17’18036912$15

Foreign banks that kept Iran trading oil through previous sanctions are pulling out under pressure from the latest round of U.S. restrictions, hitting a lifeline for the Iranian economy.

Even banks with no direct U.S. exposure are refusing to deal with Tehran, fearing that they will be cut out of the dollar-based global financial system.

With no international banks to fund trade and handle payments, Iranian businesses will struggle to buy and sell with the outside world, even as China, the European Union and India say they want that to continue.

In May, President Donald Trump pulled the U.S. out of the 2015 Iran nuclear deal and vowed to reimpose economy-crippling sanctions on Tehran.

Several large foreign refiners have already said they are considering scaling back Iranian oil imports. Other companies are reluctant to invest, while those exporting goods to Iran are struggling to repatriate payments from the country. All say that is because banks won’t deal with Iran, and many of those lenders cite their need to access U.S. dollars for refusing such trade. Europe’s state-backed lenders and central banks are leery of their governments’ requests to help companies trade with Iran, people familiar with the matter say.

Almost all trade in oil, Iran’s main export, is in dollars. Banks’ reluctance to help may be taking a toll on Iran’s oil exports, analysts say. Exports have fallen to an average of 2.2 million barrels a day this month, compared with 2.7 million barrels a day in May, according to data from London-based consultancy Vortexa.

The dollar has been the global currency of choice for decades, and its dominance of finance has increased in recent years.

Dollar DominanceWhether or not the bulk of their imports come from the U.S., countries still need dollars to finance them.
Share of imports invoiced in dollarsShare of imports from the U.S.ColombiaArgentinaIndiaBrazilPakistanS. KoreaIndonesia0%102030405060708090100
Source: The International Price System, Gita Gopinath Harvard University and NBERNote: The trade-shares data are averages of the quarterly data from 1999–2014 and the invoicing data are computed as theaverage of the post-1999 years for which we have data.
ThailandCanadaUkraineIsraelJapanMaltaTurkey0%102030405060708090100

“The centrality of the dollar in global trade, even for the smallest banks and for correspondence relationships, is one of the major strategic weapons of the U.S.,” said Peter Harrell, who oversaw Iran sanctions under the Obama administration.

Last Friday, Indian Oil Corp. , the country’s largest refiner, said it was considering cutting Iran crude imports over a decision by government-run State Bank of India to stop dealing with Tehran. India is the second biggest buyer of Iranian oil and the country’s government has repeatedly said it would not implement Mr. Trump’s sanctions, which in November will bring back restrictions ended under former President Barack Obama.

European refiners, which buy around a third of Iran’s oil exports, are also dropping out. Italy’s Saras SpA is considering no longer buying Iranian oil because its banks don’t want to finance such trades, according to company officials. A Saras spokeswoman said it had made no final decision on Iran.

Big European banks had long stopped dealing with Tehran. Many have bad memories. France’s BNP Paribas , for instance, was fined a record $9 billion by the U.S. for violating Iran and Sudan sanctions in 2014.

Now, the host of small banks that continued dealing with the Islamic Republic are either restricting trades with Iran or stopping them altogether.

That includes Oberbank in Austria, Germany’s DZ Bank, Italy’s Banca Popolare di Sondrioand France-based Wormser, according to the banks and companies that deal with them.

Oberbank, DZ Bank and Wormser decided to stop Iran trades because they need to access dollars, according to people familiar with the matter.

Spokesmen at DZ Bank and Oberbank confirmed they are winding up transactions related to Iran. A spokeswoman for Wormser said it follows U.S. Treasury regulations on sanctions. Sondrio didn’t return a request for comment.

European officials have asked the region’s central banks and state-run lenders to step in where private lenders are reluctant to deal with companies working with Iran, according to people familiar with the matter. So far these institutions have mainly pushed back, the people say.

Among the reasons: Central banks need access to dollars.

“The most important challenge now is to find solutions on banking and finance, because legitimate trade and investment need banking partners and financing models that work,” EU foreign policy chief Federica Mogherini said in a recent speech.

Back to the FutureSanctions have curbed Iran’s crude oil production and exports in the past.Million barrels a day, monthly averageSource: Joint Organizations Data InitiativeNote: Certain months (Aug., Dec. 2011; June ’12; Aug.-Oct. ’17) were unreported.
Deal reachedSanctions imposedFor domesticconsumptionFor export2010’11’12’13’14’15’16’17’180.00.51.01.52.02.53.03.54.04.5

Mostafa Pakzad, a Tehran-based broker, is currently trying to help an Iranian company pay $1 million to a U.S. agricultural exporter, but has been rebuffed by banks in Spain, France and Italy. Despite previous rounds of sanctions, that U.S. company had always been able to trade with Iran under exemptions for exports of food and medical goods. Mr. Pakzad declined to name the company.

The ubiquity of the dollar ensures a measure of U.S. jurisdiction over banks that have no dealings in America.

Global trade in U.S. dollars has been rising, according to Swift, the payment-services company. In 2017, the dollar accounted for 85% of global trade based on the value of letters of credit issued, up from 81% two years earlier.

The U.S. currency is involved in nearly nine out of every 10 transactions in the daily $5.1 trillion foreign-exchange market, 2016 data from the Bank for International Settlements showed.

With so many dollar transactions, many international banks need branches in the U.S., where they are able to settle these trades on behalf of their clients. That puts them in the remit of U.S. authorities. Even where a bank doesn’t have a U.S. branch, it likely has to deal with others that do, and these lenders are increasingly nervous about dealing with anyone else that has Iranian connections for fear of breaching U.S. sanctions.

The U.S. says it will pursue any company knowingly assisting another in breaching Iran sanctions even if it didn’t deal with Iran itself.

Under Mr. Obama, officials ensured Tehran retained some trade with the rest of the world, even lobbying banks and companies to ensure the safe passage of humanitarian goods.

“What has changed is the appetite of the U.S. administration to punish and vociferously go” after sanctioned entities, said Nigel Kushner, chief executive of London-based sanctions-focused law firm W Legal. Mr. Kushner said that a European client has stopped exporting grain to Iran after its bank stopped dealing with Tehran last month.

During a visit to Germany last week, Andrew Peek, the official in charge of Iran at the U.S. State Department, reminded those dealing with Iran about the risks they are facing.

“The goal is as little economic involvement as possible, the maximum economic pressure,” he told reporters on a conference call.

Almost all trade in oil, Iran’s main export, is in dollars. Above, an oil facility on an Iranian island in the Persian Gulf.
Almost all trade in oil, Iran’s main export, is in dollars. Above, an oil facility on an Iranian island in the Persian Gulf. PHOTO: STR/AGENCE FRANCE-PRESSE/GETTY IMAGES

Write to Benoit Faucon at benoit.faucon@wsj.com and Sarah McFarlane at sarah.mcfarlane@wsj.com

COURTESY: WSJ

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