Nuclear deal could ease Iran's bank restrictions

30 March 2015

Any easing of Iran trade rules needs support of workable banking system

  • Some banks allowed to deal with Iran within very narrow boundaries
  • Iran remains excluded from Swift – the global bank messaging system
  • Any easing of trade restrictions will need support of banks to fund trade flows

The potential easing of restrictions on Iran’s banking system is likely to be a key topic of discussion at the nuclear deal talks drawing to a close in the Swiss city of Lausanne.

Representatives from the US, Germany, the UK, France, China and Russia are taking part in the talks with Iran, which aim to agree on a framework deal by the self-imposed deadline of 31 March.

The aim of the talks is to limit Iran’s nuclear proliferation programme and, in return, ease some of the economic sanctions that have been imposed on the country.

It is not yet clear what form of agreement will be reached by the end of March and whether just a joint statement or a more elaborate plan will be publicly released.

Yet any potential easing of trade embargos on Iran will require the easing of restrictions on European and US banks being able to work with Iranian banks.

“For trade to really happen, it is just as important as to have the banking, insurance and shipping sectors in place,” says Farhad Alavi, a US-based lawyer at Akrivis Law Group, who specialises in Iran sanction issues

“I would suspect that banking is featuring prominently in the discussions,” he adds.

Under current restrictions, banks are not able to work with Iranian banks unless the transaction falls within very specific sectors and secures specific approvals.

Not only do European regulations forbid banks to deal with Iranian banks, US sanctions also penalise international banks that do business in Iran outside the narrow band of exceptions.

Iranian banks are also excluded from the international electronic financial-messaging service, the Society for Worldwide Interbank Financial Telecommunications (Swift).

This organisation transmits billions of bank-to-bank messages enabling money to be transferred quickly and efficiently globally between banks. In 2012, the organisation had to cut off Iranian banks from the system to comply with European law.

This means it has become incredibly hard for companies operating in Iran to transfer money in and out of the country.

Alawi says that the questions surrounding Swift will be one of the key issues banks will consider if the Iran deal sees trade restrictions ease.

“Many banks will await the movement of larger names into [Iran) before they consider re-establishing ties – and one of the big determinants of this is whether Iran will be readmitted to Swift,” he said.

Currently one of the means of moving money out of the country to pay import bills, for example, is to process the transaction through the Central Bank of Iran.

Under the P5+1 interim agreement signed in November 2013 with Iran and the countries that make up the P5+1 group (the US, the UK, France, Russia, China and Germany), Iran was able to access a certain amount of hard currency from overseas funds to fund permitted transactions. These included the purchase of spare parts for US-made civilian aircraft, tuition for Iranian students and humanitarian purchases of good and medicine.

Even the narrow selection of goods that can legitimately be imported into Iran could potentially represent a potentially large market for international companies to exploit.

“But that is not happening because the banking situation is very difficult,” Says Alavi.

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