Page 2 of
2 TARGET IRAN,
Part 1 US
sanctions send Iran into Asia's
arms By China Hand
Despite this attitude, German defiance did
not survive the summer. In November 2007, Siemens
announced it would sign no new contracts with Iran
(while executing its existing agreements).
German banks took concrete actions to
limit trade with Iran in Fall 2007 to cut back, as
this report from a Chinese exporter message board
indicates:
I have checked with Commerzbank AG
and Dresdner Bank AG and it seems to be true
that by order of their board of directors from
the beginning of October 2007 only welfare
operations would be supported by them and not
even usual commercial businesses like deliveries
of garments would be done.
The German
government continued to wind down its Hermes
export credit program. According to the February
28 International
Herald Tribune, the
consequences of German participation, no matter
how grudging, in US-led pressure on Iran on
Germany’s bottom line was unmistakable: "German
exports to Iran have dropped drastically in the
past two years amid increasing concern over
Tehran's nuclear ambitions, according to a new
report from the German Economy Ministry."
The report shows a drop in German exports
to 3.2 billion euros in 2007 from 4.3 billion
euros in 2005. Meanwhile, government guarantees
that exporters will be paid for their goods sold
to Iran have more than halved, to 503.4 million
euros in 2007 from 1.16 billion euros in 2006. No
doubt an occasion for triumphant high-fives at the
US Treasury Department. The mood in Germany,
however, was assuredly less joyful.
The
Summer 2007 Der Spiegel article pointed out: "Were
Germany to end its Hermes export guarantees,
German locomotives might no longer be delivered to
Iran, but Chinese and Russian companies would
gladly step into the breach. The Americans would
end up gaining nothing, while the German economy
would stand to lose a lot."
Over in Asia,
China was undoubtedly pleased to see Germany
surrender the Iranian market under US duress.
Chinese exports to Iran have skyrocketed at
exactly the same time that Germany’s sagged. China
has displaced Germany as Iran’s biggest trading
partner, with trade of about $20 billion, not
including the significant sanction-evading trade
through Dubai (many, many billions more). In a
development that Germany undoubtedly noted, on
March 26, two weeks after Tehran announced it was
making a 90 million euros progress payment toward
a 2006 contract it signed with Siemens for 150
locomotives, Tehran Urban & Suburban Railway
Co signed a new 360 million euros contract with
China Northern Locomotive & Rolling Stock
Industry Group for 455 metro cars and 160
double-deck coaches. Another 455 coaches are under
tender.
Trends like these create new
problems and responsibilities for the United
States. Now the onus is on the Bush administration
to show Berlin that it is able to live up to its
self-elected role of global sanctions cop, and
prevent others from profiting by Germany’s
participation in the network of national, US-led
sanctions against Iran.
Invitation to
China The sanctions regime certainly won’t
flourish if the Europeans see it as nothing more
than an invitation for China to eat their lunch.
Treasury Deputy Secretary Robert Kimmitt
acknowledged the issue in October 2007: "We hear
from the business community that it's a concern of
theirs - to act responsibly, only to see someone
else act irresponsibly," Kimmitt said in Brussels
after talks with four EU commissioners. "The
Russians and Chinese have been signatories to each
of the UN Security Council resolutions and I would
think, whether it be in the financial sector or
other sectors, someone else stepping in would be
very inappropriate and very counter to what the
Security Council has called on the world community
to do."
The trouble has always been, of
course, that China and Russia have always insisted
on following the UN sanctions to the letter and no
further - heeding annexes listing a few dozen
companies and individuals and hundreds of items of
equipment and materials - but declining to endorse
the open-ended statement of principles and broad
call to action that the US is trying to read into
the resolutions.
The headline of a June
2007 report in the Wall Street Journal - which
noted a 70% surge in Chinese exports to Iran over
the previous year - says it all: "China-Iran Trade
Surge Vexes US"
What to do?
More specifically - and awkwardly - how
could the United States extend its reach beyond
its own borders and perform the apparently
sovereignty-affronting task of interfering in
Iran's third-country trade with China without the
legal cover of UN Security Council sanctions?
Beyond pressure on allied governments to
restrict their export credit facilities to Iran,
apparently, the solution chosen by the Treasury
Department was to attack Iran’s ability to use the
most common financial instrument in international
trade - the Letter of Credit or LC - in its import
and export dealings with China and other business
partners.
The Letter of Credit system
relies on a network of cross-border banking
relationships that offer payment guarantees and
financing to importers and exporters. To a
significant extent, the LC is the underpinning of
the Asian export miracle since the 1950s and,
until recently, it was the backbone of billions of
dollars of non-oil trade between China and Iran.
The United States has labored mightily to disrupt
this system as far as Iran and Asia are concerned
and create the risk that both Iranian and
export-country banks would be unable to meet their
payment obligations because of US harassment.
Typically, a bank will have ties with
fewer than 100 international banks - and the names
are published in a directory that no doubt saved
the officers at Treasury’s Office of Terrorism and
Financial Intelligence a good amount of heavy
lifting. Since dollar-denominated Letters of
Credit largely clear through New York, the
Treasury Department was able to convince Iran’s
correspondent banks worldwide that handling an
Iranian LC made them liable to penalties for
violation of US national sanctions.
The US
government has in the past imposed sizable
penalties for violation of US sanctions - ABN-Amro
was hit with an $80 million fine in 2005 - so the
risk was genuine and significant. The US also made
it clear that U-turn transactions - by which
intermediary banks in third countries could strip
out references to Iran in dollar-denominated LCs -
would be grounds for enforcement actions.
The compliance departments of
international banks - responsible for controlling
the risk when the bank puts its own assets and
reputation on the line in an LC transaction -
inserted boilerplate clauses in their LC
undertakings not to pay or process Iran-related
credits.
On the supply side, Stuart Levey
and the US Office of Terrorism and Financial
Intelligence (OTFI) jawboned the Chinese
government and, in a reprise of the German
end-around, also bypassed the Chinese government
to pressure Chinese banks directly with the threat
of legal proceedings against their US operations
if they were caught handling Iranian LCs.
The result was a significant dent in
LC-based business between China and Iran as many
Chinese banks reportedly decided the risk of US
penalties outweighed the benefits of handling
Iranian LCs.
Iran sent five delegations to
China to try to achieve a workout - and even
proposed establishment of a China-Iran bank that
would presumably clear all transactions internally
without going through New York - but the Chinese
demurred. China’s attitude toward the US sanctions
campaign against Iran could be characterized as
one of grudging outward compliance combined with
energetic evasion.
The lesson of Iran
sanctions appears to be Trade Will Find a Way - to
China - and, if not directly to China, then
through Dubai.
The Financial Times
reported: "Chinese banks have become very nervous
and are reluctant to deal with Iran directly,"
said a second businessman. "They prefer to work
with Iranians who import goods to Iran through
Dubai to pretend they export goods to UAE rather
than Iran."
Chinese exporter message boards
for the last three years make interesting reading.
One finds detailed and impassioned accounts of
Chinese exporters - and their equally anxious
Iranian customers - laboring to work around
sanctions, embargoes, and blocked LCs, and deal
with the problem of Iranian banks that want to pay
them but are unable to move US dollars.
Advice on the message boards was virtually
unanimous. Go Dubai. Go euro. And go T/T.
Go Dubai, as in route Iran business
through the Middle East entrepot located across
the Straits of Hormuz in the United Arab Emirates.
In response to the US sanctions against
Iran, there has been a rush of thousands of
Iranian businesses and hundreds of billions of
dollars of Iranian capital to incorporate in
Dubai, which plays the role of free-wheeling Hong
Kong to Iran’s socialist PRC, and transact Iran’s
business under UAE cover through the banks there.
Next: Dubai's role in Iran
trade
China Hand is the
author of the Asian affairs website China
Matters.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
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