"Go Dubai" is the first advice on Internet message boards by Chinese exporters
laboring to work around sanctions, embargoes and blocked letters of credit
(LCs) to get their products to Iran.
Dubai's non-oil trade with China - 99% of it from China to the United Arab
Emirates and ultimately destined for Iran and other countries in the Persian
Gulf - had soared an astounding 47% in 2007, to a value of US$19 billion,
virtually equal to the announced direct non-oil trade between China and Iran.
Dubai ties in with the message boards' other two key elements of advice in the
evolving China-Iran trade regime: "Go euro" and "Go T/T". Go Euro as in switch
to the euro, as there are fewer national sanctions that would prevent foreign
banks from processing euro transactions. Go T/T as in telegraphic transfer, ie
wire transfer of
funds executed confidentially through the Belgium-based Society for Worldwide
Financial Telecommunication (SWIFT) as an alternative to LCs.
These efforts to remove the burgeoning China-Iran trade beyond the
jurisdictional reach of the United States - to the detriment of America's
European allies - are eliciting a variety of US responses.
President George W Bush, Vice President Dick Cheney and the US Treasury
Department's Deputy Secretary for Terrorism and Financial Intelligence Stuart
Levey have all visited the UAE in recent months to call for a cutback in the
UAE's economic activity with and on behalf of Iran. As a result, Dubai has
apparently halted incorporation of new Iran-related companies and discouraged
letter of credit Iran business by its local banks (the UAE branches of
international banks had already discontinued the practice).
As an apparent shot across the bow, the Treasury Department also deployed an
official sanction (not just a warning) against Future Bank, an enterprise in
the neighboring emirate of Bahrain, a bank co-owned by the blacklisted Melli
Bank of Iran.
Replay of Banko Delta Asia
For those of us who recall the Treasury's role in the North Korea affair,
Future Bank looks a lot like Banco Delta Asia in Macau, which was blacklisted
by the US in 2005 cutting off North Korea from the international financial
system: that is, a small bank in a secondary jurisdiction, blacklisted as a
demonstration project and a warning that the United States is ready to take
extreme destructive measures against bigger recalcitrant money center banks and
territories.
It remains to be seen whether Dubai - which is keen to develop the China-Iran
connection and less than enthusiastic about US anti-Iran initiatives that can
only cut into its growth and profits - will take the Treasury's admonition to
heart.
As for the shift toward telegraphic transfers denominated in euros, America's
threat to designate the entire Iranian banking system, including its state
bank, as participants in terrorism financing and proliferation may be an
attempt to deal with this offshoring option.
Telegraphic transfers involve shifting of private funds from an account in one
bank to an account in another bank based on a simple instruction to pay by a
depositor at a member bank. European banks handle billions of dollars of these
routine transfers every day through SWIFT. (As of December 2007 SWIFT claims to
link more than 8,000 financial institutions in 208 countries. The organization
also claims to offer a secure person-to-person messaging service that can
bypass the open Internet. More than 65% of its traffic distribution is in
Europe, less than 2% related to the Middle East.)
The US Treasury's March 20 advisory may be part of a strategy to shut down the
TT/SWIFT channel for Iranian transactions by tainting the entire Iranian
banking system.
In its March 20 advisory, the Treasury Department urged "all financial
institutions to take into account the risk arising from the deficiencies in
Iran's AML/CFT [anti-money laundering/combating the financing of terrorism]
regime, as well as all applicable US and international sanctions programs, with
regard to any possible transactions with the following Iranian institutions".
"The following Iranian institutions" was a list of virtually the entire Iranian
domestic and overseas banking system, including Iran's central bank, Bank
Markazi.
As a justification, the advisory cited a passage of the most recent UN Security
Council resolution calling for "vigilance" and a statement dated February 29
calling for "enhanced due diligence" on Iranian business by the Financial
Action Task Force (FATF), a multi-national anti-money laundering organization
based on the Group of Seven of leading industrialized nations in which the US
hopes to forge an institutionalized "coalition of the financial willing"
reside.
Then the advisory goes well beyond the circumspect Security Council and FATF
language to present Iran's terrorist and proliferation activities and the
evasive actions of Iranian banks in service of these activities as established
fact:
Iran's AML/CFT deficiencies are exacerbated by the Government of
Iran's continued attempts to conduct prohibited proliferation related activity
and terrorist financing. Through state-owned banks, the Government of Iran
disguises its involvement in proliferation and terrorism activities
through an array of deceptive practices specifically designed to evade
detection. The Central Bank of Iran and Iranian commercial banks have requested
that their names be removed from global transactions in order to make it more
difficult for intermediary financial institutions to determine the true parties
in the transaction. They have also continued to provide financial services to
Iranian entities designated by the UN Security Council in its Resolutions 1737
and 1747. The US Department of the Treasury is particularly concerned that the
Central Bank of Iran may be facilitating transactions for sanctioned Iranian
banks. [emphasis added]
Presumably, the Treasury's wish is
that risk-averse compliance departments of international banks will instruct
their operating departments to refuse all Iranian transactions and avoid the
potential regulatory and legal jeopardy that might arise from disregarding the
possibility of imminent US sanctions.
Terror finance facilitator
A further, formal US designation of the Iranian banking system as a terror
finance facilitator could provide the US Treasury Department with an additional
weapon - the prospect of subpoenaing SWIFT records on telegraphic transfers.
SWIFT's relations with the US government are currently awkward and extremely
fraught. SWIFT's reputation for banking confidentiality - a legal obligation
under EU privacy laws - was rocked by a New York Times expose in 2006 reporting
on SWIFT's cooperation with the US government on subpoenas pertaining to
terrorist financing. In response, SWIFT categorically stated it could comply
only with US subpoenas related to terrorism and specifically precluded
cooperating on investigations related to lesser crimes such as money
laundering.
If the United States goes to the next level and designates Iran's banking
system as engaging in terrorist financing, it would presumably have the
standing to subpoena SWIFT records to identify banks handling money transfers
in and out of the Iranian banking system, and threaten them with draconian
sanctions and financial penalties.
Currently, such a sanction is hypothetical, as is the willingness of the United
States to impose it - and the European Union to accept it.
It remains to be seen how much genuine international support the US can muster
for such a broad-brush approach to sanctioning Iran, one which is long on
assertions, short on evidence or due process, and goes far beyond the stated UN
consensus.
As the United States tries to stand, King Canut like, between the Iran's ocean
of cash and the shores of the international trading system, Iran's volume of
direct and indirect trade does not appear to have declined. Despite relentless
jawboning by the United States and professed unity on the importance of
pressuring Iran, execution of the US-led financial blockade has reportedly been
spotty, especially among smaller, second-tier banks outside of Europe for whom
the reputational and business risks of offending the Treasury Department are
less than dire.
There are indications that the big European banks are currently honoring the US
call for cutting ties with Iran in the breach, cutting LC ties and eschewing
dollar transactions while letting euro-denominated transactions bubble along.
Certainly, Iran's ability to export oil - and get paid for it in euros - has
not suffered.
Beyond the failure to disrupt Iran's oil exports, the United States has yet to
put an end to Iran's most strategic - and vulnerable - import: gasoline.
The US had great hopes for fostering domestic dissatisfaction with the Iranian
regime by disrupting its large gasoline imports (only the United States imports
more gasoline than Iran). At US behest, the French government pressured banks
BNP Paribas and Calyon (a subsidiary of Credit Agricole) to cut off letters of
credit for Iran's gasoline trade. The Reliance refinery in India announced it
was stopping gasoline and diesel sales to Iran. An apparent major victory was
claimed when Vitol, a Swiss trader and supplier of most of Iran's gasoline,
announced in December 2008 that it was not renewing its contract.
But guess what? Iran switched its gasoline purchases to Singapore on a euro
basis, paying in cash and, according to Reuters, even through letters of
credit.
Willing to trade - but not in dollars
Some Asian traders said some Singapore banks are willing to handle Iranian LCs,
but not in dollars. Singapore's biggest banks are DBS, UOB and OCBC. As for
Vitol, Reuters reported in a separate article: "[Iran] has purchased 12 cargoes
of gasoline of around 35,000 tonnes each for January delivery, another industry
source said. Of those, Swiss-based trader Vitol will deliver five cargoes,he
added."
So it looks as if Vitol's withdrawal from the Iran gasoline business was just
another piece of sanctions theater and the inconvenience surrounding Iran's
gasoline imports has been limited.
On non-oil trade, Iran is awash in oil revenues and can afford to pay a premium
for the aggravation of evading American sanctions to import Chinese
cement-reinforcing bar, underwear, machinery and cheap electronics.
Judging from anecdotal references on a Chinese bulletin board, it looks like
the financial costs of Iran transactions for a Chinese exporter had increased
10% as a result of the LC crackdown - an unpleasant but manageable number.
The picture of unenthusiastic compliance and vigorous evasion is similar in
matters of strategic investments. European energy companies have largely
desisted from Iran investments, preferring not to expose their extensive US
business interests to possible sanctions.
While BP, Royal Dutch Shell, Total, and GDF are holding back, China and others
are pushing forward. The China National Offshore Oil Corporation (CNOOC)
reportedly concluded a deal for a $16 billion investment in Iran’s North Pars
natural gas field in December - in the midst of negotiations on the third round
of UN sanctions.
Developments such as this create an atmosphere of anxiety, impatience and
unslaked greed - elements not conducive to an effective sanctions regime -
among Western oil companies. The BBC provided a taste in June 2007 of oil
industry opinion on Iran:
Iran's huge energy reserves are hugely
significant for the oil industry. Mr [David] Kirsch [previously of the US State
Department] says many oil firms would take the risk of upsetting the US if
others were doing the same. "What you're seeing is a strange sort of dance with
some of these energy companies and they're all hoping that another company will
be the first one in to become the lightning rod for the US reaction," he
explains. "The first company that does break ranks and makes a major investment
will lead to an opening of the floodgates," he says, meaning that if one oil
company does a deal with Iran, lots of others may follow.
The
US is working to stem the tide by deploying diplomatic and regulatory pressure
against Asian oil companies and others willing to test the blockade. It has
threatened sanctions against CNOOC, on the basis that CNOOC, by virtue of its
listing on the New York Stock Exchange, is subject to the Iran Sanctions Act.
India's Essar Group pulled out of a deal to construct a refinery in Iran after
the United States - and the governor of Minnesota - threatened retaliation
against its interests in the US.
As an intimidating step, the US has also requested a copy of a multi-year gas
deal between Switzerland's EGL and Iran valued at more than $28 billion, to
determine if the Swiss partners would be subject to sanctions.
Violation of neutrality
The US government also suggested that this apparent violation of Swiss
"neutrality" - Switzerland's foreign minister participated in the signing
ceremony in Tehran on March 17 - might dictate the termination of the
arrangement by which the Swiss Embassy in Tehran handles US interests.
Reviewing America's Iran-related activities over the past few years, a
disturbing pattern emerges. We are not sanctioning Iran so much as we are
sanctioning our unwilling allies, especially those in Europe, for continuing to
do business with Iran. This is not a trend conducive to an effective sanctions
regime. The US campaign of sanctions has not only yielded resentment and
grudging enforcement by many of our allies. It has also elicited open rancor
and even defiance.
India's aggrieved tea exporters, looking to expand exports to Iran, responded
to the State Bank of India's suspension of Iranian LCs by proposing that the
Asian Clearing Union - through which South Asia negotiates some of its
international payments - add the euro to the dollar as an approved clearing
currency.
Turkey, a linchpin of US diplomacy in the Islamic world, was surprisingly blunt
in its response to US calls to join its financial embargo. When Stuart Levey
visited Ankara in January 2008 to request that Turkey halt dealings with Iran's
Bank Mellat, the Turkish Daily News reported:
Turkey says it cannot
simply suspend Iran's Bank Mellat operations in the country upon a US request.
"What binds Turkey are the resolutions of the United Nations and not US
presidential decrees or congress decisions,"' a diplomat says ...
Even within Europe, support for the US regime is less than universal. France
has been the most aggressive and wholehearted, reining in its energy and
industrial sector and reportedly cutting off all Iran banking transactions
except euro payments under existing contracts - and only with prior government
approval. France's President Nicolas Sarkozy also showed his support for the US
strategy by lobbying aggressively but unsuccessfully for additional Iran
sanctions at the EU level during the negotiations over the third Security
Council resolution.
At the other end of the spectrum are Austria and Switzerland, which have openly
and adamantly insisted on enforcing the letter of UN sanctions and no more .
Each has defiantly concluded gas deals with Iran. Austria's foreign minister
went on record in October 2007 to state: "The basis of sanctions against Iran
are the resolutions of the United Nations Security Council ... France is free
to slip in changes [in its national sanctions but not try to expand EU
sanctions]. We stick to our positions."
Violations of sanctions' spirit
As for Switzerland, despite a barrage of full-page advertisements placed by the
Anti-Defamation League in the International Herald Tribune, Wall Street Journal
and New York Times on April 8 to support the US position that the EGL gas deal
violated the "spirit" of the UN sanctions - headed "Guess who is the world's
newest financier of terrorism? Switzerland" - AFP reported that the Swiss
government and industry groups are not backing away from the transaction.
[A
Swiss government spokesman stated] the contract "is in full conformity with the
existing UN sanctions against Iran", as well as the US Iran Sanctions Act. He
also pointed out that there are at least 10 other countries with major energy
deals with Iran, including Japan, France and Italy ... Swiss industry leaders
too, were unfazed by the criticism. EGL spokesman Bogdan Preda said Wednesday
he had no further comment on the issue, other than to reiterate that the deal
"respected all national and international agreements".
The president of Swiss energy group Axpo, of which EGL is a member, Heinz
Karrer, told tabloid Blick that it is "incomprehensible" that Switzerland is
seen to be financing terrorism, pointing out that "many other countries" also
obtain energy from Iran. Head of the Economie Suisse business umbrella group
Gerold Buehrer also told the newspaper that he "stood behind the deal at the
beginning", and that he "still stands behind it".
With this mix of support, resistance, and non-compliance, the question is, if
the United States designates Iran's entire banking sector as a facilitator of
terrorism and proliferation, will the European banks and governments go along
with this draconian step, in a combination of conviction and self-interested
calculation that Europe's competition in Asia will get cut off at the knees?
The answer may have a lot to do with whether Europe believes that Iran can
provide vindication of the sanctions regime that has eluded the United States
so far on Cuba, Libya, and North Korea - and justify the costs to America’s
allies. The answer may not be one that the US administration is prepared to
hear.
Election consequences
In December, the General Accounting Office titled its review of the US
government's anti-Iran activities under the gloomy title "Iran Sanctions:
Impact in Furthering US Objectives Is Unclear and Should be Reviewed". The
Guardian summed up the apparent futility of Washington's sanctions approach in
its report on Iran's recent parliamentary elections:
The [Iranian
March] election has strengthened the hand of Iran's Revolutionary Guard, a
militantly conservative force with growing control over the economy. At least
120 of the 290 members of the new parliament will be former guardsmen like
President Mahmud Ahmadinejad. The election results are a blow to advocates of
sanctions as a means to pressure Tehran into suspending uranium enrichment,
which the country's critics allege is a cover for a secret arms programme. Iran
insists it is for energy generation.
A year ago US and British diplomats were pointing to criticism of Ahmadinejad's
combative style on the world stage as evidence that economic pressure was
working. "It's hard to see that now," a western diplomat in Tehran admitted.
Even reformists say sanctions do more harm than good, by making Iranians close
ranks around the leadership ... The elections took place in the wake of a third
wave of sanctions imposed by the UN security council, and as the US attempted
to tighten the ring around Tehran by imposing sanctions on a Bahraini bank
partly owned by Iranian state-run financial institutions.
Saeed Leylaz, a liberal political analyst in Tehran, said the election outcome
demonstrated the bankruptcy of western policy. "[Radical conservatives] like
it. They like isolation to cover and hide their mismanagement behind sanctions
and to have more control internally."
Bear in mind, people like Saeed Leylaz are the people we are supposed to be
helping with sanctions. While the effectiveness of sanctions is questionable,
the costs to Europe of the US sanctions regime are unmistakable.
The pressure that the United States is exerting on Iran's economy through the
financial system is genuine and significant ... but so is Iran's shift away
from the dollar and the reorientation of its trade and strategic relationships
toward Asia. These tectonic shifts may dictate that Europe decides to co-exist
with the reality of the Asian-Iranian relationship, instead of futilely
attempting to strangle it in its cradle. The open question is whether these new
realities will be addressed - or even acknowledged - in the United States as
America's Iran policy evolves.
Opportunity for China
Ambiguity - and the threat of drastic unilateral American action - are at the
heart of the US Iran diplomatic strategy. So far, US tough talk and stern
measures have all occurred within the moderating context of the G5+1 (UN
Security Council members plus Germany) process. The next G5+1 meeting on Iran,
scheduled for Shanghai on April 16, could provide China the opportunity to
burnish its currently tarnished international image by taking the lead on the
Iran issue. Iran's Press TV reported on April 9 that Russia, a good indicator
of China's stance on Iran, apparently feels that more inducements rather than
more sanctions is what the situation demands.
[Russian Foreign Minister
Sergei] Lavrov in an interview with Ekho Moskvy radio on Tuesday said that
offering new incentives to Iran is aimed at persuading Tehran to freeze its
uranium enrichment program. The Russian foreign minister also voiced his
country's opposition to new sanctions against Iran over its nuclear program.
"We must focus on drafting new positive proposals now," AP quoted Lavrov as
saying.
The Russian top diplomat declared that the proposals drafted by diplomats from
the US, Russia, China, Britain and France, along with Germany, would offer Iran
new economic, energy and security incentives to Iran.
The iron
law of US diplomacy at present seems to dictate that it can only enter into
Iran-related discussions with a coercive unilateral instrument close at hand to
deploy if discussions don’t go our way. At this time, the most readily
available weapon is the threat to escalate the March 20 warning concerning the
Iranian banking network to a full-fledged sanction.
It may turn out that the sanction threat will serve primarily as America's
latest bargaining chip in the endless game of high stakes poker between Iran,
Europe, China, and the United States, and not be the harbinger of total
financial warfare against less-than-enthusiastic allies or an imminent US
attack against Iran.
Another indicator of Washington's intentions and militancy on Iran will be what
happens to the CNOOC deal.
Despite its growing economic and strategic embrace of Iran, China is not eager
to seek open conflict with the United States. China's former ambassador to Iran
commented in the Chinese media that China would hesitate to openly welcome a
sworn enemy of the United States into the Shanghai Cooperation Organization.
China, obviously aware of the diplomatic and regulatory pressures that the US
brought to bear on the Swiss gas deal and Indian refinery project, has
circumspectly declined to officially announce the conclusion of the CNOOC deal
and give the United States an opening to demand a copy of the agreement.
Nevertheless, the Chinese Ministry of Foreign Affairs went on record to draw a
line in the sand on the CNOOC contract, an indication that it isn't ready to
pull the plug on the deal in response to US pressure:
The energy
cooperation between CNOOC and Iran is nothing beyond a business deal between
relevant enterprises. ... UN Security Council's resolutions and actions should
contribute to the peaceful solution of the issue through dialogue and
consultation. Actions against Iran should not affect or impair normal economic
and energy cooperation with Iran.
The possibility that CNOOC
may simply delist from the already beleaguered New York Stock Exchange in
response to sanctions and seek a more hospitable home elsewhere could figure in
Washington's calculations as to the advisability of sanctioning CNOOC.
In the last year of President George W Bush's term, with the world looking
beyond him to a new president and more flexible policies, the result of
additional sanctions may not be as dramatic as the United States desires and
Iran fears. However, the unanimous desire of American political parties and
candidates to be tough on Iran in an election year, and the geo-political
ambitions of pro-American leaders Nicholas Sarkozy and Silvio Berlusconi -
expected to return as Italy's president - could tilt the global balance in
favor of escalating the confrontation with Iran and lock the next US
administration into a hardline anti-Iran posture.
Nevertheless, even if Bush claims a short-term victory for his legacy of
US-orchestrated national sanctions and zero-sum confrontation with Iran,
circumstances lead one to believe that Iran, an oil exporting nation with
significant foreign exchange reserves, powerful friends and a significant
number of unenthusiastic enemies, can survive even formal, across-the-board
financial ostracism.
The long-term result will probably be the rise of the euro, and the loss of
America's post-World War II dollar-based world financial hegemony - accelerated
by a significant shift in the Middle East's political and economic center of
gravity toward Asia, led by Iran.
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:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
Part 1: 
