Hermes Cover Success Depends on Iran Banking Ties

In what was another auspicious development for Iran, Euler Hermes has offered to cover Iranian projects, which move is expected to ease the flow of investment into Iran and enhance the country’s status. 

However, a lack of full-fledged banking ties between Iran and Europe is preventing the complete benefits of the German sovereign guarantee to be felt by Iran.    

On Tuesday, the German Economy and Energy Minister Brigitte Zypries announced during her meeting with Iranian Foreign Minister Mohammad Javad Zarif in Berlin that the country’s leading provider of trade credit insurance  is interested in insuring investments in Iran, especially in energy and electricity sectors.

The export credit guarantees offered by the German company and government are an important part of the country’s foreign trade policy and provide an expanded array of insurance options, mainly targeted at exports to developing countries such as Iran.

However, while the support of a credible ECA such as Hermes will help encourage banks, lenders must be willing to provide finance in the first place.

“The insurance coverage of Hermes alone is not enough and there must be a bank or financial institution behind it to be able to provide the funds,” Ferial Mostofi, the head of Investment Commission at the Iran Chamber of Commerce, Industries, Mines and Agriculture, told Financial Tribune. 

She noted that currently, a number of second-tier European banks do lend support, but things are far from perfect as Iran is still unable to enjoy ties with major German and European banks. 

As Mostofi outlines, “big lenders remain wary of working with Iranian banks because they fear they might be fined and this causes a number of difficulties when it comes to procuring support for major projects”.

After the implementation of the Joint Comprehensive Plan of Action, as Iran’s nuclear deal with world powers is formally known, all sanctions imposed on the Iranian banking system were lifted, but hefty penalties imposed on a number of banks for working with Iran during the embargo have created understandable hesitancy in others.

BNP Paribas, ING and Commerzbank AG were among lenders that were slapped with US penalties partly for dealing with Iran. BNP Paribas had to pay a record $9 billion. 

But considering the fact that President Hassan Rouhani has won a second term on promises of promoting economic development and ending isolationism, investors hope for improved ties.   

This is evidenced by the efforts of the Export Guarantee Fund of Iran to expand ties with various export credit agencies since the lifting of sanctions. EGFI has held talks with institutions across the world, including the United Kingdom Export Finance, Japanese Nippon Export and Investment Insurance, Export Credit Guarantee Corporation of India, South Korea’s K-Sure and Italy’s SACE.

But widespread and much-needed banking reforms are prerequisites for achieving this goal, as the president himself said last week that reforming the banking sector will be at the center of his agenda.

Internal Reforms 

The head of Investment Commission with ICCIMA also referred to these reforms, stressing the necessity of upgrading Iranian lenders and making them conform to international regulations, namely those related to capital adequacy and financial transparency.

Mostofi pointed to the recent verdict of the Financial Action Task Force, the global standard-setting body for anti-money laundering and combating financing of terrorism regulations, which ruled that the suspension of active countermeasures against Iran will be extended indefinitely.

She said the ruling shows that Iranian banks are moving in the right direction and have made changes to adhere to the standards of the Paris-based intergovernmental agency, but their measures have not been sufficient for the country to be removed from the blacklist altogether.

“However, one must remember that such a process is time-consuming and cannot happen very soon,” she added.

Mostofi believes that the FATF’s lack of deadline for suspension of countermeasures against Iran this year is not of much significance, as the organization will automatically review the Iran dossier next year. 

Responding to Financial Tribune, the chief executive of London-based Persia International Bank, Mohammad Meskarian, said Iran has taken forward the AML/CFT requirements for all Iranian banks, which will be notified to FATF to address its concerns.