Economy, Business And Markets

European Court Ruling in CBI’s Favor

European Court Ruling  in CBI’s Favor
European Court Ruling  in CBI’s Favor

Unilateral sanctions imposed on the Central Bank of Iran since January 2012 by the European Union have had a significant role in the relationship between Tehran and the 28-member block. Undoubtedly such restrictions had made both parties worse off regarding their international trade, international relations and also transfer of money among traders and merchants both in Iran and the Europe. The first symptom, which shows that these restrictions have worked, has been observed in transaction costs.

In terms of transaction costs, anyone engaged in trade with Iran has had to find a shortcut to bypass the sanctions. Under such conditions the emergence of dealers is inevitable. With more dealers in the transaction process, the more costly it will be. But this situation now is an albatross around the EU’s neck. Lack of enough evidence against the CBI compelled the court of justice to strike down the restrictions towards the bank. Although this is a small verdict in the scheme of things, which means that elimination of restrictions will not take place immediately, it has opened a new chapter in the future international relations with the Islamic Republic. The possible effects of this decision could be analyzed from different aspects if it is enforced.

From an international point of view, elimination of central bank’s sanctions opens the doors for traders both in Iran and Europe. This will end up in minimizing the transaction costs and there would be no room for dealers to be engaged in international transactions. Hence the ultimate consumers of goods and services will incur less cost and the social welfare will improve. But this is one side of the coin. So far the transactions between Iran and China as well as Iran and India have taken place in form of barter. Besides, China has had the right to keep Iran’s proceeds from oil exports in yuan and make use of these funds. Total funds in China and India stand at about $90 billion -- $56 billion  in China, and $34 billion in India respectively.

The nature of barters has been an obvious discrimination for sure and the goods imported to Iran in exchange of oil have been an important hindrance in development of Iran’s industries. Enforcement of the recent decision of the Court of Justice will put an end to this opportunity for China and India; hence Iran’s economy would not be forced to import unnecessary goods instead of receiving petrodollars

Another aspect which is worth pointing out, is the presence of international companies in Iran. The ongoing negotiations between the Islamic Republic and the so-called P5+1 and its current positive trajectory, have motivated international investors to be more willing to start investing in Iran. The most important concern of investors has been sanctions, especially those against the central bank, which acts as the main obstacle for absorbing investors’ funds and also transfer of funds abroad. The enforcement of the court of justice decision will be a turning point in business environment of Iran. Under such conditions a safe environment will be provided to foreign investors to engage in mutual projects in the country; hence a wide variety of projects can be funded by means of foreign investment.

One of the sectors with a considerable advantage for investors is the oil, gas and petrochemical sector. This advantage could be observed by the degree of attendance of international companies’ representatives in a recent forum held by the National Petrochemical Company of Iran. Many analysts believe one of the main problems regarding investment is the role of sanctions. It acts as an obstacle to transfer funds freely to, and from Iran. Any suspension or elimination of financial restrictions thus creates an opportunity for Iran to be beneficiary of foreign investments.

The last aspect deals with the independence of the central bank. The main reason by which the EU imposed restrictions on the central bank was the CBI’s contribution to the government to overcome economic sanctions. This reason, by the way is not logical enough since the CBI has always been dependant on the Iranian government in accordance with contributions. Such circumstances undoubtedly emphasize the necessity for the central bank to become independent. As an independent entity, the central bank will then be dealing with its main task which is implementation of sound monetary policies. In that case, there would be no room for international legislative authorities to step in and disturb inter-country financial relations.

To sum up, the recent verdict of the EU court will be the starting point of a new chapter in the Islamic Republic relations with the world. This could be a win-win situation which would result in having less transaction costs and more investment opportunities.