US Weighing Sanctions to Cripple Iran Humanitarian Trade

The Trump administration is reportedly considering a new set of sanctions designations targeting 14 Iranian banks that are not currently subject to secondary sanctions. The new designations would be made under authorities associated with “terrorism, ballistic-missile development and human-rights abuses.” The targeting of these banks would cripple Iran’s already degraded channels for the importation of humanitarian goods—including food and medicine—at a time when the country is battling the COVID-19 pandemic.

This new proposal, spearheaded by the Foundation for Defense of Democracies, long-time opponents of the 2015 nuclear deal, would be the latest and most extreme in a series of sanctions moves intended to deliberately undermined long-standing protections for humanitarian trade. Proponents of the proposal believe that it will be “possible to mitigate the humanitarian costs, chiefly through so-called comfort letters from the Treasury Department.”

However, considering the precedent set by the Trump administration, there is no reason to believe that the humanitarian costs can be mitigated. In 2019, Iran imported over $1 billion of pharmaceutical products and over $3.5 billion in cereals. This trade is so sizable that no degree of licensing or special accommodations by the Treasury Department, nor any recourse to the still non-functional Swiss Humanitarian Trade Arrangement, will suffice to ensure that ordinary Iranians are not unduly impacted by the consequences of the move. In short, the Treasury Department lacks the means to designate these banks while ensuring that Iran’s imports of food and medicine remain routine and reliable.

The designation would have three distinct consequences:

1.     Iran’s rial would lose value.

The designation would serve as a supply-side and demand-side shock for Iran’s foreign exchange markets. On the supply-side, the closure of the few remaining correspondent banking channels between Iran and the global financial system would make it near-impossible for Iranian exporters to repatriate foreign exchange revenue. This makes it significantly more expensive for Iranian importers to purchase foreign exchange through the centralized NIMA exchange.

On the demand-side, ordinary Iranians will respond to the new uncertainty by seeking to convert more of their savings into foreign currency, pushing up the free market exchange rate, beyond its recent historic highs. The net effect will be that all Iranian imports become more expensive in the short-term, exacerbating the already significant inflationary pressures that have seen year-on-year inflation rise as high as 50 percent in recent months. Because Iran imports significant volumes of food and medicine products, these humanitarian goods will likewise become more expensive for Iranian households. 

2.     There would be a liquidity crisis around Iran’s humanitarian trade. 

While foreign currency within Iran would become more expensive, the foreign currency held by Iranian these banks and their Iranian clients in accounts outside of Iran will be frozen . Since the Trump administration hit Iran’s central bank with a new designation in September 2019, it has become increasingly difficult for the Central Bank of Iran to freely use its funds for the purposes of facilitating humanitarian trade as long allowed under US sanctions exemptions. In July of this year, Reuters reported on how these challenges were having a direct impact on Iran’s ability to make payments for purchases of food commodities such as grain and soybeans.

In the face of these challenges, Iranian pharmaceutical and food importers have increasingly used funds held by private sector banks and companies outside of Iran as means to make payments for goods. These funds are often held at accounts belonging to Iranian banks at foreign financial institutions in countries such as Turkey, South Korea, and China. If these Iranian banks are designated in a manner that eliminates the clear exemptions for the use of Iranian-origin funds for humanitarian trade, foreign financial institutions will be obligated to freeze the accounts of Iranian banks and their clients.

Such a situation, which is functionally the same as the situation facing funds belonging to Iran’s central bank, would contribute to a sudden liquidity crisis. Even if European and Asian companies remain willing to sell humanitarian goods to Iran, and even if the Treasury Department issues new licenses and comfort letters to try and reassure companies about the permissibility of these sales, Iranian importers will struggle to source the foreign currency needed to pay for these goods. This will likely contribute to significantly more delays in the importation of food and medicine which could lead to issues of scarcity and affordability.

Because of the restrictions imposed by sanctions on Iran’s banking sector, the financial transactions that enabled these imports are facilitated through an increasingly complex and fragile set of banking channels. Iranian importers and their suppliers are required to have multiple channels, knowing that new sanctions designations or financial circumstances could render any channel non-viable overnight. This byzantine system is the direct opposite of the simple, reliable banking channels countries need to ensure the availability of food and medicine. Targeting these key Iranian banks with new sanction will smash the remaining few reliable channels. 

3.     Many global pharmaceutical and food companies would quit the Iranian market.

Among the banks that may be targeted are those Iranian institutions that have gone to the greatest lengths to adopt anti-money laundering and counter terrorist financing policies, including those policies recommended by the Financial Action Task Force. While such policies have been only partially implemented across the wider Iranian financial system, these banks have instituted policies that exceed regulatory requirements in Iran in order to effectively serve Iranian importers and the multinational pharmaceutical and food commodities companies that supply them. These banks take an active role in helping these companies meet the stringent due diligence requirements necessary to successfully process Iran-related payments at banks in Europe and Asia. The impact of such a designation on these banks would be grave.

We know this because of the experience of Parsian Bank, a similar private sector financial institution which became subject to a terrorism-related designation in October 2018. As reported by the Washington Post, the designation of Parsian Bank left many multinational companies, including German drugs giant Bayer, scrambling to transfer their accounts to new Iranian banks in order to maintain their sales to Iran. But should the Trump administration move to designate all the remaining banks, there will be no alternatives available.

This will be a significant blow to the operations of many multinational companies which still maintain a local presence in Iran—companies overwhelmingly involved in the importation and production of food and medicine. Given these new operational restrictions, it is likely that many of the European and Asian companies still selling into Iran will either temporarily or permanently cease operations. As an employee at Bayer Iran commented to the Washington Post on the impact of sanctions on foreign pharmaceutical companies in Iran, “Many companies have started limiting their activities and laying off employees.”

Consequences for the US

What is striking about the proposed sanctions is the lack of any clear policy rationale for their imposition. The targeting of these banks in no way advances the Trump administration’s stated aims to curtail Iran’s “malign behaviors.” These banks are not significant vectors for money laundering and terrorist financing nor are they substantively linked to the Iranian government nor entities such as the Islamic Revolutionary Guard Corps. These banks have not been designated so far under the proposed authorities precisely because they are unlike most other Iranian banks. It is these distinct governance and operational characteristics that have enabled several of these banks to play a crucial role in humanitarian trade. As such, there is no national security justification for the designations—the only clear impact will be the further immiseration of ordinary Iranians as the supply of food and medicine becomes increasingly erratic.

Those who support targeting these banks have spoken openly about their intention to make future diplomacy with Iran more difficult in the event that Joe Biden wins the election in the next few weeks. This admission itself exposes the cynical thinking behind the proposal. But more consequentially for those individuals who have spent more than a decade developing US sanctions powers, the application of sanctions in the manner being proposed will no doubt damage the credibility of US sanctions as a tool of foreign policy.

Following significant concerns raised by governments, international organizations, and activists about the ability of sanctioned countries to respond to the COVID-19 pandemic, the Treasury Department issued a new fact sheet in April to clarify the exemptions and general licenses that govern humanitarian trade. At the time, OFAC director Andrea Gakci reaffirmed her office’s commitment to protecting “humanitarian relief efforts related to the COVID-19 crisis.”

The factsheet touted the launch of the Swiss Humanitarian Trade Arrangement (SHTA) as a model financial channel that would enable food and medicine to flow to Iran. SHTA has processed just one transaction during the COVID-19 crisis in Iran. One of the principle challenges facing SHTA and similar financial channels being considered is the failure of the Treasury Department to clearly permit the Central Bank of Iran, to access the foreign exchange reserves necessary to make payments through the channel. Such impediments will only get worse if Iran’s private sector banks are made subject to a similar designation as the central bank.

“Maximum pressure” sanctions are increasingly seen by US allies, and not least the Iranian public, as so poorly targeted as to intentionally harm the health and wellbeing of ordinary Iranians. Any move to designate the remaining Iranian banks at the heart of the country’s humanitarian trade would not only confirm this view of US sanctions policy, but also serve to directly undermine the commitments made by US officials, including Treasury Secretary Steven Mnuchin, who stated in April that his department was “committed to working with financial institutions and non-profit organizations in their efforts to mitigate risks and allow humanitarian assistance and associated payments to flow to those who need it.” Mnuchin should stand by his word and the US government should stand by its principles—the proposal to designate these banks must be rejected.

Photo: IRNA

After UN Showdown, INSTEX Can Help Sustain Iran Nuclear Deal

In return for limits to Iran’s nuclear activities under the 2015 agreement, or the Joint Comprehensive Plan of Action (JCPOA), the other side—the United States, the EU/E3 (France, Germany and the UK), China and Russia—were supposed to lift sanctions on the country. The US opted out of this compromise in May 2018 by withdrawing from the JCPOA. By deterring most private sector actors from Iran-related activities, US secondary sanctions have also prevented other JCPOA parties from living up to their end of the deal. In addition to a deep socio-economic crisis within Iran, US sanctions have undermined Iranian people’s access to basic humanitarian goods--and pushed the country to reduce its nuclear commitments. The EU and E3 efforts to protect the JCPOA under these circumstances have offered a grim lesson about the limits of European autonomy in a dollar-dominated world economy. 

When the Trump administration withdrew from the JCPOA, the EU stressed its commitment to ensuring continued sanctions lifting and to upholding the agreement. This determination was also expressed in practical measures. In summer 2018 the EU included the upcoming US sanctions on Iran in the so-called Blocking Regulation, thus banning EU companies from complying with them. In September 2018 the EU and the E3 announced that they would develop a special trade instrument to facilitate European-Iranian trade, including in oil, which was to be targeted by US secondary sanctions.

However, the Trump administration’s obliviousness to the Blocking Regulation soon exposed the absence of an effective enforcement mechanism to enforce it, and in practice US law took priority over EU law in the private sector’s risk assessments. Apparently recognizing their lack of political and economic leverage over US policy, by January 2019 the E3 had reduced the mission of the trade instrument—then named Instrument in Support of Trade Exchanges (INSTEX)— to trade in humanitarian goods.

While its limited focus fell short of previous expectations that the EU could counter or even significantly minimize the negative effects of US sanctions, INSTEX addresses a critical problem created by them. Humanitarian trade, which is in principle exempt from sanctions, has also been hit by the banking sector’s fear of US penalties, leading to a medicine shortage in Iran. In addition to being urgent, addressing this particular area of sanction over-compliance is also practical, as humanitarian trade runs a lower risk of being targeted by US sanctions than other trade areas.

INSTEX seeks to enable the exchange of humanitarian goods or services between Europe and Iran without the transfer of currency, thus minimizing the risk of US penalties. European exporters are to be compensated with funds located in Europe, based on the value commensurate with the value of imports from Iran. INSTEX’ Iranian counterpart, the Special Trade and Finance Instrument (STFI), is similarly tasked to coordinate payments within Iran.

INSTEX can reassure banks and companies through its joint ownership by the E3 and four other European states—Belgium, Denmark, the Netherlands and Norway, as well as Finland and Sweden, which are expected to join soon. In addition to providing a high level of trust in the instrument’s due diligence procedures, governmental ownership raises the threshold for the USA to impose sanctions on INSTEX.

Having processed only one pilot transaction thus far, INSTEX still needs to overcome major obstacles to function as intended. One key challenge is that the value of European exports to Iran exceeds the value of Iranian exports to Europe. Potential solutions to the problem include paying European exporters using Iran’s revenues currently frozen in foreign banks, or offering Iran a loan to buy humanitarian goods. However, the US is seeking to block these options.

The chances of striking a functioning trade balance could also be increased through the expansion of INSTEX to non-European companies, and extension of the INSTEX mandate to non-humanitarian trade that are not targeted by the USA but are impeded by fear of secondary sanctions. While INSTEX is unlikely to deliberately go against US sanctions, the E3 might decide to take further steps to protect is economic sovereignty if the instrument is targeted by the USA.

Currently it might seem that INSTEX is being taken over by political events, in particular the 2020 US presidential elections. Democratic Party victory in the elections could open the door for the US re-entry into the JCPOA, which would appear to make INSTEX less relevant. However, restoring the JCPOA or reaching any new agreements with Iran is dependent on sanctions lifting. This is likely to be difficult given the private sector’s disillusionment with the Obama administration’s previous assurances about the safety of engaging with Iran. INSTEX could help address this problem by providing additional guarantees to risk-averse banks and companies fearing the next U-turn in US policy towards Iran. 

Alternatively, the possibility of Trump’s re-election as US president—or a snapback of UN Security Council sanctions on Iran—could lead to the collapse of the JCPOA. While this can be expected to reduce European commitment to INSTEX, its humanitarian mission should be pursued as a matter of ethical necessity, even without the JCPOA.

Clearly, INSTEX alone cannot save the JCPOA, the future of which essentially depends on US-Iranian relations. INSTEX can nevertheless help maintain the nuclear agreement until, or even after, diplomatic solutions are found. In addition to demonstrating solidarity on the JCPOA and commitment to basic humanitarian principles, INSTEX can also been seen as a test case of a more independent European foreign policy.

Photo: IRNA

As Iran Faces Virus, Trump Admin Fails to Use Swiss Channel to Ease Medical Exports

The report is published in partnership with the European Leadership Network.

Just a few days after Iran announced its first deaths from COVID-19 in February, the Trump administration’s Special Envoy for Iran Brian Hook was asked during a briefing for an update on the Swiss Humanitarian Trade Arrangement (SHTA), a payment channel intended to ease the sale of medicine and medical devices by Swiss companies to Iran. Responding to the question, Hook acknowledged that no further exports had been processed since a pilot sale of $2.55 million of medication a month earlier, but insisted that there were “more transactions coming.”

Two months later, over 6,000 Iranians have lost their lives to COVID-19, and the Swiss channel has yet to process any further transactions. 

Since the Trump administration reimposed secondary sanctions on Iran in November 2018, the Swiss government has worked to establish a dedicated banking channel to ease the export of medical supplies to Iran. Switzerland is the second largest supplier of medicine to Iran after the European Union. While technically exempt from sanctions, the sale of medical supplies has been made more difficult as banks refuse to process Iran-related transactions. In a recent client note, former Director of the US Office of Foreign Asset Control (OFAC) John Smith detailed how “the Trump administration’s maximum pressure campaign has likely dissuaded many companies from exporting medicine and medical devices to Iran that they otherwise could.” 

New data from the Swiss Federal Customs Administration makes clear that the export of medicine to Iran has weakened over the last year. As a result of these disruptions, ordinary Iranians face rising prices and shortages of sorely-needed medication, a situation all the more unacceptable during a global pandemic.

As COVID-19 spread in Iran, the Trump administration faced increased pressure to ease humanitarian trade. A statement organized by the European Leadership Network and The Iran Project and signed by 24 former senior officials from the United States and Europe warned that “failure to provide relief could have significant and long-lasting consequences for the reputation of the United States and Europe among the Iranian people.” But the administration has yet to respond to these calls with any sense of urgency, deflecting questions on humanitarian trade by pointing to the channel “set up through the Swiss to help the Iranian people.”

While Swiss officials originally hoped the payment channel would be ready in February 2019, it took nearly a year to complete negotiations with the Trump administration and launch the framework. Hawkish officials, including John Bolton, saw the channel as an unnecessary concession to Iran. The administration also proceeded with new sanctions designations that complicated implementation of the channel, including a move in September 2019 to impose new sanctions on the Central Bank of Iran that eliminated long-standing exemptions allowing the bank to play a role in humanitarian trade. The Swiss channel was only “finalized” by the US Treasury Department on 27 February, the same day a new general license was issued restoring key humanitarian exemptions for Iran’s central bank. 

The failure to process further transactions through the channel over the last three months is surprising given the reported interest among “dozens” of Swiss companies. But the Trump administration has failed to address two key impediments. 

First, companies wishing to use the channel are faced with extraordinary reporting requirements. European officials have likened these requirements to a “fishing expedition” for information about Iran’s financial sector. Rather than simply revive the arrangement that enabled Swiss entities to sustain sales of medicine to Iran after the Obama administration imposed devastating financial sanctions on Iran, the Trump administration increased the documentation and reporting requirements, demanding unprecedented disclosures by Swiss companies on the financial holdings of the Iranian banks from which they expect to receive payment. Even if Swiss exporters are prepared to overcome these hurdles, the channel is obviously ill-suited as a means to ease trade during a global pandemic when purchases of medical supplies need to be made quickly and reliably. Peter Harrell, who worked on Iran sanctions in the Obama administration, has argued that the Treasury Department ought to “temporarily relax some of the most oversight stringent requirements for this” in light of COVID-19.

Second, the Trump administration apparently failed to ensure that there was sufficient liquidity available to allow Iranian importers to pay their Swiss suppliers, leaving Swiss officials in a lurch. The Central Bank of Iran is believed to maintain CHF 50 million in reserves at Banque de Commerce et de Placements (BCP), the bank which has long played a central role in Swiss-Iran bilateral trade and around which SHTA has been designed. In addition, several Iranian private sector banks also hold funds at BCP. A rough estimate of the combined holdings is CHF 150 million. By comparison, Switzerland’s total exports of pharmaceutical products to Iran in 2019 was just over CHF 150 million.

Iranian authorities are reluctant to draw down these reserves, which would be nearly impossible to replenish while the country remains under “maximum pressure” sanctions. In a revealing interview from last December, Brian Hook suggested that Iran maintains access to just 10 percent of its foreign currency reserves. Notably, Iran’s central bank governor, Abdolnasser Hemmati, has suggested that Iran’s request for an emergency loan from the International Monetary Fund (IMF) could help address liquidity issues facing SHTA, stating that the IMF loan could be paid out via the Swiss channel in order to assuage concerns voiced by the Trump administration over the potential misuse of funds. 

The successful operationalization of SHTA requires Iranian buy-in. Authorities in Tehran will be concerned about funneling critical trade of medical supplies through a channel made unreliable due to precarious access to financial resources. Meanwhile, recent enforcement actions taken against Halkbank in Turkey and the Industrial Bank of Korea—two banks that have historically supported humanitarian trade but which failed to maintain rigorous compliance standards—will test the resolve of executives at BCP. In another warning shot, OFAC last week announced a $7.8 million settlement agreement with Swiss technology firm SITA, which inadvertently used US-based servers to provide baggage handling services to an Iranian airline making it the “the first company to pay a large settlement merely for routing otherwise lawful transactions through U.S. computer servers.”

The troubled launch of the Swiss channel offers a cautionary tale for other countries seeking to ease humanitarian trade with Iran through good faith engagement with the Trump administration. Since November of last year, the South Korean government has been in discussions with the Trump administration over measures that could revive falling humanitarian exports to Iran. In December 2019, Korean pharmaceutical exports to Iran were down 47 percent year-on-year. Recently, Korean authorities announced that they had made some headway and that they are working to establish the Korean Humanitarian Trade Arrangement, an analogue of the Swiss channel that would be built around Woori Bank. 

The Swiss government is advising the Korean government on how to meet the stringent requirements set-forth by officials in Washington. While South Korea is not a major exporter of pharmaceutical products to Iran, it is a former buyer of Iranian oil and Iran maintains significant reserves in the country. One possible solution to the liquidity problems facing SHTA may be to allow Iran’s central bank to draw on reserves held in South Korea in order to make payments to Swiss exporters. In March, Iranian Foreign Ministry Spokesperson Abbas Mousavi complained that the United States was “creating an obstacle for the transfer of Iran’s financial resources into the channel,” and cited an effort to draw “other financial resources in various countries” for use in SHTA. 

Against this backdrop, references made by Trump administration officials to SHTA as evidence of efforts to protect humanitarian trade with Iran have been deceptive, if not deceitful. The Treasury Department’s recent reply to congresswoman Alexandria Occasio-Cortez’s letter warning of sanctions impacts on Iran's COVID-19 response, tellingly omits any reference to the Swiss channel, suggesting that the administration is aware that their failure to operationalize the channel during the COVID-19 crisis undermines voiced commitments to humanitarian trade. 

Swiss officials should be applauded for continuing to pursue operationalization of the channel despite the hurdles put in front of them. They remain confident that further transactions will be made soon and note progress on a solution that would give Iran freer use of its foreign currency reserves. But the Trump administration abjectly failed to ensure its much-touted channel eased Iran’s access to medical supplies at the moment of greatest need for the Iranian people.

Photo: State Department

Europe-Iran Trade Mechanism Completes Landmark Iran Sale

The Germany foreign ministry announced on Tuesday that INSTEX, the Iran trade mechanism backed by nine European states, has completed its first transaction.

"France, Germany and the United Kingdom confirm that INSTEX has successfully concluded its first transaction, facilitating the export of medical goods from Europe to Iran. These goods are now in Iran," the ministry said in a statement.

An individual with knowledge of the transaction, speaking on background, said that a German exporter had used the INSTEX mechanism to receive payment for the sale of medication to an Iranian private sector importer. The transactions was later reported to be worth EUR 500,000.

The sale is consistent with INSTEX’s initial mission to facilitate humanitarian trade, currently impinged by the impact of U.S. secondary sanctions on banking ties between Europe and Iran.

Officially launched in January 2019, INSTEX was slow to operationalize as French, German, and British officials grappled with the political and technical challenges of establishing a novel state-owned trade mechanism.

But in the summer of last year, INSTEX hired its first managing director and expanded its team, leading to a step-change in the company’s operations.

The new management resisted pressure to conclude an initial transaction as soon as possible—European officials had explored providing a factoring service as a stopgap—and instead sought facilitate a sale that would utilize the cross-border clearing mechanism. Through this mechanism, INSTEX makes payments to European exporters on behalf of Iranian importers, reducing the transaction costs associated with Europe-Iran trade. These sales are netted against exports made by Iranian companies, who are paid in turn by INSTEX’s Iranian counterpart, STFI.

INSTEX management has been working on several transactions in parallel, on the back of strong interest from European exporters to engage the mechanism. The German foreign ministry statement concludes, “INSTEX and its Iranian counterpart STFI will work on more transactions and enhancing the mechanism.”

Photo: IRNA

Iran's Urgent IMF Loan Request Challenges Trump Policy

This article was originally published by Responsible Statecraft.

For the first time in 60 years, Iran has requested a loan from the International Monetary Fund (IMF), seeking emergency financing to support its efforts to combat COVID-19. On March 4, the IMF announced that it would make available up to $50 billion in financial assistance through its Rapid Financing Instrument (RFI), a facility targeting “low-income and emerging markets.”

Iran’s request for financial assistance reflects the acute challenges the country faces in its efforts to control the country’s COVID-19 outbreak—over 14,000 Iranians have been infected according to official statistics. The government has mobilized extensive resources to try to respond to the public health crisis, but the Iranian economy is being pushed to a breaking point. Iran is seeking $5 billion in emergency assistance from the IMF, funding that could dramatically improve the prognosis not only for the Iranian economy, but also the health and wellbeing of the Iranian public.

As medical professor Abbas Kebriaeezadeh and recently explained, Iran is struggling to replenish inventories of medicine and medical equipment both because of supply chain disruptions related to border closures and other related restrictions as well as underlying weakness in Iran’s access to the international financial system that make payments cumbersome to complete. Short term aid from the World Health Organization and European governments, as well as countries such as China, Japan, and Qatar, has helped Iran meet immediate needs for supplies. But as the outbreak continues, and as other countries begin to confront their own public health crises, Iran will need to rely on commercial sources of medicine and medical equipment.

However, even if Iran is able to find suppliers that are able to speedily and reliably dispatch these much-needed goods, the country would still face a balance of payments problem—precisely the problem that the IMF’s RFI facility is supposed to solve. Trade data for February, before the outbreak arrived in Iran, point to significant vulnerability as Iran’s non-oil trade deficit reached $1.68 billion on the back of $4.33 billion in imports and just $2.65 billion in exports.

Since the Trump administration eliminated waivers permitting the purchase of Iranian oil in May 2018, Iran has struggled to earn the dollars and euros that are needed to keep its economy supplied with advanced goods. Consequently, over the 18 months, Iran has seen inflation reach as high as 40 percent, straining the finances of ordinary households and pushing as many as 1.6 million Iranians below the poverty line.

Iran’s economy will be hit hard by the various efforts to contain the country’s COVID-19 outbreak. Of particular concern for Iranian economists, among them Masoud Nili, a long-time advisor to the Rouhani administration, is how the skyrocketing cost of healthcare will force the central bank to pump liquidity into the economy, causing a situation Nili calls “inflationary coronavirus.” A shortage of foreign currency will make inflation worse, as the rial continues to lose value relative to other currencies. A loan from the IMF would help Iran’s central banks keep importers of foreign medicine and medical goods supplied with foreign currency, thereby easing inflationary pressures.

Importantly, Iran would not necessarily receive the IMF loan in Iran. More practically, the funds would be deposited into dollar and euro-denominated accounts controlled by the Central Bank of Iran, but maintained in Europe. So few Iranian banks maintain correspondent accounts in Europe that bringing the IMF assistance back to Iran, only to allocate it to commercial banks to be transferred on behalf of clients to suppliers in Europe, would add significant time and expense to the urgent transactions. Depositing the funds in Europe would also eliminate the risk of their misuse—financial regulators will be able to track Iran’s use of the loan within the European financial system. The loan isn’t being paid in cash, after all.

Moreover, given that the funds would likely remain in Europe, the U.S. Treasury Department could insist on oversight of the IMF loan, including the review of due diligence documentation that would be required in each instance where funds originating from the IMF are being paid into the account of a European pharmaceutical or medical equipment supplier—the suppliers have a clear interest in ensuring their sale of goods is fully compliant with U.S. secondary sanctions.

This type of oversight would not be dissimilar to the compliance framework behind the Swiss Humanitarian Trade Arrangement (SHTA), a payments channel created after the Swiss government sought clearer authorizations from the Trump administration to maintain the sale of medicine and medical equipment to Iran by Swiss firms, which include some of the world’s largest suppliers of these goods.

In light of the balance of payments problem and more fundamental issues in cross-border payments, 11 European governments have backed a trade mechanism called INSTEX. But this mechanism was created after requests made to the Trump administration for clarifications around humanitarian trade with Iran were rebuffed. Given the significant role played by the United States in the IMF, the Trump administration would need to effectively approve any financial assistance given to Iran by the IMF—the political and legal issues around an IMF loan to Iran therefore have more in common with the Swiss arrangement.

In this way, by calling upon the IMF to provide it access to a facility that the fund has offered to all similar countries confronting COVID-19, Iran is effectively asking the fund’s leadership to seek such an approval from the Trump administration in order to open the kind of financial channel that Iran’s central bank has found increasingly difficult to maintain. In the two years since the Trump administration launch its “maximum pressure” sanctions campaign, Iran has struggled to freely access the ample foreign currency reserves—valued at around $70 billion—that it maintains in accounts around the world. This is in large part due to the hesitance of central banks, including European central banks, the Bank of Japan, and the Reserve Bank of India, to invite scrutiny from U.S. sanctions enforcement authorities and possibly compromise their ties with the U.S. financial system. If, because of these longstanding impediments, the IMF fails to provide Iran financial assistance that it makes available to countries in similar situations, the fund’s reputation will take a hit, as the fact of effective American control over its operations is laid bare.

It is unlikely that Iran will receive an IMF loan, but interestingly the official request comes just days after the Treasury Department clarified authorizations that permit financial dealings with the Central Bank of Iran in order to facilitate humanitarian trade — further evidence that administration officials do not see systemic issues related to terrorist financing or money laundering stemming from Iran’s humanitarian trade. The latest clarifications became necessary after an unprecedented move to sanction Iran’s central bank under new authorities in September had been widely perceived to eliminate the longstanding humanitarian exemption.

Clearly, there is a discussion-taking place within the Trump administration about the acceptable level of isolation for Iran’s central bank, especially if that isolation harms the Iranian people. While Iran is unable to directly engage with the Trump administration over these issues given the lack of diplomatic ties and ongoing political tensions, the outreach to the IMF can be seen as an effort to help shape the internal debate over these policies at the State Department and Treasury Department. Iran’s request is legitimate, its economic needs are acute, and the stakes could not be higher. Iran should get this loan.

Photo: IRNA

Swiss Channel for Iran Humanitarian Trade Launches After Lengthy Delay

This press release was issued by the Embassy of Switzerland in Iran.

The Swiss Humanitarian Trade Arrangement (SHTA), a payment mechanism to enable humanitarian goods to be delivered to Iran, is about to be implemented. On 27 January, an initial payment for the shipment of medicines to Iran was approved in the form of a trial run. 

The aim of the Swiss Humanitarian Trade Arrangement (SHTA) is to ensure that exporters and trading companies in the food, pharmaceutical and medical sectors based in Switzerland have a secure payment channel with a Swiss bank through which payments for their exports to Iran are guaranteed. In this way, Switzerland is helping to supply the Iranian population with agricultural commodities, food, medicines and medical equipment. This is in keeping with Switzerland’s humanitarian tradition. 

The SHTA was developed by Switzerland in close cooperation with the relevant authorities in the USA and Iran, as well as with selected Swiss banks and companies. Under the SHTA, the US Department of the Treasury will provide the banks involved with the necessary assurances that the financial transactions can be processed in accordance with US legislation. 

In return, exporters and banks participating in the SHTA will provide SECO with detailed information about their business activities and business partners in Iran, and the transactions they carry out. SECO will verify this information and, in cooperation with the US Treasury Department, ensure that increased due diligence has been exercised in respect of the transactions carried out. To this end, SECO will also make the information received from the banks and exporters available to the US Treasury Department. 

Negotiations on the SHTA are nearing completion. SECO, together with the FDFA and the State Secretariat for International Financial Matters SIF, has been working intensively since the end of 2018 to implement such a humanitarian payment mechanism. The Federal Council approved the implementation of the SHTA in principle on 20 January 2020. 

As a pilot transaction, an initial payment for the shipment of medicines to Iran by a Swiss pharmaceutical company was authorized on 27 January. The shipment consists of cancer drugs and drugs required for organ transplants. The medicines are valued at approximately EUR 2.3 million. As the SHTA is not yet in force, the US Treasury has given the necessary assurances to the Swiss bank involved for this specific transaction.

Since the US withdrew from the nuclear agreement with Iran in May 2018 and reintroduced unilateral US sanctions, it has become increasingly difficult for Swiss exporters to supply humanitarian goods to Iran, although such shipments are in principle not subject to US sanctions. Due to the legal risks associated with US sanctions, hardly any financial institutions are willing to make payments in connection with Iran. The few remaining payment channels are expensive, complex and not very reliable. 

Photo: IRNA

Iran Needs Humanitarian Aid. Trump Should Help.

It was the smallest of gestures, and might easily have been missed if it wasn’t for the identities of those involved. In the chamber of the United Nations Security Council on Thursday, the American ambassador to the UN walked over to her Iranian counterpart to offer condolences.

Kelly Craft was responding to a speech by Majid Takht-Ravanchi, in which the Iranian ambassador mourned the death of Ava, a two-year-old girl in Tehran, whose doctors had been unable to procure bandages for skin blisters caused by a rare genetic disease. Takht-Ravanchi blamed U.S. sanctions — specifically, their impact on supplies of essential medicines.

It would’ve been easy enough to dismiss the story as a disingenuous play for sympathy, and an opportunistic attempt to deflect blame by a regime that has in recent weeks slaughtered hundreds of its own citizens—including children. But Craft was right to express compassion for the plight of ordinary Iranians. In fact, a bigger, more meaningful gesture is long overdue: making sure no other Ava need die for her government’s faults.

Medicines and foodstuffs are exempted from the U.S. sanctions on Iran, but the prospect of punishment has spooked potential suppliers, and especially foreign banks. Although this problem is easily fixed, President Donald Trump’s administration has been shamefully tardy in doing so.

What it will take is for the U.S. to green-light a proposed Swiss channel for humanitarian trade, and to expand the channel’s mandate to include non-Swiss suppliers. The channel has been in the works for more than a year. The most obvious European beneficiaries would be Swiss drugmakers Roche Holding AG and Novartis AG, and the food group Nestle SA, which have a long history of trade with Iran. But there’s no logical reason other companies, even American ones, shouldn’t be allowed to use the conduit.

U.S. authorities have blocked the channel, mainly by dragging their feet in clarifying what they would and would not allow through it. Some progress was announced in October, and still more earlier this month.

This isn’t good enough. While it’s true that the Iranian regime uses the sanctions as a convenient cover for its own failings — and some of the medical shortages are of its own making — there’s no gainsaying that trade restrictions inflict real pain on many people. Human-rights groups have documented how the sanctions harm Iranians’ right to health.

At the same time, they have encouraged European governments to seek alternative routes such as INSTEX, a so-called “special purpose vehicle” designed to sidestep the American financial system. It hasn’t worked yet. But it has put the Trump administration in the unedifying position of threatening its allies over humanitarian trade.

American intransigence on this has also given Iran a stick with which to beat the Europeans. When not shedding crocodile tears over Ava, the regime in Tehran threatens to ratchet up its enrichment of uranium, unless Europe opens up trade channels.

By clearing the legal and bureaucratic path for the Swiss channel, the Trump administration would not only be doing the right thing by the Iranian people, it would be revealing the regime’s threats for what they are: nuclear blackmail. It would also free the Europeans to impose sanctions of their own, guilt-free.

All of this is long overdue. But if politics requires a propitious moment for the big gesture, it so happens that one is close at hand: January marks the 40th anniversary of Switzerland’s role as the de-facto representative of American interests in Tehran. It’s hard to think of a better time to announce a Swiss-American humanitarian channel.

And should the channel need a name, something more meaningful than “INSTEX,” something that conveys a political message as well as a humanitarian one ... how about Ava?

Photo: IRNA

New Trump Admin Channel for Iran Humanitarian Trade Comes With a Killer Catch

The Treasury Department has announced that it will operationalize a financial channel to ease humanitarian trade with Iran, after acknowledging to European officials that recent sanctions imposed on the Central Bank of Iran (CBI) risked encumbering trade in food and medicine. 

The channel, which was originally expected to become operational in February 2019, was first was first proposed by the Swiss government in the aftermath of the Trump administration’s reimposition of secondary sanctions on Iran in November of last year.

Switzerland is a leading exporter of pharmaceutical products to Iran. The Swiss government had sought to safeguard its bilateral trade by seeking legal clarity from the Treasury Department on behalf of Swiss banks. But the National Security Council, then led by John Bolton, blocked its operationalization despite support for the channel within the State Department. 

The new announcement expands the scope of the channel to include any American or foreign financial institution engaged in humanitarian trade with Iran. This expanded scope and the timing of the move likely reflect concerns over the impact to humanitarian trade resulting from the Trump administration’s move to designate Iran’s central bank under a terrorism authority. That sanctions designation eliminated a long-standing exemption permitting a role for CBI in trade in food and medicine. 

Over the last few weeks, European multinationals involved in the sale of humanitarian goods to Iran have been scrambling to understand the impact of the new designation on CBI. The Treasury Department failed to issue guidance in the aftermath of the designation to inform changes to compliance policies.

In particular, European companies engaged in the sale of food and pharmaceuticals were unclear as to whether the reliance of their customers on foreign currency allocations made by the Central Bank of Iran constitutes exposure to the new designation. Bourse & Bazaar contacted treasury managers and compliance officers at six European multinational companies in the days following the designation of the central bank. All refused to provide comment, but confirmed that the new sanctions had triggered internal reviews. 

The move to finally launch the humanitarian channel appears to be an attempt to manage the unintended consequences of CBI’s terrorism designation. Over the last few weeks, European officials raised concerns with American counterparts about the impact of humanitarian trade. Speaking on background, a European official confirmed to Bourse & Bazaar that U.S. officials had described the launch of the humanitarian channel as a way to assuage those concerns. 

Under the new framework, financial institutions which accept payments related to the sale of food and medicine to Iran will be permitted to “seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.” For years, European banks have sought “comfort letters” from the Office of Foreign Assets Control (OFAC) for humanitarian trade. It has been OFAC policy not to provide such letters and humanitarian transactions are not eligible for the licensing process due to the exempt nature of the trade. In this regard, the new framework represents a significant shift in policy. 

But the new framework may introduce more problems than it solves. In order to receive such comfort letters, the financial institutions must undertake an enhanced due diligence process, reporting to Treasury “a great deal of information on a monthly basis.” The due diligence requirements go far beyond what has been considered the industry standard process for companies engaged in trade with Iran. Considering the significant costs and administrative burdens of such reporting, the requirement will likely limit the uptake of the new framework to those financial institutions engaged in the greatest volume of humanitarian trade with Iran.

The reporting requirements will also raise concerns among Iranian banks. Among the information requested by the Treasury Department are the “monthly statement balances with the value, currency, and balance date of any account of an Iranian financial institution” held at the foreign bank and used for humanitarian trade. 

Concurrently with its announcement of the new channel, the Treasury Department identified Iran as “a jurisdiction of primary money laundering concern under Section 311 of the USA PATRIOT Act.” As Tyler Cullis warned in Bourse & Bazaar in July, this move could independently have a devastating impact on humanitarian trade:

Under the proposed rule, US banks would be required to undertake “special due diligence” with respect to correspondent accounts maintained on behalf of foreign financial institutions. Such “special due diligence” does not require that US banks close the accounts of foreign banks that themselves maintain accounts for Iranian banks so long as such banks do not permit Iran indirect access to the US correspondent account. But US banks are unlikely to narrowly tailor their conduct to the precise nuances of law and will show reluctance to continue banking foreign correspondents that themselves bank Iran. As a result, European banks that maintain accounts on behalf of Iranian financial institutions are likely to take steps to shutter such accounts so as to sustain their own accounts at US banks.

It is unclear whether companies can opt not to seek comfort letters through the new framework. Some financial institutions may prefer to maintain trade without the additional legal clarity as they have done since the reimposition of secondary sanctions last year, relying on the existing general licenses issued by the Treasury Department to permit humanitarian trade.

But the Treasury Department’s pursuit of “unprecedented transparency into humanitarian trade” and its allegations of Iran’s use of “so-called humanitarian trade to evade sanctions and fund its malign activity,” may see Trump administration officials pressure companies to use the new framework, requiring disclosures of sensitive financial information that will be unacceptable to Iranian banks and companies wary of U.S. intentions. The Trump administration’s latest gesture to ease humanitarian trade may end up doing just the opposite.

The Treasury Department’s announcement may be intended to pre-empt next week’s launch of a major report from Human Rights Watch that is expected to show significant failures on the part of the United States to safeguard humanitarian trade in accordance with its own sanctions policies. The administration continues to claim that its “unprecedented economic pressure” is “not directed at the people of Iran.”

Photo: IRNA

Why Iran Pays More for Each Kilogram of European Medicine

Since the year 2000, Iran has about doubled its annual imports of pharmaceutical products from the European Union, reflecting both advances in Iranian healthcare and the growth in Europe-Iran trade ties. This growth has remained durable in the face of multilateral—and more recently—unilateral sanctions. Pharmaceutical products can be sold under longstanding humanitarian exemptions under both the US and EU sanctions regimes.

Yet, reporting from Iran has highlighted the significant disruptions in the price and availability of many medications in Iran. Iranian medical professionals complain that despite the exemptions, sanctions are making it more difficult for patients to reliably and affordably access medication. US officials have countered that there has not been an dramatic drop in pharmaceutical exports to Iran, but their defense relies on an incomplete picture of the nature of the trade disruption. Iranian patients are not principally struggling because of a supply disruption. They are suffering because of a price distortion that can be observed in the relationship between the quantity of European pharmaceutical exports to Iran, and the declared value of those exports.

To contextualize the distortions in European pharmaceutical exports to Iran, it is possible to conduct Pearson correlation analyses for the quantity and value of monthly pharmaceutical exports from the European Union to Russia, Turkey, Pakistan, and Iran for the period between January 2000 and June 2019. Intuitively, we would expect that an increase in the quantity of exports from Europe to these countries would be correlated with an increase in the declared value of those exports—if Europe is selling more it should be earning more. 

This is clearly the case when looking to European pharmaceutical exports to Russia, Turkey, and Pakistan in this period. The observed correlations are strongly positive and statistically significant. However, the underlying data tell slightly different stories for each country. In the case of Russia, the magnitude of the increase in the value of exports since 2000 has been greater than the increase in quantity. In Turkey, the opposite is true. To put it more simply, Russia is buying slightly more medicine at a significantly higher price, while Turkey is buying significantly more medicine at a slightly higher price. That is an observation that deserves its own analysis, but in the context of understanding comparative differences with Iranian purchases of European medicine, what matters is that in both cases an increase in quantity of medicine exported correlates with an increase in the value of medicine exported.

The data for Russia, Turkey, and Pakistan shows relatively low levels of volatility. This can be seen when the value and quantity of monthly exports are indexed. Fluctuations each month can be explained by a range of factors such as seasonal or cyclical demand, as well as variation in the composition of exports, particularly in terms of price. Many medicines weigh roughly the same amount, but have vastly different prices—consider the price of aspirin and the price of pills used in the treatment of rare diseases.

Sudden spikes in pharmaceutical exports are often related to disaster response. The December 2005 spike in European exports to Pakistan corresponds to the 2005 Kashmir earthquake, which killed nearly 90,000 people. The August 2010 spike in exports to Russia corresponds to a weeks long heatwave that led to thousands of deaths and triggered extensive wildfires. 

Putting these spikes in context, and looking to fluctuations over time, we see that the expected relationship holds—the greater the quantity of pharmaceutical products exported from Europe to Russia, Turkey, and Pakistan, the greater the declared value of those exports. 

In the case of Iran, the expected relationship also holds, but not so definitively. Looking to the period between January 2000 and June 2019, the correlation between quantity of exports and value of exports is still positive and statistically significant, but is notably weaker. The explanation becomes clear when looking at a chart of indexed export quantity and value. Sales of European pharmaceutical products to Iran are marked by huge volatility. In more recent years, it appears that the declared value of exports has increased without a commensurate increase in the quantity. 

There has been extensive reporting on the impact of sanctions on Iran’s ability to reliably important pharmaceutical products. To test whether the relative weakness in the relationship between export quantity and value is sanctions related, it is possible to test the relationship in two time periods. Multilateral sanctions on Iran reached their apogee in July 2012, when the United States imposed strict sanctions intended to cut off Iranian banks from the global financial system. The number of correspondent banking relationships dwindled, meaning that even for trade in pharmaceuticals, which remained an exempted category, European exporters and Iranian importers faced significant challenges in identifying viable banking channels. When such channels were found, their use typically entails higher transaction costs and payment delays. 

Looking to the period prior to July 2012, we can observe a moderately positive and statistically significant correlation between export quantity and value. When limiting the analysis to the period after July 2012, that relationship is only weakly positive. This is a remarkable finding, suggesting that since 2012, the price paid by Iranian importers for European pharmaceuticals is only loosely related to the quantity of goods ordered. Sanctions may have exacerbated whatever factors led the relationship between quantity and value to be weaker than that observed for Russia, Turkey, and Pakistan.

As a consequence of the weakened relationship between quantity and value, Iranian importers are paying significantly more for each kilogram of European medication they purchase than importers in Russia, Turkey, or Pakistan. In the period between June 2018 and June 2019, European exports to Iran can be “priced” at EUR 8464 for each 100 kilograms exported. By comparison, exports to Russia were just EUR 5707 for each 100 kilograms, while exports to Turkey were EUR 5645. In the case of Russia and Turkey there may be economies of scale at play—the value of monthly European pharmaceutical exports to these countries are on average 9 and 3.5 times higher, respectively, than those to Iran. But even Pakistan, which imports less than half the pharmaceutical products that Iran imports from Europe each month, benefits from a significantly lower price of EUR 7509 per 100 kilograms. Taking the average of the price enjoyed by Russia, Turkey, and Pakistan, in the most recent 12 months for which data is available, Iran paid EUR 2723 more for each 100 kilograms of pharmaceutical products. This premium is almost certainly being passed onto consumers, with devastating effects. 

It is difficult to say to what extent distortions in Europe-Iran pharmaceutical trade are attributable to sanctions impacts. Certainly Turkey, Russia, and Pakistan do not share the same experience of being targeted by unilateral and multilateral sanctions, though they do share many of the same political and economic risk factors that can serve as an impediment to bilateral trade. There are other possible explanations for Iran’s highly volatile pharmaceutical imports, including issues related to the devaluation of the Iranian rial, the use of middlemen in transactions, and changes in the composition of imports related to protectionist policies.  

Looking to total relative proportion of total export quantities in 2018, it is possible to take a snapshot of the composition of European exports to the four countries. What we find is that the composition of exports is broadly similar, with nearly all of the top ten export categories for Iran represented among the top ten for Russia, Turkey, and Pakistan, albeit with differences in proportion. What is clear is that all of the countries import significant volumes of pharmaceutical ingredients, such as vitamins, for use in domestic pharmaceutical manufacturing. Iran imports significantly more vitamin E than the other countries, but significantly less wadding. Neither is a particularly expensive good.

What is most remarkable about the price distortion is that it can be observed through European customs data. In this data, the value of goods is reflective of the value declared by the European seller at time of export. This distinguishes the analysis here from reports focusing on the price increases observed by Iranian consumers. It would appear that at least some of the exorbitant increases in the price of medication for Iranians are attributable to disruptions in trade that originate outside of Iran, rather than tariffs, hoarding, price gouging, or other market disruptions that are known to exist within Iran. 

The price distortion also challenges the conception of sanctions impacts on pharmaceutical trade as being principally about reduced export volumes or shortages within Iran. The analysis presented here suggests that European pharmaceutical exports to Iran could theoretically grow in both absolute value and quantity under sanctions, and yet there could still be harms felt by Iranian consumers if the price of medication continues to rise unchecked. This means that sanctions policy cannot be defended on the basis that trade data shows limited disruption in the value or quantity of exports. The price related disruption shown here only becomes clear when looking to the relationship between export value and quantity over time. Any significant increase in the price of medication at time of export will necessarily lead to circumstances where the sick and dying in Iran cannot afford the medication they need.

Photo: IRNA

Trump’s NSC ‘Blocks’ Swiss Effort to Ease Iran Humanitarian Trade

In November of last year, as the Trump administration reimposed secondary sanctions on Iran and embarked on its “maximum pressure” policy, the Swiss government opened discussions with the Treasury and State Departments to ensure that Switzerland’s significant sales of pharmaceutical products and medical devices—technically exempt from U.S. sanctions—could continue unimpeded. 

But the hardline sanctions policy being pushed by the National Security Council has so far prevented a Swiss effort to ease trade in food and medicine in a remarkable subversion of longstanding U.S. protections for humanitarian trade with Iran. 

According to Swiss customs data, in 2017 Switzerland exported CHF 236 million in pharmaceutical products to Iran. Last year, the total fell to just CHF 164 million, hampered by both the Trump administration’s withdrawal from the Iran nuclear deal and volatility in Iran’s foreign exchange market. In the first half of this year, exports have totaled CHF 79 million. 

European companies engaged in trade with Iran have become adept at finding payment solutions in the absence of normal correspondent banking. Some European and Swiss banks continue to process Iran-related transactions for sanctions-exempt trade, particularly for large clients with longstanding commercial relationships in Iran. 

But when trade manages to flow despite the direct and indirect effects of sanctions, it is often with higher transaction costs for all parties, which are then passed onto the consumer. Additionally, many advanced therapies or specific medical devices are produced by smaller Swiss companies, which do not have the same capacity as major Swiss pharmaceutical firms to find alternative payment solutions to sustain their trade with Iran. Hidden in the trade data is the reality that specific medications are not being sold to Iran as reliably, contributing to the shortages that have compromised the treatment of many of the most vulnerable Iranians, particularly those with chronic illnesses. 

In light of such challenges, which were first experienced under Obama-era sanctions, the Swiss government entered into discussions with the Trump administration, seeking additional clarity for Swiss banks engaged in humanitarian trade around “two key challenges.” As described by a Swiss official to Bourse & Bazaar, the Swiss government was seeking “some sort of ‘certainty’ for banks involved [in humanitarian trade with Iran] so that they will not be excluded from the US market.” Additionally, the Swiss government was hoping to provide their banks clarity on the permissibility of “the transfer of Iranian-origin funds into the Swiss accounts” when Iranian importers pay Swiss importers for humanitarian goods. 

Early discussions proceeded quickly, not least because the Swiss were seeking to reinstate a compliance model that had been used by the Treasury and State Departments before, during the period in which the Obama administration was tightening its secondary sanctions on Iran. In late January, several reports indicated that the payments channel had become operational—that was incorrect. Despite delays, Swiss officials believed they were in the “final stages” of launching the payment channel in February. They too were mistaken. 

Six months on, the Swiss government and Swiss banks have yet to receive any meaningful clarity from the Trump administration on their proposed channel for humanitarian trade. As NBC’s Dan de Luce reported in March, administration officials were still debating “a proposal from Switzerland to set up a humanitarian payment channel that would encourage Swiss banks to handle sales of medicine, medical devices and other items to Iran without fear of violating U.S. sanctions.” 

Importantly, what the Swiss are proposing is entirely consistent with existing U.S. sanctions laws and does not seek to undermine secondary sanctions powers. The Swiss approach does not entail the creation of a special purpose vehicle in the manner of INSTEX, the company established by the French, German, and U.K. government to support their sanctions-exempt trade with Iran. The INSTEX project was itself launched after the Trump administration rejected a request by the E3 governments for expanded waivers covering humanitarian trade. 

European officials with knowledge of the Swiss negotiations tell Bourse & Bazaar that while officials at the State Department and Treasury Department had quickly understood the intention and importance of the Swiss request and moved to provide the requested assurances, the necessary administrative actions were later “blocked” by officials at the National Security Council, which has taken an unusually active role in sanctions policy in this administration.

The debate over the Swiss humanitarian trade mirrors similar disagreements among key administration officials about the reasonable limits of the Trump administration’s maximum pressure campaign. Led by John Bolton, the NSC has taken the same hard stance in debates around the revocation of the oil waivers permitting controlled exports of Iranian oil, around the sanctions designation of Iran’s Islamic Revolutionary Guard Corps (IRGC), and around the partial revocation of waivers that permit civil nuclear projects central to the non-proliferation commitments of the JCPOA. 

Earlier this week, the State Department published a video in which Special Envoy for Iran Brian Hook sought to dispel several “myths about sanctions that continue to be promoted by the Iranian regime,” including “myth” that sanctions target humanitarian trade. Back in December of last year, the State Department provided a supportive statement to the Financial Times in response to questions about the Swiss payment channel, declaring: “We understand the importance of this activity since it helps the Iranian people. It has never been, nor is it now, U.S. policy to target this trade.” Officials at the NSC apparently disagree. 

Photo: Wikicommons

European Pharmaceutical Exports to Iran Fall Sharply

Editor’s Note: In the course of writing this report, it was discovered that there are major discrepancies in the data on Denmark’s pharmaceutical exports to Iran as presented by Eurostat and Danmark Statistik. The Danish exports cited below are as reported from Eurostat, but the data is pending correction. We are in touch with the relevant agencies to find out why the data is inconsistent. There is no reason to believe Eurostat figures are otherwise inaccurate.

Data from Eurostat and the Swiss Federal Customs Administration show that European exports of pharmaceutical products to Iran have fallen considerably on a year-on-year basis. While some of Iran’s smaller trade partners have seen total export values rise, Iran’s top sources of European pharmaceutical products are seeing exports contract.

Looking to cumulative export totals from January to September—the most recent month for which data is available—exports among the 28 member states of the European Union are down 6 percent when compared to the same point last year, while the total quantity exported has fallen 10 percent. Among the 6 member states which exported in excess of EUR 30 million in pharmaceutical products to Iran in 2017, only Germany and the Netherlands have seen export volumes rise this year.

German exports were about EUR 40 million in September 2018, the largest one-month total in the past two years and perhaps an indication of stockpiling by Iranian importers. However, Austria, Italy, France and Belgium have all seen exports fall substantially indicating that any stockpiling is not widespread.

Switzerland is Iran’s second largest source of European pharmaceutical products after Germany. While Swiss exports were down 43 percent year-on-year in September, the figures have regained some ground. October data, which is available in Switzerland, shows exports now down 21 percent, from a cumulative total of CHF 156 million in October 2017 to CHF 123 million in October of this year.

These concerning figures may explain why the Swiss government has opened a dialogue with the Trump administration on establishing a dedicated channel for humanitarian trade.

Aside from their humanitarian importance, pharmaceutical products are a major component of bilateral trade between Europe and Iran, accounting for 7 percent of total exports from the European Union to Iran, and about 40 percent of Swiss exports to Iran, a reflection of Switzerland’s standing as a world-leader in the pharmaceutical sector. Overall, Iran imported nearly EUR 1 billion in pharmaceutical products from Europe last year.

The new export data substantiates fears that reimpostion of US secondary sanctions on Iran has begun to restrict humanitarian trade, despite the fact that the sale of humanitarian goods, including pharmaceutical products, is technically sanctions exempt. This disruptions are already being felt in Iran, as medical professionals report new shortages of critical medications.

One of the persistent questions surrounding shortages of medicine in Iran is whether they are caused primarily by interruptions in the supply chain outside Iran or by challenges inside Iran. Reports of delays at customs, hoarding by wholesalers, and panic buying by consumers suggest that the shortages are likely exacerbated by domestic circumstances.

However, the clear drop in exports from Europe indicates that fewer pharmaceutical products are arriving at Iran’s ports in the first place. Europe is by far the most important source of medicine and medical devices for the Iranian market.

Reduced sales could be the result of the increased cost of importing medication due to the devaluation of the rial or difficulties faced by Iranian importers in securing allocations of the necessary foreign currency to make the purchases.

But given that consumers are generally price insensitive when it comes to essential goods like medication, and given that the Iranian government has prioritized foreign exchange allocations for importers of essential goods, it is more likely that the fall in European pharmaceutical exports to Iran is related to the widely reported banking difficulties that are effecting Europe’s humanitarian trade with Iran.

While European exports may have rebounded beginning in October, is unlikely that situation will look very different when data is made available for the final quarter of the year.

As Europe works to establish a special purpose vehicle (SPV) to address the limited banking channels available for exporters, thereby enabling a greater volume of trade with Iran, there will be significant pressure for the forthcoming mechanism to focus on humanitarian trade first. This year, every EU member state has exported pharmaceutical products to Iran, demonstrating broad commercial interest that could help incentivize cooperation among member states to establish an SPV for humanitarian trade.

Europe must ensure a quick rebound in pharmaceutical exports, not simply for the sake of those suffering from illness in Iran, but also to demonstrate its ability to protect its trade starting with where it should be least vulnerable—the export of sanctions exempt products.

Photo Credit: IRNA

America’s Latest Wave of Iran Sanctions: An Explainer

This article was originally published by the European Council on Foreign Relations.

On 5 November, the Trump administration’s latest and most significant wave of sanctions against Iran came into effect. The US Treasury has issued a list of more than 700 Specially Designated Nationals (SDNs) and Blocked Persons, which includes roughly 300 entities that did not feature in Obama-era sanctions. The designations combine with a series of briefings from senior US administration officials, along with fact sheets and guidelines from the US Treasury’s Office of Foreign Assets Control (OFAC). Below is an overview what we know so far about how the US will implement its sanctions. 

Waivers allow Iran to maintain some of its oil exports

American sanctions targeting Iran’s oil exports and related banking activity will cause many companies and countries to halt or reduce their purchases of Iranian oil. The US administration has stressed that, in contrast to Obama-era measures, the latest sanctions target Iranian condensate as much as crude oil, thereby affecting another source of energy revenue.

Yet the US administration has issued Significant Reduction Exemptions (SREs) to eight countries: China, India, Italy, Greece, Japan, South Korean, Turkey, and Taiwan. Iraq did not receive an SRE, but obtained a waiver to continue purchasing Iranian electricity.

The United States did not issue a formal response to the joint letter from the E3 (Germany, France, and the United Kingdom) issued in June 2018 to request that EU companies be exempt from secondary sanctions. Other EU member states were surprised that Italy and Greece obtained waivers, suggesting that they separately negotiated country-specific rather than EU-wide exemptions. That China sought a waiver indicates that it may be avoiding confrontation with the US as it seeks to sustain trade with Iran.

The US authorities will review these waivers periodically (it is unclear when), requiring recipient countries to prove that they have substantially reduced their imports of Iranian oil (under Obama-era sanctions, these reductions were around 20 percent). According to Secretary of State Pompeo, two of the countries will eventually “completely end imports as part of their agreements”, but – again – the timing is unclear.

The US has abandoned its stated objective of reducing Iran’s oil exports to “zero”, seemingly due to concerns that this would cause a spike in global oil prices. However, revenues from Iran’s oil sales will be held in escrow accounts and can only be used for trade in humanitarian goods or other non-sanctioned products. As such, the US administration is insisting that its oil waivers are still consistent with its aim of ensuring that Iran’s government has “zero oil revenue” that can be used for “malign activity” in the region.

Banking measures allow for limited humanitarian trade

While most Iranian financial institutions are subject to US secondary sanctions, a few of Iran’s private banks are exempt from these measures. In principle, these banks can facilitate humanitarian trade even with US companies, a situation akin to that prior to the implementation of the sanctions relief that followed the implementation of the Joint Comprehensive Plan of Action (JCPOA).

Until recently, four private companies were responsible for facilitating nearly all of Iran’s humanitarian trade: Parsian Bank, Middle East Bank, Saman Bank, and Pasargad Bank. But, on 16 October, the US Treasury named Parsian Bank as a Specially Designated Global Terrorist. This new measure bans the bank from facilitating humanitarian trade. Responding to the designation, Kourosh Parvizian, Parsian’s CEO, described the new sanctions as a “mistake” that threatened “a bank that handles the transactions behind the majority of imports of foodstuffs, medicine and other humanitarian trade items for the Iranian people.”

The US clearly intended the designation of Parsian Bank to send a message to the Iranian financial system and its international counterparties. Commenting on the thin grounds for designating the bank a terrorist organisation, sanctions attorneys have expressed concern about the US Treasury’s approach to humanitarian trade.

The Parsian designation will loom over the remaining entities engaged in humanitarian trade with Iran, reminding them that the US could block their access to the international financial system at any moment. For now, the White House has not applied new terrorism- or proliferation-related designations to Middle East Bank, Pasargad Bank, or Saman Bank. This is crucial to these companies’ capacity to facilitate humanitarian trade.

OFAC guidelines state: “broadly speaking, transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran are not sanctionable unless they involve persons on the SDN List that have been designated in connection with Iran’s support for international terrorism or proliferation of weapons of mass destruction.” Companies that use these banks to conduct transactions for humanitarian trade must ensure that no other SDN-listed entities are involved in this trade.

Overall, the manner in which the US has reimposed sanctions allows humanitarian trade to continue. But the US has not taken any steps to actively safeguard vital trade in food and medicine, leaving European companies in the lurch about the risks involved in humanitarian trade linked with Iran and placing the citizens of Iran under intense pressure.

Partly to address this urgent problem, Switzerland is negotiating directly with the US authorities to create a humanitarian banking channel with Iran. Under Obama-era sanctions, several small Swiss merchant banks maintained ties with the likes of Parsian, Middle East Bank, Saman, and Pasargad. That the Swiss government now considers it necessary to intervene could indicate that these Swiss banks are more reluctant to engage with Iranian companies due to the Trump administration’s aggressive stance on all Iran-related commerce. Home to several major pharmaceuticals manufacturers, food companies, and commodities traders, Switzerland is perhaps Iran’s most important partner in humanitarian trade.

Iran’s access to SWIFT has been significantly restricted but not blocked

For several months, there has been widespread speculation about whether the US would pressure Belgium-based financial messaging organisation SWIFT to block payments from all Iranian banks. Treasury Secretary Steven Mnuchin noted the US has required SWIFT to disconnects any Iranian entity that the country designates as a terrorist or proliferation entity. For now, a handful of Iranian banks that are not subject to designations will likely remain connected to SWIFT.

On Monday, SWIFT stated that it would suspend some Iranian banks’ access to its network, noting “this step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system”. The move is unsurprising given Mnuchin’s warning that “SWIFT would be subject to US sanctions if it provides financial messaging services to certain designated Iranian financial institutions”. Thus, it is possible that there will be a showdown between the European Union and the US if SWIFT decides not to disconnect all targeted Iranian entities and the US Treasury responds with sanctions against the organisation.

Expanded targeting of civilian aircraft and maritime vessels

American sanctions on aircraft belonging to Iran Air, the country’s national carrier, will complicate its operations. Under Obama-era sanctions, such measures made it difficult for Iran Air to receive ground handling and refuelling services at many European airports. This forced Iran Air planes flying between Europe and Iran to refuel in third countries.

Notably, the US Treasury has targeted Iran Air’s recently acquired ATR regional aircraft, which largely conduct domestic flights. The move may be designed to complicate maintenance of the aircraft, increasing safety risks for Iranian passengers.

The US Treasury has also sanctioned a wide range of Iranian oil tankers, as well as other cargo vessels and container ships. This will restrict Iran’s ability to engage in trade, as ports may refuse to service the vessels.

Civilian nuclear cooperation is permitted in limited cases

The US has placed the Atomic Energy Agency Organization of Iran on its SDN list, subjecting it to secondary sanctions. The organisation is the main entity responsible for implementing Iran’s nuclear-related obligations under the JCPOA.

To fully comply with the agreement, Iran must make several adjustments to its nuclear programme, such as redesigning its heavy water reactor at Arak and converting the Fordow enrichment facility into a research complex. To carry out this technical work, Iran is cooperating with the United Kingdom, China, and Russia.

The US has clarified that “all nuclear cooperation with Iran, except for the limited activities for which waivers are being granted, will be sanctionable”. Nonetheless, the US has granted sanctions waivers to non-proliferation projects at Arak, Bushehr, and Fordow facilities, noting that “each of the waivers we are granting is conditional on the cooperation of the various stakeholders”.

The US is monitoring Europe’s planned SPV

In response to America’s reimposition of sanctions this year, the EU and E3 governments reiterated their intention to create a Special Purpose Vehicle (SPV), a new mechanism to facilitate trade with Iran while reducing Iranian reliance on the international financial system. European officials still hope to legally establish the SPV in the coming weeks, but the mechanism is unlikely to become operational for several months. When asked by reporters about the SPV, US policy adviser Brian Hook noted that the “United States will not hesitate to sanction any sanctionable activity in connection with our Iran sanctions regime”.

European governments could establish an SPV to facilitate humanitarian trade alone, thereby minimising the risk that the US will target the mechanism. But it appears that they are planning a single SPV that would include trade the US regards as sanctionable.

That the White House has issued some waivers to allow for civil nuclear cooperation with Iran signals its desire to maintain the JCPOA’s limitations on Iran without allowing the country any of the tangible economic benefits envisaged under the deal. According to one senior Iranian official, unless the remaining JCPOA parties can provide Iran with a meaningful economic package in the coming months, Tehran is likely to re-evaluate its stance on the agreement. In this respect, it is crucial that Europe demonstrates its ability to successfully launch the SPV and, together with China and Russia, takes both economic and political measures to signal that the JCPOA can weather the American sanctions storm.

Photo Credit: IRNA

Parsian Bank CEO: US Treasury Made ‘Mistake’ in Iran Sanctions Designation

The CEO of Iran’s Parsian Bank, which was sanctioned last week by the US Treasury, has described the designation of the bank as a Specially Designated Global Terrorist (SDGT) a “mistake.” The unprecedented move against one of Iran’s leading private sector banks by US authorities has many in Iran’s banking sector worried, especially with regards to the ongoing viability of humanitarian trade.

On October 16, the US Treasury Office of Foreign Assets Control (OFAC) designated twenty Iranian entities as SDGTs for allegedly providing support to Bonyad Taavon Basij, a holding company associated with Iran’s Basij paramilitary force. Several banks and financial institutions were among the targeted entities—the most prominent among them was Parsian Bank, a private sector financial institution.

Parsian was designated "for assisting, sponsoring, or providing financial, material, or technological support for, or financial or other services to or in support of, Andisheh Mehvaran Investment Company", itself one of several intermediaries ultimately linked back to Bonyad Taavon Basij.

The designation of Parsian seemed to confirm growing concerns that the Trump administration intends to target Iranian banks previously exempt from secondary sanctions as part of its “maximum pressure” policy on Iran.

According to Parsian Bank’s CEO, Kourosh Parvizian, US authorities have exaggerated a financial link in order to designate the bank. "Parsian was sanctioned because one company, Andisheh Mevaran, bought and sold less than 0.3 percent of the total shares of the bank in the stock market," Parvizian told Bourse & Bazaar, adding that such a small shareholder would have no influence over the management or operations of the bank, meaning that any financial link fell well below OFAC’s typical concern with the “control” of Iranian companies by sanctioned entities.

The number of shares purchased by Andisheh Mehvaran even falls below the normal threshold for regulatory oversight by the Central Bank of Iran. The markets regulator only requires approval for share purchases when real or legal persons are seeking to purchase more than 5 or 10 percent of the firm's total outstanding shares respectively. Parsian Bank has 23.7 billion shares currently outstanding on the Tehran Stock Exchange and counts over 70,000 shareholders.

By either deliberately or negligently misconstruing the bank as beholden to Andisheh Mehvaran, US treasury officials made a “mistake at the expense of over 70,000 shareholders and 6.5 million customers of a bank that handles the transactions behind the majority of imports of foodstuffs, medicine and other humanitarian trade items for the Iranian people," Parvizian said.

The belief that Parsian Bank’s designation is a result of a "mistake" runs counter to the views of many sanctions attorneys, who believe that the Trump administration is trying to send signal of zero-tolerance to Iranians banks and their international partners.

Adam Smith, of law firm Gibson Dunn & Crutcher, told the Wall Street Journal’s Samuel Rubenfeld that the designation of Parsian Bank “will make it more difficult to get financing for humanitarian projects.” Smith, a former Treasury Department official, is “very nervous” about how a more hardline sanctions policy from the Trump administration could impact humanitarian trade.  

Iran's Foreign Minister Javad Zarif seemingly agrees that the designation of Parsian Bank was intended to send a signal, slamming the Trump administration’s “addiction to sanctions” in a tweet. Zarif specifically pointed to the eight degrees of separation between Parsian Bank and Bonyad Taavon Basij, the primary target of the sanctions action.

Iran’s foreign minister also decried the disregard for the ruling earlier this month from the International Court of Justice (ICJ) which called on the US to lift restrictions on humanitarian trade. Likewise, Parvizian stated, “The designation [of Parsian] runs counter to remarks made by senior US officials that foodstuffs and medicines will not be targeted by sanctions.”

In the aftermath of the designation, Parsian Bank has sought to reassure its customers and shareholders. Shortly after Parsian was added to the SDGTs list, the bank released statements both for the general public and for its shareholders declaring that operations will not be significantly impacted since the bank had already halted all dollar-denominated transactions years ago due to sanctions. Parvizian added, "I cannot say the sanctions won't have any effects, but those effects won't be what the US wants.”

But in some respects, the damage has already been done. Parvizian is understandably upset that his customers and shareholders will bear the brunt of the designation. They had put their trust in the bank being spared from the full extent of sanctions since Parsian was among the Iranian banks that enjoyed a favorable position relative to the wider Iranian financial system prior to the JCPOA nuclear deal. "On top of everything, the designation has considerably increased our reputational risk," he said.

Over the years, the bank’s reputation has benefited from its investments in raising managerial standards, including improving anti-money laundering (AML) and combating financing of terrorism (CFT) compliance procedures as well as know your customer (KYC) due diligence. Parvizian believes that US authorities are fully aware of Parsian’s efforts in these areas.

"For instance, during our non-dollar dealings with Iraq, even the Central Bank of Iraq made an inquiry with US authorities about Parsian and they had answered positively," he said.  

That Parsian serves as an example for other banks in compliance standards is especially important given the intense debate that has surrounded Iran’s progress on instituting the reforms required by the Financial Action Task Force (FATF) action plan.

Last Friday, the global standard-setting body extended Iran's deadline to complete its action plan until February, a victory over US and several of its allies have long sought to blacklist the Islamic Republic. The push for financial reforms will be harder to justify if banks like Parsian, which are among the closest to meeting FATF standards in their international operations, will nonetheless be targeted with new US sanctions.   

As relayed by Parvizian, the history of private sector banking in Iran is a story of overcoming adversity. This episode is no different. The bank, which had not been contacted or otherwise informed by the OFAC prior to its designation, is now working through "defined channels" to explore whether it can appeal to have the designation reversed.

Photo Credit: Ibena.ir