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The Banking Bane
Economy, Business And Markets

The Banking Bane

Iranians ushered in the New Year with renewed optimism for better living conditions for the 80 million population after enduring a decade-plus of hardship imposed by the unjustified and harsh economic sanctions and the disastrous policies of the two-term presidency of Mahmoud Ahmadinejad (2005-2013). The diplomatic and economic opening which ensued last year’s nuclear deal with the US and six other world powers, has been central to President Hassan Rouhani’s efforts in undoing the damages of the sanctions era and putting the country back on track — a point driven home by him in his live TV address marking the first day of Nouruz (March 20.)
This sanguine mood, however, has been soured by the continued saga surrounding the nuclear agreement: remaining US sanctions deterring European and other international banks from engagement with Iranian companies. In fact, Iran has been complaining that it is not getting the benefits promised by the Joint Comprehensive Plan of Action (JCPOA) implemented in January based on which the country took thousands of its uranium-spinning centrifuges offline.
This was a point emphasized by the Leader Ayatollah Seyyed Ali Khamenei in his annual Nouruz address. He accused Washington of undermining the spirit of the sanctions relief outlined clearly in the nuclear deal with the six powers. In particular, he referred to “big corporations, big institutions and big banks’’ not daring to work in and with Iran because ‘’the US Treasury” scares them away. Emphasizing the need for relying on domestic talent and resources, the leader proposed the “Resistance Economy: Action and Implementation’’ as the central tenet of incoming Iranian year.

 Home Truths
Although the nuclear deal has made possible the release of an estimated $130 billion in frozen Iranian assets and paved the way for Tehran to regain access to the SWIFT network (Society for Worldwide Interbank Financial Telecommunications)—allowing it to transfer funds across the global electronic banking system, the seven-nation pact is far from a perfect, clear-cut, mutually rewarding agreement.  Chris Backemeyer, the US State Department’s principal deputy coordinator for sanctions policy, acknowledged last week that “[Iran] sanctions are very confusing.’’ Blackemeyer, who was in Dubai to promote the Iran deal to wary firms said, however, was there to explain that US-based companies with overseas subsidiaries potentially could do deals in Iran, so long as the money moved through foreign banks.
The ambiguity surrounding the nuclear deal-- some foreign sources have told the Financial Tribune this could be intentional so there is room for US maneuvering—has its root in the long history of deep-seated acrimony between Iran and the United States. Iran still remains on the so-called American list of “state sponsors of terrorism” and as a jurisdiction of “primary money laundering concern.” Sanctions are also in place over Iran’s ballistic missile tests, barring US banks from directly handling transactions involving the Islamic Republic and Iranian businesses from conducting deals in the greenback.  
Of concern is also the opposition by hardliners in both Iran and the US to the nuclear deal. While the threat might be less immediate in Iran --with hardliners being marginalized in the February parliamentary elections -- it is more seriously felt in America. Congressional Republicans are among the most hawkish opponents of President Barack Obama’s diplomatic outreach to its longtime rival but they have so far lacked the majority to kill the deal. Republican presidential wannabes for November election, however, could do the unthinkable and attempt to undo the hard-won agreement.    
The bombastic frontrunner Donald Trump was given a standing ovation at the American-Israel Public Affairs Committee (AIPAC) conference this week after saying his ‘’number one priority is to dismantle the disastrous deal with Iran’’ if elected president. The ultra-conservative senator Ted Cruz who is positioning himself as the alternative to the real-estate billionaire, has also vowed to ‘’rip to shreds the catastrophic Iranian nuclear deal on day one.’’
But Iran and the rest of the world will obviously not give in to warmongering speeches from candidates who barely have credibility within their own ranks leave alone world public opinion. The blustering rhetoric from GOP candidates (seen for almost for decades) notwithstanding, Iran will continue on the path of diplomacy and rational engagement with the comity of nations.

 Jaw-Jaw Better Than War-War
However well-intentioned the opposition from domestic critics of the nuclear deal might be, the Rouhani administration should first and foremost assure a wary public that the benefits of the nuclear deal with world powers will come in fits and starts. There are now signs that his administrations’ pursuing of detente with the world is bearing fruit, even in the complex finance and banking sectors.    
Speaking at the Royal United Services Institute (RUSI) in London on March 10, Mohammad Nahavandian, President Rouhani’s chief of staff, urged British banks to take the lead in restoring relations with Iran, recalling that the first come is first served when it comes to doing business with his country. Indeed, Britain is appearing to heed his words: coinciding with Nahavandian’s visit, British Prime Minister David Cameron wrote a strong-worded letter to Barclays, contending that the largely state-owned bank’s refusal to process payments from Iran is “in opposition to the policy of the UK government.”  
According to the Times, the Royal Bank of Scotland is also coming under pressure after the Cameron’s intervention. Cameron’s move is significant and timely as Tehran is due to host a major British delegation in May headed by UK Business Secretary Sajid Javid.  
And in what could be regarded as a major political victory for Tehran is the recent revelation that the Obama administration--to the chagrin of its congressional adversaries -- is considering easing financial restrictions that prohibit US dollars from being used in transactions with Iran.  
American officials told The Associated Press on Thursday the Treasury Department has prepared a general license permitting offshore financial institutions to access dollars for foreign currency trades in support of business with Iran, a practice that is currently illegal. In a speech Wednesday, Treasury Secretary Jack Lew said, “Since Iran has kept its end of the deal, it is our responsibility to uphold ours, in both letter and spirit.” In an about-face from previous comments, Lew warned that “sanctions overreach” risked driving business away from the United States, hurting the US and global economy and empowering economic rivals.

 Constraints  
Because of its status as the world’s dominant currency, the dollar often is used in money conversions. For example: If Iran wants to sell oil to India and be paid in euros instead of rupees, so they could more easily purchase European goods, the process commonly starts with the rupees being converted into dollars.
Existing American sanctions block Iran from exchanging the money on its own. Asian and European banks have steered clear of such transactions, fearful of US regulators who have levied billions of dollars in fines in recent years. Using dollars to make even a rupees-to-euros conversion, following that example, would still involve the money entering the US financial system, if only momentarily. A tweak to these rules could prove significant for Tehran’s economy.
Although some major sticking points would continue to pose challenges —Iran’s ballistic missile program being a likely bone of contention—patient dialogue and diplomacy should win the day. A glance at America’s history shows there have been a lot of arms-control agreements and nuclear agreements that have been violently opposed by the party that was not in the office at the time, but most of them had to live with them afterwards.
Therefore, even a Republican in the White House in 2017 should not be considered the coup de grace for the seven-nation nuclear accord.  Meanwhile Iran should keep on with its economic reforms including meaningful changes in its outdated banking system. Sanction relief is indeed a welcome move but real reform always begins at home.

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