The Financial Restrictions (Iran) Order 2011 of 21st November is the most draconian form of unilateral sanctions ever introduced by the Government – and it does an awful lot more than it says on the tin. UK exports to Iran are already estimated to be down by 58% in the last 3 years. With protests outside the British Embassy in Tehran and William Hague's decision to close Iran's embassy in London, is British Iranian trade on its last legs? The Order prohibits banks and insurance companies who operate in the UK (and their worldwide branches) from entering into or continuing to participate in any transaction or business relationship with an Iranian bank.
Initial Reactions
The initial reaction of British banks and exporters to Iran was to shrug their shoulders. So what is new? For some time now, British banks have voluntarily chosen to refuse to allow customers to receive monies from the few remaining non-sanctioned Iranian banks.
Payment Routes
British exporters tend to have long established routes allowing them to legitimately receive monies from Iranian banks. Let me explain how. A British exporter sells and ships 10,000 widgets to a customer in Iran. The Iranian customer transfers money from his account with an Iranian bank to his second bank account in Turkey. The British exporter also happens to have a bank account in Turkey. So the funds flow from the Iranian buyer's Iranian bank to the Iranian buyer's Turkish bank and then on to the British exporter's Turkish bank. From there, the British exporter simply transfers monies over to his London bank as he pleases. But there is one snag. EU regulations enacted in October 2010 prevent the London bank from receiving monies in excess of €40,000 from an Iranian person unless HM Treasury has first provided authorisation. The London bank would never knowingly allow this to happen. However, under the October 2010 regulations, the British exporter can (arguably) apply himself to HM Treasury for authorisation "on behalf of" his London bank - who remain in blissful ignorance. The London bank will not be aware of the authorisation request and simply sees a payment coming from a Turkish bank.
Endgame
The sea of change lies in HM Treasury's interpretation of the Order of last week. It was initially considered that the Order prevented any direct participation between an Iranian bank and a British bank. This led to a shrug of the shoulders since no direct transactions have been taking place in the ordinary course of business for some time now and traditional payment routes would remain unaffected.
However, HM Treasury have since confirmed that under the Order "It is also prohibited [for a British bank] to participate in transactions involving indirect payments from Iranian banks, such as those made through one or more intermediaries."
Such interpretation will have a devastating impact on the way UK exporters traditionally trade and get paid. The only solution available for British exporters will be to receive payments into a non UK bank account. But if HM Treasury's interpretation is taken literally, the British exporter will never be able to bring those funds into a UK bank. Pending further clarification from HM Treasury, UK banks now appear to be officially closed to any payments – whether direct or indirect - from Iranian banks.
The US
The US has last week introduced further sanctions. The bottom line is that the US may place sanctions on any non US entity or person involved in the Iranian oil and gas or petrochemical sectors. Oil is Iran's main source of income, earning it $56 billion in the first seven months of 2011, according to US Energy Department estimates. Further, about 50 % of Iran's non crude oil exports come from the sale of petrochemicals. The US is telling the rest of the world that they shall have to choose between doing business with Iran and the US. They also announced a proposal (not yet implemented) to require US financial institutions to take steps to ensure that none of their relationships with foreign financial institutions are used to provide direct or indirect access for any Iranian entity to the US financial system. This will in result in US banks being required to obtain written certification from non US correspondent and other banks that a particular transaction does not involve Iran. In practice, some US banks will likely refuse to deal at all with any bank failing to certify that it has no dealings with Iran.
The UN
It is unlikely that we will see any significant sanctions enacted by the UN. Russia and China have made clear that they will oppose such a move.
The EU
It is widely anticipated that the EU will imminently add a further tranche of Iranian banks, companies and persons to its asset freeze later today. The addition of further Iranian banks would be devastating for international trade with Iran, in particular, if Germany succeeds in persuading France to agree to shut down Bank Tejarat in Paris. It is anticipated that moving forward finance will be channelled through Russia and China who need comply only with UN sanctions. Germany (amongst others) is said to be leading a call for an EU ban on Iranian oil exports although we understand it is unlikely this will be agreed by the EU. Iranian oil exports to the EU amounted to 18% of Europe's Iranian goods received during the first six months of 2011, with the majority being supplied to Italy, Spain and Greece. If the EU does not reach consensus, it is likely we will see unilateral action being taken by individual EU countries.
The end result of the current push on sanctions will likely be a devastating blow to EU exporters and manufacturers who hitherto legitimately serviced Iran, a potential threat to the world economy, reliant as it is on Iranian oil and a boon for China, India and Russia who have already marched in and taken business from under the nose of their EU competitors. Turkey shall have to decide whether it will relent to growing EU pressure.
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