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US Weighing Sanctions to Cripple Iran Humanitarian Trade

Wednesday, October 7, 2020

Esfandyar Batmanghelidj

The Trump administration is reportedly considering a new set of sanctions designations targeting 14 Iranian banks that are not currently subject to secondary sanctions. The new designations would be made under authorities associated with “terrorism, ballistic-missile development and human-rights abuses.” The targeting of these banks would cripple Iran’s already degraded channels for the importation of humanitarian goods—including food and medicine—at a time when the country is battling the COVID-19 pandemic.

This new proposal, spearheaded by the Foundation for Defense of Democracies, long-time opponents of the 2015 nuclear deal, would be the latest and most extreme in a series of sanctions moves intended to deliberately undermined long-standing protections for humanitarian trade. Proponents of the proposal believe that it will be “possible to mitigate the humanitarian costs, chiefly through so-called comfort letters from the Treasury Department.”

However, considering the precedent set by the Trump administration, there is no reason to believe that the humanitarian costs can be mitigated. In 2019, Iran imported over $1 billion of pharmaceutical products and over $3.5 billion in cereals. This trade is so sizable that no degree of licensing or special accommodations by the Treasury Department, nor any recourse to the still non-functional Swiss Humanitarian Trade Arrangement, will suffice to ensure that ordinary Iranians are not unduly impacted by the consequences of the move. In short, the Treasury Department lacks the means to designate these banks while ensuring that Iran’s imports of food and medicine remain routine and reliable.

 

The designation would have three distinct consequences:

1.     Iran’s rial would lose value.

The designation would serve as a supply-side and demand-side shock for Iran’s foreign exchange markets. On the supply-side, the closure of the few remaining correspondent banking channels between Iran and the global financial system would make it near-impossible for Iranian exporters to repatriate foreign exchange revenue. This makes it significantly more expensive for Iranian importers to purchase foreign exchange through the centralized NIMA exchange.

On the demand-side, ordinary Iranians will respond to the new uncertainty by seeking to convert more of their savings into foreign currency, pushing up the free market exchange rate, beyond its recent historic highs. The net effect will be that all Iranian imports become more expensive in the short-term, exacerbating the already significant inflationary pressures that have seen year-on-year inflation rise as high as 50 percent in recent months. Because Iran imports significant volumes of food and medicine products, these humanitarian goods will likewise become more expensive for Iranian households.

2.     There would be a liquidity crisis around Iran’s humanitarian trade.

While foreign currency within Iran would become more expensive, the foreign currency held by Iranian these banks and their Iranian clients in accounts outside of Iran will be frozen . Since the Trump administration hit Iran’s central bank with a new designation in September 2019, it has become increasingly difficult for the Central Bank of Iran to freely use its funds for the purposes of facilitating humanitarian trade as long allowed under US sanctions exemptions. In July of this year, Reuters reported on how these challenges were having a direct impact on Iran’s ability to make payments for purchases of food commodities such as grain and soybeans.

In the face of these challenges, Iranian pharmaceutical and food importers have increasingly used funds held by private sector banks and companies outside of Iran as means to make payments for goods. These funds are often held at accounts belonging to Iranian banks at foreign financial institutions in countries such as Turkey, South Korea, and China. If these Iranian banks are designated in a manner that eliminates the clear exemptions for the use of Iranian-origin funds for humanitarian trade, foreign financial institutions will be obligated to freeze the accounts of Iranian banks and their clients.

Such a situation, which is functionally the same as the situation facing funds belonging to Iran’s central bank, would contribute to a sudden liquidity crisis. Even if European and Asian companies remain willing to sell humanitarian goods to Iran, and even if the Treasury Department issues new licenses and comfort letters to try and reassure companies about the permissibility of these sales, Iranian importers will struggle to source the foreign currency needed to pay for these goods. This will likely contribute to significantly more delays in the importation of food and medicine which could lead to issues of scarcity and affordability.

Because of the restrictions imposed by sanctions on Iran’s banking sector, the financial transactions that enabled these imports are  facilitated through an increasingly complex and fragile set of banking channels. Iranian importers and their suppliers are required to have multiple channels, knowing that new sanctions designations or financial circumstances could render any channel non-viable overnight. This byzantine system is the direct opposite of the simple, reliable banking channels countries need to ensure the availability of food and medicine. Targeting these key Iranian banks with new sanction will smash the remaining few reliable channels.

3.     Many global pharmaceutical and food companies would quit the Iranian market.

Among the banks that may be targeted are those Iranian institutions that have gone to the greatest lengths to adopt anti-money laundering and counter terrorist financing policies, including those policies recommended by the Financial Action Task Force. While such policies have been only partially implemented across the wider Iranian financial system, these banks have instituted policies that exceed regulatory requirements in Iran in order to effectively serve Iranian importers and the multinational pharmaceutical and food commodities companies that supply them. These banks take an active role in helping these companies meet the stringent due diligence requirements necessary to successfully process Iran-related payments at banks in Europe and Asia. The impact of such a designation on these banks would be grave.

We know this because of the experience of Parsian Bank, a similar private sector financial institution which became subject to a terrorism-related designation in October 2018. As reported by the Washington Post, the designation of Parsian Bank left many multinational companies, including German drugs giant Bayer, scrambling to transfer their accounts to new Iranian banks in order to maintain their sales to Iran. But should the Trump administration move to designate all the remaining banks, there will be no alternatives available.

This will be a significant blow to the operations of many multinational companies which still maintain a local presence in Iran—companies overwhelmingly involved in the importation and production of food and medicine. Given these new operational restrictions, it is likely that many of the European and Asian companies still selling into Iran will either temporarily or permanently cease operations. As an employee at Bayer Iran commented to the Washington Post on the impact of sanctions on foreign pharmaceutical companies in Iran, “Many companies have started limiting their activities and laying off employees.”

 

Consequences for the US

What is striking about the proposed sanctions is the lack of any clear policy rationale for their imposition. The targeting of these banks in no way advances the Trump administration’s stated aims to curtail Iran’s “malign behaviors.” These banks are not significant vectors for money laundering and terrorist financing nor are they substantively linked to the Iranian government nor entities such as the Islamic Revolutionary Guard Corps. These banks have not been designated so far under the proposed authorities precisely because they are unlike most other Iranian banks. It is these distinct governance and operational characteristics that have enabled several of these banks to play a crucial role in humanitarian trade. As such, there is no national security justification for the designations—the only clear impact will be the further immiseration of ordinary Iranians as the supply of food and medicine becomes increasingly erratic.

Those who support targeting these banks have spoken openly about their intention to make future diplomacy with Iran more difficult in the event that Joe Biden wins the election in the next few weeks. This admission itself exposes the cynical thinking behind the proposal. But more consequentially for those individuals who have spent more than a decade developing US sanctions powers, the application of sanctions in the manner being proposed will no doubt damage the credibility of US sanctions as a tool of foreign policy.

Following significant concerns raised by governments, international organizations, and activists about the ability of sanctioned countries to respond to the COVID-19 pandemic, the Treasury Department issued a new fact sheet in April to clarify the exemptions and general licenses that govern humanitarian trade. At the time, OFAC director Andrea Gakci reaffirmed her office’s commitment to protecting “humanitarian relief efforts related to the COVID-19 crisis.”

The factsheet touted the launch of the Swiss Humanitarian Trade Arrangement (SHTA) as a model financial channel that would enable food and medicine to flow to Iran. SHTA has processed just one transaction during the COVID-19 crisis in Iran. One of the principle challenges facing SHTA and similar financial channels being considered is the failure of the Treasury Department to clearly permit the Central Bank of Iran, to access the foreign exchange reserves necessary to make payments through the channel. Such impediments will only get worse if Iran’s private sector banks are made subject to a similar designation as the central bank.

“Maximum pressure” sanctions are increasingly seen by US allies, and not least the Iranian public, as so poorly targeted as to intentionally harm the health and wellbeing of ordinary Iranians. Any move to designate the remaining Iranian banks at the heart of the country’s humanitarian trade would not only confirm this view of US sanctions policy, but also serve to directly undermine the commitments made by US officials, including Treasury Secretary Steven Mnuchin, who stated in April that his department was “committed to working with financial institutions and non-profit organizations in their efforts to mitigate risks and allow humanitarian assistance and associated payments to flow to those who need it.” Mnuchin should stand by his word and the US government should stand by its principles—the proposal to designate these banks must be rejected.

 

 

Source: Bourseandbazaar