Iran: The Case for Protecting Humanitarian Trade

This article has been republished with permission from the European Council on Foreign Relations. 

A crisis is looming in Iran’s healthcare sector: patients are reporting shortages in life-saving medicine. The situation is expected to worsen once US sanctions on Iran are reimposed in November. European and US companies that can provide the advanced medicine and equipment needed to treat chronic diseases inside Iran are grappling with how to sustain their operations. The goods that are making it into Iran are being sold at soaring prices due to a sharp currency downturn following Donald Trump’s sanctions decision.

Millions of ordinary Iranians are bracing themselves for the impact of these sanctions. The UN special rapporteur for human rights warned that the sanctions will undermine human rights in the country, drive people into poverty, and make imported goods unaffordable. The impact of incoming sanctions on the humanitarian sector contradicts the US administration’s repeated statements in support of the Iranian people.

Iranians experienced similar hardship between 2012-2013 when the United States and Europe introduced the severest of sanctions to pressure Iran to restrict its nuclear program. At the time, the US Treasury provided broad authorization and exceptions for the sale of medicine and medical devices. Yet only a limited number of Western companies managed to operate under these conditions. Many were forced to halt or downsize trade due to disruptions in banking and high operational costs.

A repeat of this situation must be prevented. Unilateral US sanctions must not be allowed to needlessly cause suffering to millions of Iranian citizens. This is especially the case given that Iran continues to implement restrictions on its nuclear program under the 2015 deal. Europe, China, and Russia have also vowed to uphold the agreement.

The overarching hurdle facing many companies that export medical goods and services to Iran is related to securing banking services and finance to enable such transactions to happen. This includes a recent foreign currency shortage with which to reimburse European companies. The lack of clarity over how the US will enforce its sanctions has exacerbated these problems. For example, while the latest US OFAC guidelines reaffirm that there is broad authorization for humanitarian transactions, there is ambiguity over how extensively the US will use secondary sanctions to target private Iranian banks.

Since the nuclear deal, such banks were clearly exempt from secondary sanctions. That meant that non-US companies could establish ties with such banks to facilitate payments for the sale of humanitarian goods to Iran. Their position is now unclear. The US has outlined plans to sanction the Central Bank of Iran (CBI); but it is inevitable that any local private Iranian bank will have to transact with the CBI. Under the current US sanctions framework it is unclear if this would trigger a designation for that local bank, meaning that European banks would most likely refuse to transact with that entity.

Such uncertainty can effectively block payment channels into Iran and prevent life-saving assistance from reaching doctors and Iranian patients. Indeed, several leading pharmaceutical companies currently engaged in Iran have shared with us their concerns that banks, insurance companies, and distribution channels that have facilitated humanitarian trade with Iran are getting cold feet, fearing they could fall foul of US sanctions. Competing interpretations of the OFAC guidelines also are causing over-compliance by European companies whose board members are reluctant to accept reputational damage in the US even for humanitarian exchanges with Iran.

For Iranians, access to basic healthcare is a constitutionally protected fundamental human right. In recent years, health conditions in Iran have been gradually improving for underprivileged patients. In part this has been due to the easing of international sanctions that have made healthcare products more affordable and easily accessible. President Hassan Rouhani’s government also introduced new reforms that offer healthcare to almost 11 million previously unprotected people.

Treatment for chronic diseases is a major challenge for Iran where successful treatment requires advanced devices, training, and pharmaceuticals that are often provided through Western companies. Protecting access of such companies to Iran is therefore imperative.

As global powers look to salvage the nuclear deal despite the US withdrawal, they should seek to preserve humanitarian trade with Iran. Despite opposing views between Europe and the US on the nuclear agreement, saving the lives of Iranians should not be a topic of debate. Brian Hook, the newly appointed US special representative for Iran, recently stated that the US and Europe should be working together to “find lasting solutions that truly support Iran’s people”. Europe should press the US to fulfill this offer by working to immediately facilitate and remove obstacles to humanitarian trade with Iran.

European governments should urge the US Treasury to quickly clarify the ambiguities created by its latest guidelines and ensure that a reasonable number of Iranian private financial institutions remain exempt from US secondary sanctions. The European Union should double down on efforts to ensure payment channels with Iran are preserved, including Iran’s access to the SWIFT financial messaging service. As a matter of priority it should aim for banks in Europe to remain open for humanitarian trade with Iran. To help foreign companies sustain the profit margins of operations inside Iran, the Iranian government could also offer cost-saving incentives for companies that import medicine and medical goods into the country.

The European Commission recently announced it will provide an €18m economic package for the social benefit of ordinary Iranians. If required, it should introduce similar new provisions after November to bridge any gaps in funding and payment facilities for medicine exported by European companies. This lending mechanism (in euros as opposed to US dollars), should be large enough to at least cover the import of life-saving medicine into Iran and should be flexible enough to respond to new needs. The EU and Iran could also consider establishing a medical fund for donating pharmaceuticals and equipment to Iran. In such instances, no banking transactions will be required and therefore the risks to European companies will be reduced.

The EU could also encourage expanded scientific cooperation with Iran in medical research and training. Relative to many countries in the Middle East, Iran has advanced public and private medical research institutions that are likely to welcome such bilateral cooperation. In fact, Iranian and US scientists have long engaged in successful health diplomacy projects. European governments can support and facilitate such humanitarian-focused projects. Such measures from Europe can demonstrate that their commitment to the humanitarian needs of Iranian people goes beyond rhetoric.

Many Western governments view sanctions as an effective economic tool to alter the actions of adversary states. Yet sanctions have repeatedly hit ordinary people the hardest and resulted in a negative impact on health in the targeted country. The human cost of sanctions in countries such as Iraq, Iran, Syria, and Venezuela has been severe. Going forward, the international community must implement safeguards to fully protect humanitarian sectors of trade. As Europe pledges to demonstrate its commitment to the Iran nuclear deal, it could take a lead in this dialogue and provide concrete solutions.

Photo Credit: IRNA

Here's How the European Commission Will Allocate EUR 18 Million in Iran

For Iran, EUR 18 million represents just a drop in the bucket in terms of the foreign direct investment that the country needs for its economic development. But in terms of development funding, this amount, an initial tranche of a larger EUR 50 million bilateral allocation introduced by the European Commission and the European External Action Service this month, represents a highly significant, “first-of-its-kind,” intervention to support Europe-Iran trade and investment.

Iran is an unusual recipient for European development aid—by the usual metrics, the country is too rich. But after some internal political wrangling, the European Commission decided to proceed with a “special measure” in order to support the policy priorities of the European Union, namely the preservation of the Joint Comprehensive Plan of Action (JCPOA).

However, the funding is not primarily intended as an attempt to mitigate the effect of returning U.S. secondary sanctions. Rather, as made clear in the “action document” which details how the development funding will be distributed, the European Commission has allocated the funding “in line with the European Consensus on Development” to provide “targeted support in the areas of Prosperity, Planet and People.”

In the area of “Prosperity,” the European Commission will seek “increased and diversified trade in goods and services” by supporting better trade policy, more effective investment promotion activities, and greater support for entrepreneurship and innovation. In the area of “Planet,” the European Commission will seek “the decoupling of economic growth from environmental degradation” by supporting programs that improve waste management and reduce water and air pollution through technologies that improve efficiency and greater awareness among policymakers and the general public. Finally, in the area of “People,” the Commission seeks to support “comprehensive and evidence-based drug use prevention, treatment, rehabilitation and social reintegration” with a special focus on the use of opiates such as heroin and its role in spreading HIV/AIDS. The “Prosperity” and “Planet” areas have been allocated EUR 8 million in funding, while “People” has been allocated EUR 2 million.

The implementation of the funding differs in each area and will use both direct and indirect management, with the Commission ensuring that “that the EU appropriate rules and procedures for providing financing to third parties are respected” in all cases.

Funding in the area of “Prosperity” will be allocated through the International Trade Center (ITC), a United Nations agency. The ITC will assist Iran’s Trade Promotion Organization, a agency of the Ministry of Industry, Mine and Trade to develop a “national export strategy” with a particular focus on boosting the capacity of small and medium-sized enterprises (SMEs) as well as the internal managerial and technological capacity of TPO. ITC and TPO will also collaborate to develop a “Youth Trade Accelerator Program” which will youth-led enterprises. Initial meetings have already been held between ITC officials and Iran’s TPO and the cooperation envisioned and funded by the Commission builds on an MOU signed between ITC and TPO in 2016.

In the area of “Planet,” the European Commission will directly administer the funding on the bases of grants and will reply upon “pillar-assessed” organizations from its member states, a designation that applies to those organizations which have been pre-approved to implement resources from the European Union’s general budget. Efforts in this area will build on the EU-Iran framework for technical cooperation on the environment signed by Iran’s vice president for environment Masoumeh Ebtekar and EU environment commissioner Karmenu Vella in Brussels in September 2016. A consortium of member-state organizations is expected partner with Iranian stakeholders  to drive the implementation of pilot projects that “contribute to enhancing Iran’s self-reliance in the areas of addressing water pollution and integrated water resources management, air pollution, waste management and soil degradation.”

Finally, in the area of “People,” funding will be directly managed and dispersed via grants. The Commission will issue a single call in the “first trimester of 2019” for proposals “to finance projects aiming at comprehensive and evidence-based drug use prevention, treatment, rehabilitation and social reintegration, with special emphasis on high-risk groups.” Interestingly, these grants will not be made directly to Iranian institutions. Instead, eligibility criteria mandate that grants flow to “agency, non-governmental organization, public sector operator, local authority, international research organization, university or university related organization” from an EU member state or a small group of international organizations. While the public health benefits of these grants will no doubt be substantial, these restrictions raise the question of how much of the financial impact of the EUR 2 million in grant funding allocated for the area of “People” will be felt in Iran.

Overall, the Commission’s efforts are encouraging for their scope and the clear willingness to deepen bilateral ties between the European Union and Iran at a fraught political moment. But beyond good intentions, implementation will be key. To this end, the Commission outlines a series of “assumptions” which underpin the feasibility of the planned cooperation with Iran.

The envisaged cooperation requires that “Iran ensures the necessary human, financial and material resources to facilitate the implementation of projects as far as cooperation with national authorities is required” and—in a crucial consideration given still-unexplained arrests of Iranian environmentalists—that “technical exchanges and cooperation between public sector and civil society actors… remain non-sensitive and feasible.”

Photo Credit: European Commission

For Payment Service Venmo, 'Persian🍕' Raises Alarms

A few weeks ago, a group of my Iranian-American friends and I gathered after work and chatted about the current political climate over dinner. Like many millennials, we ordered food from Seamless and at the end of the night used Venmo—a “digital wallet” connected to one’s bank account that allows users to instantly send and receive money —to pay back the host for purchasing pizzas and salad for the group.

When sending her contribution to the host, one of my friends wrote “Persian🍕” in the caption. Venmo users commonly include little messages when sending money to friends. But this time the transaction was flagged and blocked immediately. Why? Because the word “Persian” was included in the transaction memo.

Tyler Cullis, an associate attorney at Ferrari & Associates, a sanctions law firm in Washington D.C., explained that “certain words trigger and raise a red flag with Venmo and its parent company, PayPal.” These triggers are any words that could raise potential sanctions compliance issues and require their compliance team to further review the payment to make sure it is not violating any sanctions law. “These regulations are laws, and U.S. persons acting in violation of them may be subject to civil and criminal penalties,” he added.

According to current U.S. law, companies have to stop any payments if they believe it to be of Iranian origin because their facilitation, intentional or not, would be a sanctions violation according to the relevant regulations, which specifically prohibit U.S. persons from engaging in any transaction or dealing in or related to goods or services of Iranian-origin.

The pizza that was ordered certainly did not come from Iran—perhaps to the dismay of many Iranians in the diaspora who swear by actual Persian pizza—ketchup and all. Plus, I would think that it would become quite soggy after it was in transatlantic transit from Tehran to Washington.

Venmo’s algorithm scans for “suspicious” transactions based on certain keywords, but it is often inconsistent and illogical. When asked how one would know whether a transaction would inadvertently include a banned word or whether a list would be published on their website for further clarity, a Venmo spokesperson stated that they would not share that since users could then potentially find a way around it.

While perhaps this may only seem to be a minor inconvenience, the impact of Venmo and PayPal’s targeted actions goes far beyond sending and receiving money for food transactions. Small businesses, academic departments, and nonprofit organizations have been directly impacted this blanket ban. Various humanitarian organizations have also had their transactions flagged for further review, delaying the receipt of donations.

Last December, after a major earthquake shook the Khuzestan region of Iran, several individuals affiliated with larger groups hosted fundraisers to gather supplies and money to send to several U.S. based organizations with OFAC licenses. In Washington D.C., one such fundraiser was organized and several donations were blocked when users typed in “Iran earthquake relief” in the memo line on Venmo to purchase their entry to the event. Individuals and smaller groups attempting to make a small impact in their community are the ones affected given many folks don’t have cash on hand or credit card machines and Venmo is known to be a fast and effective substitute.

A representative at Venmo stated that all transactions are reviewed by their compliance team for security purposes but if “something seems off, it is further investigated.” I was also told that if a transaction seems to be “against their user agreement” then it will be flagged for further review.

Several provisions violate the user agreement listed on the Venmo website, however none of those transactions had been immediately flagged. If one types in “drugs,” “cocaine,” or “heroin” into the memo line—clear violations of Venmo’s user agreement which states users may not use Venmo to conduct transactions that involve “tobacco products, prescription drugs and devices, drug paraphernalia, narcotics, steroids, certain controlled substances or other products that present a risk to consumer safety”—the transactions are not immediately flagged for additional review nor blocked.

It’s important to note that Venmo can only be set up by someone with a U.S. bank account and U.S. mobile number. These requirements make it near impossible for Iranians in Iran to engage with and utilize the app.

So what does Venmo consider to be more problematic ? A transaction entitled “Persian 🍕” or “Cocaine 👃”? That a harmless transaction for food is more strictly regulated than a transaction which could potentially be for the sale of controlled substances reflects the stigma attached to anything labeled “Iranian” or “Persian” by users.

Policing transactions with low risks of being actual sanctions violations, but ignoring those significantly more likely to be blatant violations of their own company’s user agreement and potentially abetting illegal activities, is counterintuitive. If Venmo and PayPal truly cared about users not abusing their app and making sure their transactions are appropriate, they should aim to address this issue more intelligently, and not merely implement a blanket ban against certain cultures and keywords.

Photo Credit: Venmo

Can Europe Defend Itself And Iran From U.S. Sanctions?

This article was originally published in LobeLog. 

In an op-ed published in the German newspaper Handelsblatt, German Foreign Minister Heiko Maas declared that the “the US and Europe have been drifting apart for years.” Nowhere is this clearer than in the disagreement between the United States and Europe over the fate of the Iran nuclear deal. When President Trump withdrew from the Joint Comprehensive Plan of Action (JCPOA) and announced his intention to reimpose secondary sanctions that would impact European businesses, he made clear that he wouldn’t treat Europe in what Maas called a “balanced partnership.” In response, Maas believes that Europe must “bring more weight to bear” in global affairs.

In order to defend the JCPOA and protect European companies active in Iran from U.S. sanctions, Maas outlined three initiatives: “establishing payment channels independent of the US, a European monetary fund, and an independent SWIFT [payments] system.” These initiatives echo ideas expressed by French economy minister Bruno Le Maire in the aftermath of Trump’s withdrawal from the JCPOA. Le Maire has called for European governments to work together to protect Europe’s economic autonomy by creating “independent, sovereign European financial institutions which would allow financing channels between French, Italian, German, Spanish and any other countries on the planet.” Le Maire has declared that “the United States should not be the planet’s economic policeman.”

It will be difficult to realize the political designs of Maas and Le Maire within the economic structures that link Europe and global markets, including Iran. As Maas concedes, “the devil is in thousands of details.” It should be no surprise, therefore, that speaking to President Hassan Rouhani’s cabinet last week, Supreme Leader Ali Khamenei declared that Iran “must not pin hope on the Europeans for issues such as the JCPOA or the economy,” noting that promises must be examined with “skepticism.”

Iran should not take for granted the hopeful vision of more resolute European leadership, especially if that leadership promises to deliver fairer political and economic outcomes for Iran. But in light of the present economic crisis, the Iranian government and Iranian people can no longer afford to take a long-term view when it comes to fundamental questions like access to the international financial system, whether or not that system continues to be dominated by the United States. As such, it is important to try and discern the specific and short-term implications of the new political vision espoused by leaders like Maas and Le Maire.

First, there has been the greatest progress in designing possible payment channels that would help sustain transactions in the face of U.S. secondary sanctions. As an initial step, the central banks of France, Germany, the United Kingdom, Austria, and Sweden have indicated their openness to establishing payment channels with the Central Bank of Iran that would be immune to sanctions since the U.S. government is unlikely to take the extreme step of sanctioning European central banks for transacting with Iranian entities. Importantly, these central banks, which would be facilitating transactions on an ad hocbasis, would not need to rely on payment systems such as SWIFT.

However, the central banks have established a pre-condition: Iran must fully implement the Financial Action Task Force (FATF) action plan. But even if Iran does successful implement the FATF reforms, and even if European central banks fulfill their promise, the creation of limited payment channels does not amount to an independent financial system. In such a scenario, the impact of U.S. sanctions on European and Iranian banks will continue to prevent trade and investment in meaningful volumes.

Second, the creation of an independent payment messaging system is essential to enabling those smaller European banks that lack a “U.S nexus” to transact with Iranian banks, thereby enabling trade and investment at higher volumes. To this end, Maas has called for the creation of “an independent SWIFT [payments] system.” Notably, Maas’ statement makes it clear that European leaders do not expect to successfully defend the independence of SWIFT in its current form. SWIFT, headquartered near Brussels, is a cooperative owned by its member financial institutions, including major American banks such as Citibank and JP Morgan. Even so, SWIFT represents a rare global financial institution in which the United States is not dominant, but dependent. Some analysts, among them former officials from the U.S. Department of Treasury, have observed that it would be harmful to U.S. economic interests to sanction SWIFT. In fact, when SWIFT disconnected Iranian banks from its system in 2012, this was only because the organization voluntarily agreed to do so in accordance with European sanctions policy at the time, not because of the realistic threat that the U.S. would sanction the entity.

It is not entirely clear whether Maas wants Europe to insist on SWIFT’s independence or to devise new messaging systems altogether. A new system would be technically easy to establish but would prove difficult to monitor for possible money laundering or terrorist financing, an important political consideration. Although the former approach would certainly deliver Iran a more immediate solution on banking challenges stemming from U.S. sanctions, given that Iranian banks were reconnected to the SWIFT following implementation of the nuclear deal, Europe will more likely take the latter, more time-intensive approach. German Chancellor Angela Merkel responded to Maas’ op-ed (which she called an “important contribution”) by noting that “on the question of independent payment systems, we have some problems in our dealings with Iran…on the other hand we know that on questions of terrorist financing, for example, SWIFT is very important.” Merkel’s comments suggest that political capital will most likely be spent creating a minimal, ad hoc messaging system in support of transactions with Iran rather than defending the independence of SWIFT in the face of a U.S. sanctions threat.

Finally, if payment channel and payment messaging solutions can be devised, Europe will need to ensure financing flows through these channels to Iran, in order to spur economic growth and support infrastructure and energy projects led by European companies. Here, Maas has pointed to the creation of a European Monetary Fund. Plans for the creation of such a fund have been circulating in European capitals for over a year and are based on upgrading the European Stability Mechanism (ESM), the entity that managed the bailouts of Eurozone states made necessary by the global financial crisis. Currently, ESM borrows on capital markets by issuing bonds. Such a reliance on capital markets has proven the critical barrier to the European Commission’s effort to get the European Investment Bank (EIB), which finances capital projects around the world, to invest in Iran. Like ESM, EIB raises capital by selling bonds, often to American institutional investors. Understandably, the CEO of EIB has publicly rejected calls to invest in Iran, stating that to do so “would risk the business model of the bank.”

The creation of a European Monetary Fund would be supported by financing drawn directly from European central banks and not capital markets, limiting exposure to U.S. investors, and therefore to the risk of U.S. sanctions. Such an institution would also reduce European reliance on the International Monetary Fund and World Bank, which remain politically dominated by the United States. Whereas countries such as Turkey and Egypt have readily used IMF financing to fuel growth and weather economic crisis, longstanding tensions between the United States and the Islamic Republic mean that Iran has been unable to secure IMF loans.

European governments are aware of the need to support Iran’s economic development through capital allocation. The European Commission’s recent move to allocate to Iran 18 million euros of a planned 50 million euros of development aid in order to “widen economic and sectoral relations” demonstrates the desire to fund growth. The European Commission simply lacks the right financial institutions to provide such capital to Iran at a meaningful scale.

Overall, Maas’ message contains real, practical ideas about how to not only sustain trade and investment in Iran in the face of secondary sanctions but also strengthen Europe’s economic sovereignty in lasting ways. However, Iran must recognize that there is no readymade “economic package” that Europe can deliver to save the JCPOA. There is only an “economic process” where improvements in the facilitation of trade and investment will occur over time and in sequence.

In the coming months, it will be feasible to institute a payment channel between central banks. In the coming year, it will be feasible to establish a new payment messaging system. Finally, over the course of several years, Iran could benefit from the creation of a European Monetary Fund, financing from which could truly transform prospects for Iran’s economy. For its part, Iran must remain willing to undertake its own economic process, beginning with critical FATF reforms. In this way, if Europe and Iran each grow stronger, through a renewed insistence on independence and autonomy, the prospects for political and economic cooperation will actually improve. The United States cannot be the fulcrum on which all partnerships must balance.

Photo Credit: German Federal Foreign Office

Iran's Currency Crisis is a Supply-Side Story

On Monday, the Iranian rial sank to a historic low. But those Iranians who scrambled to convert their rials into dollars found it difficult to do so—as they have for months. Since April, reports on the accelerating crisis have consistently noted a lack of hard currency available at Iran’s exchange bureaus.

This important detail of the current crisis has gone largely unexamined in foreign reportage. While the determinants for demand for foreign exchange—widespread anxiety about the state of the economy and the return of sanctions—are well understood, the second determinant of market prices—foreign exchange supply—remains subject to mere passing mention. This is a mistake. Iran’s currency crisis is a supply-side story.

In the absence of data, it is hard to show quantitatively that the currency crisis is primarily a supply-side phenomenon, but there are numerous factors that make this likely. Iran has been prevented from repatriating its foreign exchange reserves held in Europe. Its regional neighbors have vowed to cease using the US dollar to conduct bilateral trade. Illicit networks that have long funneled US currency to the black market have been interrupted. Most tellingly, the Trump administration is being urged by its close advisors to “quickly exacerbate the regime’s currency crisis” by interfering with Iran’s foreign exchange supply.

While the government has no doubt failed to inspire confidence in its economic leadership, contributing to the ouster of both the central bank governor and economy minister, it is unlikely that expectations of rising inflation and economic recession alone would create so dramatic a rush to the safe-haven of the dollar.

In an interview with Euronews, economist Saeed Laylaz, offers more detail on how the historic exchange rate principally reflects a shortage phenomenon. “You might imagine that the dollar price of 12,000 or 13,000 toman accounts for 100 percent of the currency market, when in actuality we have various companies completing imports with a dollar at a price less than 8,000 toman in the secondary market,” Laylaz explains. In his assessment, while the 8,000 toman rate accounts for 80 percent of transactions on the secondary market, “the dollar bill is 12,000 toman.” Greenbacks are physically scarce and this accounts for the historic prices making headlines worldwide. 

For companies with access to dollars at 8,000 toman and especially for those enterprises with access to dollars at the government rate of 4,200 toman, the price of the physical dollar bill offers an immense opportunity for arbitrage. The temptation for companies to divert a portion of their foreign exchange into the most lucrative and speculative parts of the free market has proven hard to ignore. One example can be seen in the petrochemical sector, where major companies, including state-owned enterprises, have been slow to make their foreign exchange available for sale on the secondary market through NIMA, the country’s centralized marketplace, despite instructions from the central bank and oil ministry.

Economist Hossein Raghfar described these companies as “accountable to no one” when it became apparent that they may have sought to sell their currency at the free market rate, rather than at the lower official exchange rate, despite the government instruction. Nonetheless, in the assessment of Masoud Nili, the government's chief economic advisor, this kind of arbitrage activity is a symptom of the rising premium and not its root cause. Nili comes close to acknowledging that the government's focus on profiteering in the early months of the crisis was an attempt to deflect from more consequential interruptions in foreign exchange supply. 

It is likely that the primary cause of the currency crisis is a severe shortage in foreign exchange. This places the Rouhani administration in an especially difficult bind. It might seem straightforward that increasing the foreign exchange supply would help stabilize the rial and prevent the speculation enabled by the extreme scarcity of the dollar and euro. Mohammad Reza Farzanegan looks at some of these issues in his study of illegal trade in Iran from 1970 to 2002. He confirms that easing the ability of actors to “acquire more subsidized exchange” will lead to some part of the currency to be “sold in the black market of foreign exchange.” The actions of the petrochemical companies offer a perfect case study. 

This is especially important at a time when the incentives for illegal import activity are increasing. Farzanegan writes that “whenever state intervention drives a wedge between international and domestic prices… there is an incentive for underground activities.” In subsequent research he has shown convincingly that the “wedge between international and domestic prices” can be applied externally—sanctions spur “underground activities.” In this way, making foreign exchange more readily available may stabilize the exchange rate, but it can serve to accelerate rent-seeking and smuggling, the agents of which have historically used their trading networks to take their profits offshore.

The specter of capital flight looms large over the administration. In a recent address, newly appointed central bank governor Ehsan Hemmati announced that the country would not use oil revenues in order to prop-up the currency. In a likely related move, Iran has decided not to seek to transfer EUR 300 million in cash from its funds in Germany to Iran to increase foreign exchange supply. A report in Shargh, a leading newspaper, suggests that the government had decided not to intervene to support the rial in order to prevent capital flight by allowing the dollar to become a scarce and expensive "luxury item." 

A recent report by Iran’s Parliamentary Research Center estimated that capital flight in the year leading up to March 20 amounted to USD 13 billion dollars. By comparison, during the Ahmadinejad administration, that figure was possibly ten times higher, with reports suggesting that between USD 100-200 billion was taken out of the economy as sanctions tightened. Between 2005-2012 Iran generated USD 639 billion in oil revenues, with falling exports offset to a degree by historic oil prices. Yet Ahmadinejad left office with Iran’s foreign exchange reserves at only around USD 50 billion higher than when he entered.

To prevent capital flight on that order, the Rouhani administration can prioritize rate convergence and stabilization over interventions that would significantly lower the price of the dollar. The Central Bank of Iran has sought to "bridge" the two sides of the market that Laylaz describes, announcing that "authorized exchanges can sell foreign currency bought from exporters and other sources registered through the SANA system, in the form of banknotes in the open market." The banknotes would be purchasable upon request from the central bank. In this way, any increase in the supply of banknotes at the upper end of the market will be associated with reduced supply at the lower end, helping push the rate to convergence, even if the rate remains historically high. A high exchange rate may be a necessary evil in order to protect fragile economic growth.

In a study of the Iran’s economy from 1981-2012, Hoda Zobeiri, Narges Roshan and Milad Shahrazi of the University of Mazandaran identify a strong negative relationship between capital flight and economic growth in Iran. By trapping capital at home, even devaluing rials, the Rouhani administration might hope that wealth is committed domestically towards investments and capital formation that can sustain growth. Some evidence that this may be taking place can be seen in the fact that the Tehran Stock Exchange is on a historic bull run.

Laylaz and others have criticized the administration for “adding fuel to the fire of the market” by failing to curb the demand for foreign currency. But by focusing on demand, critics will miss important supply-side phenomena, such as how the currency shortage may slow the capital flight that has historically preceded the reimposition of sanctions. Whether or not this is an intentional outcome of the Rouhani administration’s policy, that the inability or unwillingness to increase foreign exchange supply may be consistent with attempts to limit illicit trade and capital flight is a surprising outcome and one that deserves to be formalized as part of wider efforts to manage and minimize rent-seeking in Iran.

Photo Credit: Depositphotos

Can Chinese Investment Bring Sunshine Back to Iran's Solar Industry?

Renewable energy has been one of the brightest sectors in the Iranian economy, achieving 70 percent growth in the last Iranian year according to official data. There are currently 85 large-scale and more than 1,850 small-scale renewable power plants feeding electricity into the national grid. The overall capacity of renewable power plants in Iran reached 637 MW this month. A further 41 large-scale power plants with a total output capacity of 431 MW are currently under construction across the country.

Overall, the sector is projected to generate 1,000 MW of clean electricity annually by 2022. This additional capacity is especially important as policymakers seek to meet rising electricity demand and prevent summer blackouts in coming years. It is also a source of export revenue. Iran has exported USD 4.1 billion worth of electricity to its neighbors over the last five years, with renewable energy a growing contributor. 

The environmental benefits are also significant. Growing use of renewable energy has saved 541 million liters of increasingly precious water and replaced the consumption of 600 million liters of fossil fuels in the past ten years.

At a smaller scale, an increasing number of farmers, struggling with a chronic shortage of water supplies, are turning to solar power generation on their farms. Farmers in Esfahan who are no longer permitted to cultivate rice are taking advantage of a 20-year government guarantee for the supply of electricity. It is estimated that over 1,000 small-scale solar power plants are now installed in farms across rural Iran.

Attractive Legal Structure

But this encouraging growth is now in doubt. The Trump administration’s unilateral withdrawal from the JCPOA nuclear deal has brought economic uncertainty for local investors and made foreign direct investment increasingly difficult.

Mohammad Sadegh Zadeh, deputy minister of energy and head of the Renewable Energy and Energy Efficiency Organization (SATBA), recently announced that the sector has attracted IRR 100 trillion (USD 940 million) from local private-sector investors over the last two years. Foreign investment has been even more important, contributing USD 1.7 billion, nearly 70 percent of total investment since President Rouhani took the office in 2013.

Foreign investors completed several projects in this period. These include a 20 MW solar farm in Mahan backed by Swiss investors, five German-backed solar power plants in Hamedan with a total capacity of 38.5 MW, the first phase of a 50 MW solar plant backed by Italian investors, two Greek-backed 10 MW solar farms in Yazd and Isfahan; a 10 MW solar farm in Tehran backed by French investors, as well as further projects developed by Turkish, Austrian and Swedish companies.

However, Trump’s unilateral exit from the 2015 nuclear agreement with Iran, and his decision to re-impose sanctions against the country, pose a new threat toward foreign investments. The effects are already being felt in the sector.

British developer Quercus, which was set to develop Middle East’s largest solar power plant in Iran, decided to halt its work in the country, while other developers are reportedly re-thinking their plans for their future activities in the country, especially as even routine banking transactions become more difficult.

The depreciation of the rial and the tight foreign exchange market also pose a challenge for developers and make the incentives in Iran’s electricity market less attractive, according to Shahriar Sabet, a London-based renewable energy investor.

“Iran has created an attractive legal structure for investors which includes the power purchase agreement and FIPPA [Foreign Investment Promotion and Protection Act]... Also the feed-in-tariff (FiT) is an important factor as it remains one of the highest paid in the world,” Sabet says.

“Although with depreciation in rial, the FiT has dropped significantly but under FIPPA investors can still repatriate their capital and revenue under official exchange rate”, Sabet explains. “ The government is working hard to continue allocating the official exchange rate to the sector for the repatriation of revenues which in this climate is another positive sign,”

Sabet also emphsises that “institutionally, Iran has tried very hard to prioritize the renewable energy sector, with coordination between the Ministry of Energy, Ministry of Economy, SATBA, and local grid companies, to create a very supportive platform with clear procedures for foreign investment.”

“The current conditions, internally and internationally, have adverse effects on the market. However if Iran maintains its current structures, our view is that it is a market to invest in. I do believe those who are on the ground should not abandon their projects and confront the headwinds and new investors should also explore ways to enter this highly attractive and relatively stable sector in Iran,” Sabet insists.

The Need for Government Guarantees

But the government still has options to save the sector. Ehsan Imani, an expert in feasibility studies of renewable power plants, believes that the government needs to focus on three major issues to keep foreigners interested in the market.

“Payment guarantees could be the very first and the most effective tool to revive the market’s attraction. The feed-in-tarrif also should remain high although it is still higher than some other countries even after drops in recent months the. Investors cannot easily ignore Iran if the government reconsider its pricing policy and issue payment guarantees,” he explains.

Sabet agrees on the need for guarantees: “Issuing such guarantees for smaller projects will create more confidence and boost the flow of investment albeit at smaller scale.”

Regular settlement is also of high importance from Imani's point of view: “Late payments naturally could change the minds of those investors who are plans to enter the market.”

Until the recent currency crisis, SATBA had reportedly managed to meet its payment requirements on time. The Central Bank of Iran has offered to make payments in yuan instead of euros, a move not favored by European investors.

The Sun Rises in the East

As with other sectors of Iran’s economy, the withdrawal of European investors from Iran’s solar industry may mean that “Chinese money turns out to be the best available option while other investors have to miss the opportunity,” as Sabet puts it.

Chinese investors face fewer barriers to investment according to Imani, “They face no serious restrictions to sell facilities to Iran, and payments are easy to make–[even if it is paid in yuan].”

This is especially true because Chinese companies lead the world in the manufacturing of solar panels. Because the panels merely need to be installed in Iran, up to 80 percent of the total investment cost for a solar project in Iran can be paid directly to Chinese panel suppliers or plant designers in local currency.

Recent developments in the market suggest a growing role for Chinese investors. In July, Yazd province officials signed an agreement with a partnership of Chinese and Italian firms for the development of a transformative 500-1,000 MW of solar projects. The agreement includes installing 20,000 small 5 KW power plants in residential units across the province.

The provincial government in Qom province  signed an MOU with a major Chinese company to develop of a 30 MW power plant in the central province. Chinese firms have also reportedly reached agreements for development of large solar power plants and the local manufacturing of solar panels in Fars, Zanjan, North Khorasan and East Azarbaijan provinces.

For Iran’s solar sector, the sun may be setting in the West. But it may rise again in the East.

Photo Credit: IRNA

As Economic Anxieties Deepen, This Clinic Helps Iranians Manage Debilitating Stress

Whether facing a deadly eight-year war or seemingly unending economic crises, Iranians have been exposed to more than their fair share of stress in the past few decades. A significant 23 percent of Iranians—around 20 million people—struggle with mental health while 12 percent of men and 16 percent of women suffer from depression, according to figures from the Ministry of Health.

A recent study of children and adults in Tehran by the Iranian Pediatric Association found that 80 percent of residents experience at least one major stressful event per year and 45 percent report feeling stress due to the present economic situation. Association director Dr. Ahmad Ali Noorbala told an audience at the University of Tehran, "The results of this study show that the incidence of mental disorders in our country is increasing. We live in a country where people sometimes experience unpleasant events and face a lot of stress daily. If they cannot control the stress, they may face psychological problems, which can manifest physical illnesses." Nonetheless, traditional mentalities and lackluster education mean that a cultural stigma persists around the issue of mental health.

In the absence of adequate government attention to the increasing risks to mental health, a private clinic in Tehran is employing an integrative method of therapy—never before offered in Iran—to help individuals better cope with stress. Having begun general studies in 2011 and having recently completed three years of clinical research, the Aramesh Multidisciplinary Pain Clinic publicly launched its neuropsychotherapy services on August 15.

Their treatment method is a meta-framework which takes into account the dynamic interplay between the mind, body, society, and environment. This framework formulates a holistic therapeutic practice informed by neuroscientific research. Outside of Iran, such treatments were first pioneered around a decade ago.

“In countries like Iran where stress is very acute, using knowledge that can teach us how to manage this stress can prove immensely influential on our daily performance,” Masoud Nosratabadi, a professor of clinical psychology at the University of Social Welfare & Rehabilitation Sciences and a supervisor of the clinic’s neuropsychotherapy department told Bourse & Bazaar.

In recent months, Nostrabadi and his colleagues have seen an increase in patients complaining about stress related to rising economic anxieties. Due to returning US sanctions, promised to be “the strongest in history,” Iran’s currency has collapsed and inflation has risen. Most experts foresee inflation to return to 20 percent, pushing up the price of many common goods. With their livelihoods threatened, some Iranians are considering emigration. But most will not be able to escape the pressures of life under sanctions in this way.

Stress caused by economic conditions has public health consequences. As Nostrabadi points out, the common denominator of many serious ailments, from heart disease and cancer to strokes and respiratory sicknesses, is stress and related emotional disorders. Evidence suggests that stress either acts as the generator of disorders and diseases or it exacerbates sickness and inhibits recovery.

Nostrabati and his team cannot control how much stress is imposed on their patients, but they aim to arm them with the tools to better manage stress. Unfortunately, many individuals are debilitated by stress and find themselves frozen in a state of inaction. “‘Freezing’ is the worst response and in my experience many Iranians go down this path when facing major stress,” Nosratabadi said.

The experts at Aramesh Clinic turned to neuropsychotherapy because previous methods failed to use comprehensive evaluations of patients and lacked integrative solutions rooted in the brain, behavior, and cognition. Old methods also ignored the uniqueness of each patient by offering general treatment guidelines.

When patients first arrive at Aramesh, they undergo a full evaluation consisting of four dimensions: mental health and stress control, cognitive performance, brain biomarkers, and personality traits. The clinicians employ brain performance improvement technology including but not limited to neurofeedback and biofeedback therapy.

In such a treatment protocol, the clinicians at Aramesh Clinic display measure brain activity using electroencephalography (EEG) monitors attached to the scalp. Heart rate monitors are also used. With brain activity and heart rate displayed to the patient on a computer screen, they are then asked to try to regulate the mind and body in order to play a simple game or to play a film. For example, reducing ones heart rate to a target level will unfreeze a game of Pacman. Through repeated practice, training is intended to give the individual a degree of control over their mental and physical state encouraging them to apply the same techniques for stress management in their daily life.  

In addition, the clinic offers psychotherapy with a focus on devising therapeutic processes that are unique to each person based on the integrative profile of the patient. Nosratabadi adds, “Our process doesn’t include medication, but we’re not against patients taking medication because some of the patients really need it.”

Neuropsychotherapy services offered at the clinic pursue two general goals. They have the potential to improve the personal and professional performance of people with a wide variety of vocations from students to executives to athletes. They can also help reduce the severity of ailments like chronic anxiety, chronic migraines, irritable bowel syndrome and sleep problems rooted in stress.

The clinic also focuses on improving corporate performance by offering evaluation services that seek to find ignored talent in corporations and incentivize workers. According to Nosratabadi, they have already consulted for many private organizations and individuals, but have yet to work with the government sector.

By neglecting mental health, Iran's government is also ignoring a major issue that is hurting its already embattled economy. As Pouya Paknejad, head of neuropsychotherapy at Aramesh Clinic's explains, to encourage government action, many countries calculate the significant losses their economies suffer each year due to stress. But there are no such source of information in Iran. "This way of thinking hasn't yet been entrenched here in Iran where we would calculate a rial equivalent to measure the impact on the economy whenever we speak of mental health," he says.

As with all other issues, reforms to Iran's approach to stress management are arriving slowly and with great difficulty. The government must better cooperate with the private sector to tackle this challenge that so greatly impacts the economy and the everyday lives of Iranians around the country.

Photo Credit: Radiokafka, Aramesh Clinic

Europe's SWIFT Problem

This article was originally published by Moneyness. 

German foreign minister Heiko Maas recently penned an article in which he said that "it’s essential that we strengthen European autonomy by establishing payment channels that are independent of the US, creating a European Monetary Fund and building up an independent Swift system."

So what exactly is Maas's quibble with SWIFT, the Society for Worldwide Interbank Financial Telecommunication? SWIFT is a proprietary messaging system that banks can use communicate information about cross border payments.  President Trump has threatened to impose sanctions on SWIFT if it doesn't remove a set of Iranian banks from the SWIFT directory. 

For Heiko Maas, this is a problem. Iran and Germany remain signatories to the same nuclear deal that Trump reneged on earlier this year. The deal committed Iran to cutting back its uranium enrichment program and allowing foreign inspectors access to nuclear sites, in return obligating signatories like Germany to normalize economic relations with Iran, including allowing the unrestricted sale of oil. If Iran is bumped from SWIFT, it could prevent Germany from meeting its side of the deal, potentially scuppering the whole thing. So a fully functioning SWIFT, one that can't be manipulated by foreign bullies, is key to Germany meeting its current foreign policy goals. 

SWIFT is vital because it is a universal standard. If I want to send you USD 10,000 from my bank in Canada to your bank in Singapore to pay for services rendered, bank employees will use SWIFT terminals and codes to communicate how to manipulate the various bank ledgers involved in the transaction. If a bank has been banished from SWIFT, then it can no longer use what is effectively a universal banker's language for making money smoothly flow across borders. 

It would be as-if you were at a party but unlike all the other party-goers were prohibited from using words to communicate. Sure, you could get your points across through hand gestures and stick drawings, but people would find conversing with you to be tiring and might prefer to avoid you. Without access to SWIFT, Iranian banks will be in the same situation as the mute party-goer. Sure, they can always use other types of communication like email, telex or fax to convey banking instructions, but these would be cumbersome since they would require counterparties to learn a new and clunky process, and they wouldn't necessarily be secure. 

It seems odd that Maas is complaining about SWIFT's independence given that it is located in Belgium, which is home territory. But Trump, who is on the other side of the Atlantic, can still influence the network. The way that he plans to bend SWIFT to his will is by threatening members of its board with potential asset expropriations, criminal charges, travel bans, as well as punishing the companies they work for by restricting them from conducting business in the U.S.

How credible is this threat? SWIFT's board is made up of executives from twenty-five of the world's largest banks, including two Americans: Citigroup's Yawar Shah and J.P Morgan's Emma Loftus. No matter how erratic and silly he is, I really can't imagine Trump following up on his threat. Would he ban all twenty-five banks, including Citigroup and J.P. Morgan, from doing business in the U.S.? Not a chance, that would decimate the global banking system and the U.S. along with it. Requiring U.S. banks do stop using SWIFT would be equally foolish. Would he risk ridicule by putting two American bank executives—Shah and Loftus—under house arrest for non-compliance? I doubt it.    

If SWIFT doesn't comply with US requirements that Iranian banks be cut off from its network, SWIFT board members (such as Yawar Shah) will face asset freezes & travel bans, and the banks that employ them (Citigroup) will be cut from the payments system: https://t.co/tVntv3USzs pic.twitter.com/XAiLOKPdtk

— JP Koning (@jp_koning) June 6, 2018

No, the SWIFT board is TBTP, or too-big-to-be-punished. But even if Trump's threat is not a credible one, surely SWIFT will fall in line anyways. Large international businesses generally comply with the requests of governments, especially the American one. But there's a kicker. European law prohibits European businesses from complying with foreign sanctions unless the have secured EU permission to do so. This leaves SWIFT in an awfully tight place. Which of the two jurisdictions' laws will it choose to break? Assuming it can't get EU permission to comply with U.S. sanctions, then it can either illegally comply with U.S. law, or it can legally contravene U.S. laws. Either way, something has to give.   

Europe can win this battle, a point that Axel Hellman makes for Al-Monitor. After all, SWIFT is located in Belgium, not New York, and jurisdiction over SWIFT surely trumps lack of jurisdiction. Indeed, on its website SWIFT says that its policy is to defer to the EU on these matters:

"Whilst sanctions are imposed independently in different jurisdictions around the world, SWIFT cannot arbitrarily choose which jurisdiction’s sanction regime to follow. Being incorporated under Belgian law it must instead comply with related EU regulation, as confirmed by the Belgian government."

Consider too that SWIFT itself is supposed to be committed to a policy of non-censorship. Chairman Yawar Shah once said that “neutrality is in SWIFT’s DNA.” So from an ideological perspective it would seem that SWIFT would be aligned with Europe's more inclusive stance.

Of course, SWIFT's stated commitment to neutrality conflicts with the fact that it has banned Iran from the network before. In early 2012, U.S. pressure on SWIFT grew in the form of proposed legislation that would punish the messaging provider should it fail to ban Iranian users. SWIFT prevaricated, noting in early February that it would await the "right multilateral legal framework" before acting. In March 2012, the EU Council passed a resolution prohibiting financial messaging providers from servicing Iranian banks, upon which SWIFT disconnected them. It was only in 2015, after passage of the nuclear deal, that SWIFT reconnected Iran. (I get this timeline from the very readable Routledge Global Institutions book on SWIFT, by Suzan Scott and Markos Zachariadis).

The takeaway here is that SWIFT only severed Iranian banks in response to European regulations, in turn a product of a conversation between American and European leaders. SWIFT will seemingly compromise its neutrality if there is a sufficient level of global agreement on the issue followed up by a European directive, not an American one. 

If Heiko Maas wants an "independent SWIFT," the above analysis would seem to illustrate that he already has it. Thanks to its European backstop, SWIFT is already independent enough to say no to U.S. bullying. As long as they are willing, European officials can force a showdown over SWIFT that they are destined to win, thus helping to preserve the Iranian nuclear deal. 

But maybe European officials don't want to go down this potentially contentious path. Perhaps they would prefer to preserve the peace and grant SWIFT an exemption that allows the organization to comply with U.S. sanctions, thus cutting Iran off from the messaging network, while trying to cobble together some sort of alternative messaging system in order to salvage the nuclear deal. Maybe this alternative is what Maas is referring to when he talks of a building an "independent SWIFT."

An alternative messaging service would have to be capable of providing bankers with sufficient usability so that Iranian oil sales can proceed fluidly. In a recent paper, Esfandyar Batmanghelidj and Axel Hellman give some clues into what this system would look like. During the previous SWIFT ban, several European banks were able to maintain their relationships with Iranian financial institutions by using "ad hoc messaging systems." These ad hoc solutions could be revived, note Batmanghelidj and Hellman. 

Using this ad hoc system, so-called gateway banks—those that have both access to the ECB's large value payments system Target2 and limited exposure to the U.S. financial system—would conduct euro transactions on behalf of buyers and sellers of Iranian oil. Since presumably only a few gateways would be necessary to conduct this trade, it would be relatively painless for them to learn the new messaging language and the set of processes involved. For instance, instead of using SWIFT bank identifier codes to indicate account numbers, Batmanghelidj and Hellman point to the possibility of using IBAN numbers, an entirely different international standard. 

This independent ad-hoc system would probably work, on the condition that the European monetary authorities continue providing gateway banks that serve Iranian clients with access to the ECB's Target2 payments system. This is a point I stressed in my previous blog post. It isn't access to SWIFT that is the lynchpin of the nuclear deal, it is access to European central banks. But as long as folks like Heiko Maas get their way, I don't see why this sponsorship wouldn't be forthcoming. In response, Trump could always try to sanction the European central bank(s) that allow this ad-hoc system to continue. But an escalation of U.S. bullying from the mere corporate level (i.e. SWIFT) to the level of a friendly sovereign nation would constitute an even more nutty policy. I just don't see it happening.

At stake here is something far larger than just Iran. As I recently wrote for the Sound Money Project, financial inclusion is a principle worth fighting for. If one bully can unilaterally ban Iran from the global payments system, who is to say the next victim won't be Canada, or Qatar, or Russia, or  China? Europe needs to stand up to the U.S. on this battle, either by forcing a SWIFT showdown or by sponsoring an ad hoc alternative—not because Iran is an angel—but because we need censorship-resistant financial utilities.

Photo Credit: B&B

International Airlines Are Leaving Iran. Here’s Why.

Iranians reacted with anger and frustration to the news that British Airways will suspend its service to Iran from September 23. Soon after, news came that Air France would axe its service on September 18. As reported by the Washington Post, some Iranians expressed a feeling of being “imprisoned in the country” as they learned that international airlines were leaving Iran. Hamid Baeidinejad, Iran’s Ambassador to the United Kingdom, responded to British Airway's withdrawal more pragmatically, noting his hope that “Iran Air, with its three weekly direct flights to London, can seize the opportunity and fill the gap.”

The news appears to reflect further instances of multinational companies withdrawing from Iran in the face of returning U.S. sanctions while bowing to the political pressure exerted by the Trump administration. Israeli Prime Minister Benyamin Netanyahu took this view, stating about the withdrawals, "That's good. More should follow, more will follow, because Iran should not be rewarded for its aggression in the region.”

But the airlines have communicated that commercial and not political factors were paramount in the decision to withdraw. The British Airways statement described their London to Tehran route as "currently not commercially viable.” Air France echoed “poor commercial viability.” KLM has pointed to "negative results and financial outlook.” Some Iranians, observing regularly full flights, have questioned the honesty of these statements.

To better understand whether commercial or political considerations are driving these decisions, Bourse & Bazaar spoke to an executive of one of the international airlines now withdrawing from Iran. The executive asked not to be named given the sensitivity of the issues at hand. 

The executive’s account provides a more precise picture of why numerous airlines have determined that flying to Tehran is no longer commercially viable. These claims are not a fig leaf for politically motivated decisions, nor attempts to downplay legal barriers posed by returning sanctions (which are minimal). Instead, over the last few months, larger economic forces arose that made routes operating at high passenger loads unattractive, at least relative to the option of redeploying aircraft other routes worldwide.

As Amir Noorbaksh has written for Bourse & Bazaar, the influx of international carriers into Iran led to increased competition. Such competition depressed airfares in the short term. Airlines knew that it would be “difficult to become profitable quickly" and had expected to “wait at least two years in order to break even,” the executive explains. But by early 2018, the break-even point remained out of reach.

International carriers had expected that the growth in business and tourist travel to and from Iran would boost demand and help drive airfares upward over time. But the stalling post-sanctions economic recovery, slowed in part by President Trump’s decision to decertify the Iran nuclear deal in October as well as domestic factors, meant that the projected growth in passenger numbers was failing to materialize.

In response, as the first quarter of this year came to a close, most international carriers active in Iran began to plan reductions in their service in order to better match supply with demand. Austrian Airlines pursued a realignment of the airline’s portfolio by suspending flights to Esfahan and Shiraz. KLM planned to suspend its flights and Air France opted to run a reduced service after switching the operation of the Paris-Tehran route to Joon, a subsidiary. British Airways likewise planned to reduce the frequency of its flights. 

These adjustments should have enabled the international airlines to increase airfares in the market by addressing oversupply, bringing profitability back within reach for the sector. But the adjustments coincided with President Trump’s withdrawal from the Iran nuclear deal and an acceleration in Iran’s currency crisis.

The falling value of the rial had two important effects for international airlines. First, it significantly decreased demand. Not only were airfares more expensive as the purchasing power of the rial declined, but Iranians were also struggling to get reliable access to the hard currency they need in order to spend freely when abroad. Majid Nejad, CEO of Alibaba.ir, Iran’s leading online travel website, told the Washington Post that “compared with the same period last year, bookings to foreign destinations from Iran have fallen by half.”

Second, as the rial lost value, the revenues accrued by international airlines in Iran also lost value. In order to mitigate the foreign exchange risk, some international airlines began to market tickets locally only at the highest booking classes (an airline industry price categorization). Those few Iranians with access to foreign banks cards could still purchase tickets at any booking class online, accessing cheaper fares. Nonetheless, the move to increase prices hit demand.

But even if higher fares could protect revenues from devaluation in the short-term, the airlines faced long-standing issues around repatriation of revenues. Last week, the Iranian Civil Aviation Organization announced that international airlines would need to buy euros at the market rate, contradicting an earlier assurance provided by the Central Bank of Iran that foreign currency would be available to the airlines at the lower government exchange rate. The executive notes that a “lack of clear communication from the central bank and aviation authority proved one of the most frustrating aspects of the whole episode.”

In any case, airlines struggled to convert their rial holdings into foreign currency at whatever the rate. The airlines executive believes that when airlines sought to convert their rial holdings in accounts at banks such as Saman Bank and Parsian Bank, the central bank failed to make the foreign currency available because they either “did not have sufficient foreign currency on hand” or “were opting to build up reserves for more critical industries like the pharmaceutical sector.” As rial-denominated revenues languished in Iran, airlines saw their losses mount, and the routes were no longer commercially viable. 

For context, the executive impresses that “business is good in the aviation industry worldwide right now” and that for airline executive committees dealing with the headache of operating in Iran, the option to simply reassign an aircraft and flight crew to another more profitable route became increasingly appealing.

For now, Lufthansa and Alitalia are continuing their services to Iran. For these European holdouts, the withdrawal of their competitors could offer a reprieve, reducing competition and perhaps helping to stabilize airfares. European governments, which have been actively involved in the challenges faced by their national carriers since January, remain politically supportive. Of course, Iran Air will benefit. Iran's national carrier announced route expansions in May in an effort to win back market share from the international players. 

No doubt, sanctions contributed to the withdrawal of international airlines out of Iran, but not for the political or legal reasons readily assumed. Rather, international airlines would have persisted in their service to Iranian destinations, emboldened by political support from European governments, had it not been for the intractable issues surrounding commercial viability.

While the withdrawal from Iran essentially came down to fundamental commercial calculations, the executive makes sure to relay that the decision to cease operating in Iran was nonetheless difficult to make. In his words, nothing was more painful than “how deeply unfair the whole situation is for our team members in Iran.” Like many other young and talented Iranians, those let go by the international carriers will be wondering "what next?"

Photo Credit: Wikicommons

Despite Political Drama, Iran's Private Sector Banks Continue March on Compliance

Iran’s efforts to meet the action plan requirements set by the Financial Action Task Force (FATF), a global standard setting body, faced another setback as reports emerged that the Guardian Council had rejected aspects of the bill approved by parliament that would see Iran accede to the United Nations Convention Against Transnational Organized Crime, known as the Palermo Convention.

The political drama surrounding the FATF action plan has overshadowed the role of Iran’s private sector banks in improving their compliance protocols while actively pushing for stronger regulatory requirements. Banks such as Bank Pasargad, Middle East Bank, and Saman Bank enjoy both large market capitalizations and a crucial role as intermediaries with the international financial system, lending these relatively young institutions considerable influence. But policymakers in Europe, scrambling to preserve banking ties with Iran in the face of returning U.S. sanctions, have overlooked the imperative of engaging Iran’s private sector banks as agents for change.   

Founded by some of the most capable bankers in Iran, many of whom studied outside of the country, Iran’s private sector banks serve as a kind of braintrust for the sector at large. The top bankers at Pasargad, Middle East, and Saman, hold degrees from University of Southampton, University of Wisconsin, and CASS Business School respectively.

The Association of Private Banks and Credit Institutions, an industry-body, actively lobbies officials at the Central Bank of Iran, at the Financial Intelligence Unit of the Ministry of Economic Affairs and Finance, and the relevant parliamentary committees. Anecdotes abound of private sector bankers arriving to the central bank late at night in order to sketch some key concept on the whiteboard on the eve of a major decision. Though not always successful in shaping policy to their designs, the private sector is far from passive when it comes to engaging government stakeholders.  

Despite this track record as change agents within the Iranian financial system, private sector banks have been squeezed not just by domestic political opponents, but also by international pressures.

Mostafa Beheshti Rouy, a veteran banker and executive board member at Bank Pasagrad, believes that international sanctions, which have been largely justified by pointing to the lack of transparency in the Iranian financial system, counterintuitively made reforms that would increase transparency harder to achieve.

“If the objective was to promote greater transparency or to establish stricter anti-money laundering or counter-terrorist financing policies in Iran, it would have been simple to pave the way by encouraging specialized international firms to advise and assist the Iranian government and financial institutions to develop and implement the necessary legislation, procedures, and programs,” Beheshti Rouy argues. 

In the absence of “practically any outside help,” over the last two decades, the Iranian financial sector was left to rely on internal expertise to design, draft, and implement the legal frameworks and compliance policies in accordance with international best practice.

Iran’s leading private sector banks have not waited for the FATF legislation to come into force in order to strengthen their internal procedures, particularly around know-your-customer (KYC) and know-your-transaction (KYT) due diligence. Concerns about the transparency and integrity of the Iranian financial system date back to the time of founding of Iran’s private sector banks two decades ago. “From the very first days” the creation of private sector banks in Iran was tied to a “special emphasis and attention in preparing corporate governance and risk policies,” says Beheshti Rouy. 

When establishing Pasargad in 2005, Beheshti Rouy and his colleagues “studied all related literature, engaged best local consultants, and to the extent possible obtained valuable information from the internet.” From the outset, the bank sought to meet international best practice when developing its core banking system, payment systems, and enterprise resource planning (ERP) systems despite their relative isolation. In 2010, the bank was among the first to integrate sanctions screening software within its core banking system. Because of international sanctions, this software was not available in Iran and needed to be acquired from abroad. 

These self-led efforts were successful in bringing Iran’s private sector banks closer to international standards for financial integrity, especially Iran’s lawmakers lagged behind in instituting the legal and regulatory reforms. Iran’s private sector bankers feel that this progress was indirectly recognized by the Obama administration in the implementation of Executive Order No. 13599 in 2012, which saw the Iranian financial sector sanctioned due to “deficiencies in Iran’s anti-money laundering regime and the weaknesses in its implementation, and the continuing and unacceptable risk posed to the international financial system by Iran’s activities.” While Iran’s private sector banks were designated under E.O. 13599 along with the rest of the financial sector, eight banks were declared “not-subject to secondary sanctions” as part of this designation.  

Richard Nephew sees the distinct designation of the eight banks differently: “It had nothing to do with recognizing them as being well run or ordered.” Nephew is senior research scholar at Columbia University’s Center on Global Energy Policy and served as deputy coordinator for sanctions policy at the State Department at the time when E.O. 13599 was devised. He explains that U.S. officials “didn't have any derogatory information on those banks to justify designation in the traditional sense but had a legal requirement to make clear that U.S. persons were not permitted to engage in transactions with those banks.” Nephew acknowledges that the lack of derogatory information could theoretically reflect that the private banks were “were well run or ordered” but stresses that when it comes to sanctions designations, a lack of incriminating information does not mean that the U.S. authorities “thought private banks were special.”  

Following implementation of the JCPOA, restrictions on private sector banks were reduced further. Iran received broad sanctions relief and was reconnected to the SWIFT international payments messaging system. But the stigma associated with sanctions continued to cloud efforts to facilitate business between Iranian and European banks, leading to Secretary of State John Kerry engaging in public outreach to global banks in an effort to reassure wary international banks.

As American policymakers struggled to assuage fears, Iran’s private sector banks doubled-down on their reform efforts in order to win approval from European export credit agencies for inclusion in financing guarantee agreements and to re-establish correspondent banking relationships.  As an example of a concrete measure, Beheshti Rouy points to his bank’s implementation SWIFT’s own sanctions screening service in an effort to identify and block “all suspicious transactions in our daily operations.”  

Today, as sanctions are set to return and while the Trump administration pursues its “financial war” on Iran, Beheshti Rouy remains hopeful that the reforms made by the most advanced Iranian banks will offer some defense. He believes that the number of banks not subject to secondary sanctions under E.O. 13599 will likely reduce from eight to just three or four, but that Pasargad, “shall remain as one of the Iranian banks authorized by U.S. Treasury to continue humanitarian trade” due to its compliance profile.  

Of course, Beheshti Rouy and his peers had much higher hopes for their financial institutions. He relays a sentiment shared by many of his peers: “If during these years we had access to international capital markets, were able to raise finance as our neighbors do, were able to engage international consulting companies, or were able to purchase the tools and software that other international banks possess, without a doubt we would have been different banks today.” 

In October, Iran faces a deadline for meeting FATF’s action plan requirements. With the clock ticking down, it would behoove European policymakers, who remain committed to economic engagement with Iran, to empower Iran’s private sector banks to drive forward reforms.

As Laurence Norman of the Wall Street Journal has reported, five European central banks have indicated they would considered opening direct payment channels with the Central Bank of Iran to enable financial ties in the face of U.S. secondary sanctions—but fully implementing the FATF action plan is a precondition. Rather than sit back and hope that Iran achieves compliance, European governments should be more active in providing technical assistance, principally by encouraging or even funding European private sector consultants to consult Iranian private sector banks directly. These banks, in turn, will be able to exert a positive influence on figures such as Iran’s new central bank governor.  

Such a bottom-up approach is commonplace. One notable program led by KPMG in cooperation with the Swedish International Development Cooperation Agency, focused on increasing risk management capacity among mid-career managers at financial institutions around the world. Run for over a decade, the program trained managers at 216 financial institutions in a list of countries including North Korea, but, indicatively, excluding Iran.

Ensuring Iran’s private sector banks can access such existing international training programs, banking technologies, and legal support despite returning U.S. sanctions would aid in the creation of the “different banks”—more robust and more transparent—that would pose a minimal threat to the integrity of the international financial system.

Photo Credit: Simon Dawson

Iran's Government Steps in to Address Paper Crisis, But Papers Over the Cracks

Among currency fluctuations and returning sanctions, Iran is now battling a paper crisis. Gradual price hikes have been increasing pressure on book and newspaper publishers over the last year, but the scale of the crisis became clear when Culture Minister Abbas Salehi announced on August 4 that the country has just enough newsprint paper in storage to meet two months worth of demand. In response to the shortage, some newspapers have been forced to cease publishing, while others, including the popular reformist newspaper Shargh, have put up a pay wall.  

The government has rolled out a support package that includes importing paper as an essential good. This will most likely calm agitated publishers in the short-term, but will prolong a vicious cycle and defer the real reform needed to address a decades-long problem of corruption and inefficiency. The paper crisis represents something bigger.

Mahmoud Sadri, a veteran journalist who currently heads the publishing department of Donya-e-Eqtesad, Iran's foremost business daily, sees the paper crisis as just the latest manifestation of “Iran's economic inefficiency.” Speaking to Bourse & Bazaar, Sadri explained, "We have no phenomenon called a paper crisis as a separate and standalone phenomenon. It's not accurate to just say paper is in crisis since many goods are in crisis.”

In Sadri’s view, the paper crisis has its roots in the time of the 1979 Islamic Revolution, during which the government took on the mission to foster cultural production and provided for all the paper and raw material needs of the publishing industry. In order to do that, the Iranian government has typically opted for one of two options: they have either purchased the paper and offered it at cheap subsidized rates or offered handouts directly to private importers.

This misguided approach created conditions ripe for rent-seeking and corruption. Importers sought to abuse the cheap money they were being provided instead of creating actual in-demand value.

Such rent seeking accelerated in recent months, as the Iranian rial came under increased pressure due to returning US sanctions. "A group of profiteers and rent-seekers have entered the market and are making things much harder for paper consumers," Abolfazl Roghani Golpaygani, president of the Iran Paper and Paperboard Syndicate said in a recent interview.

But the government seems intent to maintain the longstanding subsidies. On August 6, the Ministry of Industry announced that paper used for publishing had been added to the limited list of essential commodities that will be imported using the preferential government exchange rate of IRR 42,000 to the dollar. That rate is to remain unchanged until at least March 2019 as President Hassan Rouhani promised recently. Furthermore, the ministry agreed to immediately import 20,000 tons of paper to address the shortage.

Many journalists and publishers, like Sadri, are critical of this arrangement. They believe that the government should not use taxpayer money for handouts to publishers who often publish content simply to maintain their license, or who wish to publish content in accordance with their own political and economic leanings. There are growing calls for for a free market approach to publishing  in order to encourage competition that will boost newspaper quality and balance prices.

"How and based on what logic has paper been considered an essential good under the current circumstances?" asked Saeed Laylaz, a prominent journalist and pundit in a recent interview. He also referred to the decision as "explicit theft.”

However, cutting the flow of government support will mean that hundreds of book, newspaper, and magazine publishers will fold, with the potential for thousands of job losses at a time when high unemployment is a major challenge for the Rouhani administration. It should come as no surprise that the administration is unwilling to take a leap and reform the paper subsidies, despite Rouhani’s longstanding intention to reduce subsidies across the economy.

"The other issue is that the majority don't accept that government paper subsidies are wrong in essence," Sadri adds. In this way, Iran's government is failing to address the long-term problem by dealing with the current paper crisis as a short-term phenomenon.

But while change to the government policy may not be imminent, Sadri does believe it is inevitable. "Even if no prospects of change are foreseeable at the moment, it will happen either way," he said, pointing out that many countries have undergone similar processes of reform that on many occasions took decades to realize. In publishing, as with other parts of Iran’s economy, reform remains a waiting game.

Photo Credit: Deposit Photo

Rising Prices Push Homebuyers Out of Iran's Capital

A 41 percent rise in Tehran City’s average home prices has left some residents, especially renters, with no option but to leave the capital for more affordable housing units in suburban areas close to Tehran.

Figures released by the Ministry of Roads and Urban Development show that 37,700 housing units were sold in Tehran city during the first quarter of the current Iranian fiscal year (March 21-June 21, 2018) at an average price of IRR 70 million per square meter. A year-on-year comparison indicates 6 percent and 41 percent increases in total number of home deals and the average prices, respectively.

The rental market has also experienced a surge in recent months. No public statistics are yet available about current year rentals in Tehran. However, Hessam Oqbaei, the deputy director of the Iranian Realtors Association, reported in a recent interview a 51 percent increase in Tehran’s rental price index in the past few months. This is while the Central Bank of Iran reported 12.5 percent growth in rental index of urban areas across the country during the third month of Iranian year.

Oqbaei believes that home prices are the key factor impacting rentals in Tehran, explaining “the surge in rents cannot be lower than the growth in home prices.” “Rentals are expected to increase rapidly in coming months,” he said, adding “This is beyond what citizens can afford.”

Monthly data released by Tehran Realtors’ Association also indicates a sharp 22 percent drop in number of rental contracts in the city during the month to June 21—the number is down from 22,143 last year to 17,200 this year. 

Price Shocks

As per the latest national census conducted by Statistical Center of Iran in 2016-17, Karaj was the top destination for residents moving out of Tehran during the five years to December 2017.

In just the last three months, more than 53,000 individuals have moved from Tehran to Karaj City. In the first quarter of the Iranian fiscal year, the Karaj housing market recorded 65 percent growth in home sales and an 18 percent increase in the average price of residential units.

New housing developments and easier transport links, including expanded highways and suburban rail connected to Tehran’s subway network, have attracted homebuyers to the city. 

Following Karaj, several less expensive areas also saw increased market activity. Pakdasht in the south-east of Tehran Province and Andisheh, located south of Tehran City, recorded significant growth in home deals in the first quarter—75 percent and 56 percent, respectively.

Homebuyers paid an average of IRR 900 million in Pakdasht and IRR 1.73 billion in Andisheh City, which is closer to the capital. By comparison, the average price of sold residential units in Tehran stood at IRR 6.5 billion in the same period.

The same trend can be observed in Kamal Shahr and Mohammad Shahr, which saw the highest number of home deals in Alborz Province after Karaj. More than 1,178 deals were recorded by realtors in Kamalshahr at an average price of IRR 650 million.

The Role of Speculation

Homebuyers are not the only players in Iran’s real estate market. Choas in parallel markets such as the currency market, rising inflation, and low returns on bank deposits, have spurred speculative activities in the housing market.

Speculation in smaller towns remains risky, as sudden increases in home prices could reduce the attractiveness of the suburban markets.

The government is also taking various measures to help real homebuyers in the face of speculation—this has been on top of the Ministry for Roads and Urban Development’s agenda since President Hassan Rouhani took office.

In a recent interview, the deputy minister of roads and urban development, Hamed Mazaherian, cautioned speculators over their presence in the housing market and recommended they exit the market before they bear losses.

“The ministry will soon start addressing speculation in the market by levying taxes on vacant housing units and lands…Lawmakers are also studying a bill to levy tax on revenues earned from home sales,” he declared.

The bill proposes levying taxes equal to 80 percent of the difference between the value of residential units at the time of purchase or sale. However, an exemption is considered for deals in which the owner sells the residential unit at a lower price than the money they paid at the time of purchasing it.

More than 490,000 residential units are left vacant in Tehran City, according to roads minister Abbas Akhoundi. The Ministry of Economic Affairs and Finance has also said it strongly supports the measure, for it helps balance the housing market.

In a futher move, the ministry is also considering a series of measures to support renters. According to Mazaherian, a bill has been proposed in parliament, which suggests increasing the minimum period of rent contracts from one year to two years or more.The proposed measure also includes setting a 10 percent cap for rent increases.

Photo Credit: IRNA

Iran Sanctions Hopes Fly on Possible Delivery of Eight ATR Aircraft

In a recent interview, French Economy Minister Bruno Le Maire expressed optimism for the delivery of eight ATR turboprops to Iran as part of a contract with Iran Air, the country’s national airline.

The encouraging comments come after Le Maire disclosed two weeks ago that the United States had rejected a joint European letter requesting a broad range of waivers and exemptions that had been sent to Secretary of Treasury Steve Mnuchin and Secretary of State Mike Pompeo in June.

In a change of tone, Le Maire spoke of being “hopeful that the United States will provide authorization to deliver these aircraft.” The ATR deliveries, like the three Airbus deliveries made prior to President Trump’s withdrawal from the Iran nuclear deal, are highly symbolic of the hope and expectations for increased trade and investment following the implementation of the Joint Comprehensive Plan of Action (JCPOA).

Le Maire described the intention for ATR to deliver eight aircraft prior to the August 6 sanctions deadline. At least four ATR 72-600 aircraft have been registered to Iran Air. A further four aircraft have been photographed in Iran Air livery, but have not yet had their registrations altered. These eight aircraft can be identified as follows:

• F-WWEP (now EP-ITI)
• F-WWEU (now EP-ITJ)
• F-WWEF (now EP-ITK)
• F-WWEG (now EP-ITL)
• F-WWEC
• F-WWED
• F-WWEE
• F-WWEX

To date, Iran Air has received an initial eight ATR aircraft, having signed a contract in April 2017 for 20 planes. Iran Air is using these planes as part of a new regional service. 

The ATR contract, like so many others, was immediately put in doubt following President Trump's withdrawal from the nuclear deal on May 8 and the announcement that the US would be reimposing secondary sanctions that had been removed as part of the JCPOA. Having already manufactured the aircraft on specification for Iran Air, only to see delivery delayed by financing issues related to sanctions concerns, ATR announced it would seek a new license from the US Treasury to permit the delivery of the aircraft following the US withdrawal form the nuclear deal. 

In July, US Department of Treasury assistant secretary of terrorist financing Marshall Billingslea downplayed the likeliness of any such licenses being granted, telling FlightGlobal, "At this stage, I think we are not in a position to suggest we would be issuing such licenses.” Billingslea cited an inability to “show flexibility on transactions.”

But Le Maire’s comments will give rise to new hope that the US authorities may be adopting a more flexible stance. The French minister disclosed that he has been “negotiating for weeks” with his counterpart, Mnuchin, “fighting so that in the health sector, in the agri-food sector, which are now sanctions exempt, there may be funding channels that remain open."

In the context of this fight, the delivery of the ATR aircraft will prove the most clear indication of US flexibility. There are three reasons US authorities might decide to issue a waiver. First, ATR’s smaller aircraft are used for regional routes. This limits concerns of possible “dual use” of the aircraft for military applications. US authorities have sanctioned Iranian airlines and aircraft for conducting “resupply” flights to the conflict in Syria. Such concerns clouded the Airbus and Boeing contracts for larger commercial aircraft.

Second, unlike Airbus aircraft, ATR turboprops, manufactured under a joint venture between Airbus and Italian aerospace company Leonardo, have limited US parts content. According to ATR executives, US components account for “slightly over 10%” of total parts content, or just above the sanctions threshold. Additionally, the aircraft are already manufactured, meaning that there is no further activities necessary with US entities along the supply chain.

Finally, there is a clear humanitarian justification. As shown by the tragic crash of an Aseman Airlines ATR 72 in February, smaller aircraft are especially vulnerable to accidents caused by aging and poor maintenance. Improving air safety has been a primary consideration for Iranian authorities as they sought to acquire new aircraft following the lifting of sanctions.

A focus on delivering eight turboprops and protecting banking channels for sanctions exempt sectors does not equate to a full-defense of French business interests in Iran. It is clear that Iran contracts of leading French enterprises such as Total, Peugeot, Alstom, and Airbus remain outside the scope of compromise with the US Treasury.

However, even a small victory would be important for Le Maire, as it would push the Trump administration into a mindset of negotiated compromise rather than blanket rejection. The Trump administration is unlikely to announce any softening in their position. So the clearest indicator will be whether the eight ATR aircraft make their long-awaited flights to Tehran. The eyes of a nation will be watching.

Photo Credit: ATR

Iranian Women Face Uphill Battle Toward Equal Pay

In recent months, longstanding social issues Iran have taken a back seat to major economic challenges such as a sliding national currency, rampant corruption, and the return of sanctions. But social inequality has an economic cost too as proven by the gender pay gap and disparity in work opportunities for men and women in Iran.

According to data compiled by IranSalary, the country's first specialized online platform for remunerations, Iranian women earned 27 percent less on average than their male counterparts in the previous Iranian year (ended March 2018). The wage gap has widened in recent years, rising from an average of 23 percent three years ago. 

World Economic Forum's Global Gender Gap Report put Iran at a dismal rank of 140 in 2017, only ahead of Chad, Pakistan, Syria, and Yemen. Iran ranked 108 in 2006 among 115 nations. Iran's worst-performing index in 2017 was "economic participation and opportunity".

IranTalent, a leading jobs website and parent company of IranSalary, began collecting and publishing detailed data on Iran's employment market five years ago. Its statistical sample was initially around 30,000 people and has since grown to over 130,000 in its latest report.

"The thing that really spread in the press and in other circles from the very first year was the income gap," Aseyeh Hatami, the founder of IranTalent and IranSalary told Bourse & Bazaar. "Before that nobody had really examined this issue and hardly any awareness had been promoted around it".

"There are no written laws in Iran saying men have the right to earn more than women," she pointed out, but added that at the same time there are no laws that actively protect women's right for equal remuneration.

IranSalary's figures offer interesting insights into Iran's work environment. For instance, the wage gap increases with seniority. The few women who manage to climb their way up to a management position in a male-dominated system find that they earn as much as 47 percent less than male managers.

According to Hatami, the private sector is responsible for the majority of the gender pay gap in Iran’s labor market. That is not to say, however, that governments have been champions of equal pay. The reason behind their less significant role in widening the pay gap is that they have simply employed fewer women, especially in the higher echelons.

State-run companies are much less equal in dispersing job opportunities—just 25 percent of employees in state enterprises are women. That rate stands at 34 percent and 38 percent among private sector and foreign firms respectively. 

Another useful indicator in IranSalary numbers was the size of companies. Larger companies in Iran contribute to inequality—only 17 percent of their high-ranking managers are women. These companies are reluctant to admit their failure. "Even in our interviews with the big companies they said [the disparity] is not true and the reason behind the disparity is that men mostly earn more through overtime work since they take it on more than women," Hatami said, stressing that their data clearly signals otherwise.

On the other hand, she said figures show that married people are earning more than single workers, mostly since they employ their negotiating powers more.

On the whole, Iran suffers from a lack of transparent and comprehensive data across all its sectors. The job market is no different. IranTalent has managed to establish its reputation by gathering more than one million profiles from employers and employees.

The firm's CEO says it can help women and all jobskeers, leveraging this data to show them their potential professional trajectory in relation to their educational degree. "One major problem is that people don't even know what they can do in the future with the degree they're holding.”

For example, only 40 percent of people studying law actually become attorneys and legal counselors. Knowing that information will help Iranians—both men and women—carve out a better career path, Hatami hopes.

But what can be done to rectify the situation of the gender pay gap? Hatami does not hold out much hope for a major cultural shift both among officials and private sector employers, at least not in the short term. She points out that some hardliners in Iran still say women should not even be allowed to work.

She has felt the sting herself as well. "Most people are surprised the first time they find out the CEO of IranTalent is a woman." But she says she is sure that as women increasingly enter the work field, they bring positive change with them.

"We must work to create a more open and accepting culture that pays better attention to women's potential. But most importantly, women must start believing in themselves and negotiate for higher salaries when they are applying for a job," Hatami said.

She has not mounted an equality program in her company, but says they have managed parity through holding a simple view when taking on employees. For Hatami, "Talent and capabilities have always been central, not gender.”

Brexit Britain Must Match EU Efforts to Save Iran Nuclear Deal

The European Union and its member states have been scrambling to to preserve the economic benefits of the Joint Comprehensive Plan of Action (JCPOA) for Iran following President Trump’s withdrawal from the agreement on May 8. In the last month, the European Commission has moved to add Iran to the investment mandate of the European Investment Bank (EIB), the EU’s long-term lending institution (even in the face of significant resistance from EIB’s management). Similarly, the European Commission’s Directorate-General for International Cooperation and Development (DEVCO) has set-aside a pool of funding to support projects in Iran. The European External Action Service is also coordinating discussions around central bank payment channels and the European Commission’s revival of the blocking regulation, which prohibits European compliance with extraterritorial sanctions.

As a core party to the JCPOA, the UK government has a strong interest in seeing these European efforts succeed. However, in March of 2019, at the end of the Brexit process, the UK will likely leave the EU, meaning that it will end its participation as stakeholder in European institutions, including EIB, as well as European legal frameworks, such as the blocking regulation.

While the Bank of England is exploring the creation of payment channels with the Central Bank of Iran, the UK government has shown little real initiative to match European efforts to sustain economic engagement with Iran. In recent weeks, Iranian authorities have indicated that they believe bilateral efforts will prove the most successful in delivering solutions to protect trade and investment in the face of US secondary sanctions. Countries like France, Germany, Austria, Italy and Sweden have been exploring whether it may be possible to use state investment vehicles and financial institutions to facilitate investments to Iran. The UK has not, pointing to the EIB's expanded mandate. But given that EIB is unlikely to finance projects in Iran, and given that the UK is set to exit the EU anyway, the UK government can no longer lean on European efforts in devising an economic package for Iran. 

To demonstrate its commitment to the JCPOA, the UK should parallelize its Iran policy with that of EU member states and seek its own mechanisms through which to support access to financing in Iran’s economy—both because of the clear national security implications of maintaining the the nuclear deal, but also to take advantage of economic opportunities in a major emerging market, particularly one in which UK companies can continue to make inroads from a low base of activity.

The reimposition of US sanctions means that the UK government cannot reasonably rely on British private sector financiers to engage in project finance in Iran. Just as European governments are exploring state-owned entities through which to provide financing, so will the UK financing entity need to be state owned. Helpfully, such an institution exists.

CDC Group is the overseas investment arm of the UK government. The group is a state-owned development bank overseen by the Department for International Development. It currently overseas an investment portfolio of around GBP 5 billion and primarily funds projects in Africa and South Asia, with a strong focus in countries where were formerly part of the British Empire and now part of the Commonwealth.

CDC has a wide portfolio of investments in infrastructure, health, manufacturing, food and agriculture, and construction. The investment philosophy is focused on “sectors where growth leads to jobs” and the institutions “decision-making process ranks sectors based on their likelihood of creating jobs.” Investments take the form of both equity and debt financing.

On the basis of its focus on emerging markets and its investment philosophy focused on job creation, there is justification for the UK government to extend the investment mandate of CDC Group to include projects in Iran. Such a move would parallel the EU’s attempted move in regards to EIB and the still planned funding via DEVCO, as well as the various efforts at the member-state level.

If CDC’s investment mandate is extended to Iran, the challenge will be to ensure that the relevant capital can be deployed in Iran. For this purpose, the UK government should seek to use the UK-regulated branches of Iranian financial institutions. These institutions will be able to maintain correspondent banking relationships with their Iranian parent banks in the face of US sanctions. If the UK government can institute additional due diligence protocols around the transfer of funds via this channel, it should be possible to deploy capital in Iran without the need to rely on the UK’s tier one banks.

Importantly, in order to encourage the UK to make such a move, the Iranian government must be prepared to offer a privileged pipeline of investment opportunities to CDC Group, particularly with regard to public-private partnership projects in Iran that would include the participation of UK multinationals or SMEs. For example, CDC Group financing could help support the strong inroads made by UK solar energy developers in the Iranian market. Furthermore, the Iranian government should explore export credit or sovereign guarantee arrangements that would project CDC Group’s investments in order to lower the assessed risk behind a given project in Iran.

The Iranian government should actively seek a UK commitment to facilitate development financing in Iran. Politically, such a move would be consistent with the ambitions of “Brexit Britain” as the UK will need to replace its reliance on EU institutions in regards to engaging global growth through proactive investments. As with bilateral relations with other European countries, an expansion in economic engagement could reduce pressure on political relations. The UK will no doubt expect to see progress on its consular cases as part of trust-building and the deepening of ties with Iran.

Beyond challenges of structuring, the continued political uncertainty in the UK, including the recent change in foreign minister, will make such plans complicated to execute. But Iran can leverage its relationships with key stakeholders within the Foreign and Commonwealth Office as well as in the House of Parliament and House of Lords in order to seek a structured dialogue on this matter. Whether through CDC Group or another special purpose vehicle, Brexit Britain should be pushed to at least match EU proposals to support trade and investment in Iran, and thereby to safeguard the nuclear deal.

Photo Credit: IRNA 

Encouraged by Government, Iranian Entrepreneurs Dream of 'Smart Cities'

“Smart Cities” integrate multiple information and communications technology (ICT) and internet of things (IOT) solutions to create more successful and sustainable urban environments. There is growing interest in smart city technologies as governments around the world struggle to manage population growth and the resource consumption of major cities. Smart city transformations can improve quality of life, increase sustainability, and boost economic competitiveness.

Recently, the Iranian government has also expressed greater interest in bringing smart cities technologies to the country. Spearheaded by the Ministry of Information and Communication Technology and the Ministry of Roads and Urban Development, the Iranian government is promoting the adoption of smart city technologies and holding various events and conferences to increase awareness among government stakeholders and the business community. Iranian authorities are drawing inspiration from successful cities including Berlin and Seoul in order to adapt proven approaches to suit the Iranian cities.

With almost 120 percent internet penetration rate in Tehran, 110 percent in Mazandaran, 100 percent in Qom, 96 percent in Isfahan, and 95 percent in Khuzestan provinces, Iran already has the essential infrastructure to become “smart.” At a consumer level, Iran has 40 million smartphone users of which 28 million are mobile internet subscribers. Iran’s consumer technology and communications companies are at the forefront of smart city innovation.

MTN-Irancell, Iran’s second largest mobile network provider, is actively promoting the transformation of Iranian cities. Irancell provides relevant equipment and sensors for development of smart cities and is seeking to rollout efficient and reliable systems that will enable municipal governments to collect and manage data securely and transparently. Irancell’s technologies will allow governments to monitor, analyze, manage, and set alerts for selected urban parameters.

To prove its technologies, Irancell launched a pilot program in Khuzestan province in February 2017. Under this plan, 5,000 low-power wide-area network technology gas meters were installed in the province. In March 2017, Irancell also invested in Anzali free trade zone to implement systems for waste management, landscape watering, street lighting, parking spot management and air quality checks.

Another active company in the field is Iranian firm Nobka, which seeks to accelerate the adoption of smart city technologies in the country. One of Nobka’s projects is production of smart portable hospitals, using converted buses and shipping containers, which can support emergency responses to nature disasters. These portable hospitals use smart lighting and ventilation systems and telemedicine software to help the injured in an emergency.

Nobka is also using smart city technologies to support tourism in Gilan Province. The company has installed solar-powered Wi-Fi hotspots and smart lighting systems at Lahijan Lake. It has also used augmented reality (AR) and virtual reality (VR) to promote tourism to simulate a visit to Lounak Waterfall.

Iran’s capital, Tehran, which is approaching "megacity" status, is the primary target for smart city transformation as the government seeks to address heavy traffic jams, extreme air pollution, high energy consumption, among other challenges. The municipality of Tehran, has been actively promoting the topic, in part by supporting startups which are active in the field.

As part of its promotion efforts, Tehran Municipality, in cooperation with Pardis Technology Park, sponsored the 7th International Innovation and Technology Exhibition (INOTEX 2018). Moreover, the Tehran Municipality ICT Organization regularly holds workshops to educate the policy makers on smart cities and organizes competitions to drive innovation. The organization has also signed an agreement with China Electronics Technology Group Corporation (CETC) to spur adoption of smart city technologies. CETC will provide services including consulting, project design and research and development.

Following the withdrawal of the US from the Joint Comprehensive Plan of Action (JCPOA), the European governments have sought to support the Iran deal and sustain economic ties between the European and Iranian companies further. Cooperation around smart cities could be an ideal area of focus. 

European companies and institutions have demonstrated interest in supporting smart city transformations in Iran. Austrian Institute of Technology (AIT) held a workshop in Vienna in June 2017 on “smart city development” for officials from the city of Bushehr, which was selected as a pilot smart city project by the Iranian government. This workshop provided training on topics including the application of ICT for smart cities, urban governance and big data exploration.

While the return of US sanctions poses new challenges for European investment, such educational exchanges should be sustained. European companies and institutions should continue to engage with the Iranian entrepreneurs and urban planners in a non-political environment, demonstrating their goodwill, sharing best-practices, and supporting Iranian dreams of smart cities. 

Photo Credit: Inotex 2018

US Officials Warn of ‘Deceptive Web’ of Iran Business, But Hamper Transparency Efforts

In a recent speech, Under Secretary of the Treasury Sigal Mandelker warned that foreign companies that maintain a presence in Iran must conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” Mandelker has been touring countries in Europe, Asia, and the Middle East, engaging governments and businesses in order to “make clear the very significant risks of doing business with companies and persons” in Iran. 

Many Iranian companies, particularly in the private sector, have long taken seriously the need to conduct enhanced due diligence, including on their own customers and partners. Improved transparency is a prerequisite of working with foreign companies, which remain wary of the wrath of US regulators for any inadvertent sanctions violations.

Since the implementation of the JCPOA nuclear deal, and in anticipation of new foreign trade and investment, many Iranian enterprises have hired specialist consultants to help establish internal compliance departments and institute robust anti-money laundering (AML) and counter-terrorist financing (CTF) processes. Technology solutions are central to any such transparency efforts. 

While Iran is witnessing a wider push for transparency, particularly around Iran’s compliance with the Financial Action Task Force (FATF) action plan, there remains internal resistance to compliance reforms. As explained by one consultant who advises Iranian companies on compliance policies, "Elements of the Iranian government contribute to the problem by issuing instructions that foreign companies and technologies should not be engaged to assist the banks in their compliance efforts." These sensitiveness are especially acute for the Central Bank and Ministry of Economy, where Iranian officials fear that foreign technology could be used for espionage. Given that there are no homegrown compliance tools, system-wide implementation remains a distant prospect. 

In the meantime, ambitious banks such as Middle East Bank and Saman Bank have been at the forefront of the effort to empower their compliance departments and to demonstrate competencies in know-your-customer (KYC) and know-your-transaction (KYT) due diligence. 

However, conversations with several international compliance specialists, who agreed to describe their experiences on background, make clear that—counterintuitively—US sanctions pose the most significant challenges in the effort to improve sanction compliance within Iranian banks and companies. These sanctions prevent industry-standard technology, including software that enables the automated searches of companies and entities for hits against global sanctions lists, from being accessed by users with Iranian IP addresses.  

For example, World-Check, a market-leading compliance tool from Thomson Reuters which allows users to “automatically and cost-effectively screen all of their customers, partners, employees, and business transactions for potential Iran sanction risk,” is inaccessible from Iran, despite the fact that the company advertises a specific “Iran Economic Interest Solution” comprised of World-Check and a second product called IntegraScreen. So while foreign companies can use the product to mitigate their sanctions risks, Iranian companies cannot do so for the benefit of their foreign clients or customers.  

American companies such as Thomson Reuters are reluctant to enable use of their service from Iran due to primary sanctions prohibitions on exporting a service to Iranian companies, even if that service is intended to help Iranian firms improve their compliance with US and EU sanctions laws. Compliance professionals report that smaller European software companies, which could have filled the gap, are reluctant to do so due to the possible negative impact on their US business and difficulties in processing related licensing fees.

These circumstances leave some Iranian companies to pursue less-robust software solutions from markets such as India, which can contribute to screening failures. Alternatively, Iranian companies seek back office support “offshore,” in effect subcontracting their compliance work on an ad hoc basis. Neither of these solutions reflect the compliance best-practice that US officials insist upon for those companies that wish to pursue trade and investment in Iran. In the event of a compliance failure, such measures are unlikely to hold up to regulatory scrutiny.

US officials could remedy these issues through smarter sanctions policy. Given similar fears among consumer technology companies, the US government enshrined the accessibility of internet and communications tools in 2014 with the creation of General License D, which protects the provision of services and software “incident to the exchange of personal communications over the Internet, such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, and blogging.” The license, which has been only partially successful at preserving access to technology products for Iranians, reflected an assessment on the part of US officials that protecting the free exchange of information was consistent with the aims of Iran policy.  

Despite the consistent message from US Treasury Department and State Department officials that a lack of transparency in Iran’s economy represents a national security threat to the United States, particularly in regards to terrorist financing risks, there has been no similar effort to ensure the availability of compliance tools for Iranian end users. One compliance executive, who specializes in enhanced due diligence, wondered, “If Iran cannot access the very tools that it needs in order to reform, is it being set up to fail?”

Photo Credit: Wikicommons

Negotiations On Legal Status of Caspian Sea Approach Finish Line

Negotiations on the international legal status of the Caspian Sea, which started in 1996, appear to have at last reached the finish line. After 22 years, the five countries around the sea have come close to signing a convention on its legal status. If they do, it seems that the agreement will allow to pave the way for the construction of the underwater the Trans-Caspian Gas Pipeline and other projects and will also close the access to the sea for the armed force of third countries.  

Russia has completed its part of the work on the preparation of the convention. According to its official legal information website, the government in the end of July approved in the draft submitted by the Foreign Ministry after coordination with Azerbaijan, Iran, Kazakhstan and Turkmenistan. It is expected that the document will be signed at the summit of their heads of state on 12 August in Aktau, Kazakhstan.

Over the long negotiating process, the Caspian Five have held 51 meetings of a special working group at the level of deputy foreign ministers (the main negotiating platform established in 1996), about 10 meetings of foreign ministers and four presidential summits (in 2002 in Ashgabat, in 2007 in Tehran, in 2010 in Baku and in Astrakhan in 2014). In the last years the negotiators agreed on 90 percent of the draft convention. The delay in the agreement on the last 10 percent was because the most controversial issues remained to be solved. Two of the most acute have been the principle used for the division of the Caspian Sea and the mechanisms of approval of underwater pipeline and cable projects.

Iran has had a special position on the first issue. Insisting on Soviet-era agreements, it has not recognized the agreements between Russia, Azerbaijan and Kazakhstan on the division of the northern part of the Caspian Sea signed in 2003. These three countries used for delimitation the middle modified line (equidistant from the coast line and taking into account the length of the coastline). The Iranian position was instead to divide the sea into equal sectors of 20 per cent, since using the middle modified line would leave it with the smallest sector of about 11 per cent.

In response to such a difficult challenge, the draft of the convention does not include precise wording with geographical coordinates of the boundaries of sectors, but rather only the principles for the division of the sea. This allows for the transfer of responsibility for the division from the five-sided discussion to the two - and three-way level, as was the case when the northern part of the sea was divided.

Judging by the dynamics of recent contacts between Iran and Azerbaijan, bilateral negotiations on the division of the southern part of the sea are in full swing. This positive trend in relations between the two may have been one of the reasons for progress in the five-sided Caspian dialogue.

The second cornerstone for the negotiation process was the possibility of building trans-Caspian projects. Originally Russia and Iran emphasized the environmental danger of such projects and stressed the need for coordination by all five countries. Turkmenistan defended its right to build the Trans-Caspian Gas Pipeline without any consultations with its neighbours. In response to this challenge, the draft of the convention indicates that all submarine cables or pipelines must meet the necessary environmental requirements and standards approved under inter-state agreements. However, all the countries around the Caspian Sea would have the right to lay any pipelines and cables without the consent of their neighbours, but with the necessary notification about the routes taken. This means that, theoretically, after signing and ratifying the convention, Turkmenistan will be able to start looking for partners for the construction of the Trans-Caspian Gas Pipeline.

There is still a possibility that one of the parties refuses to endorse the draft document in its current form at the last moment. But the approval of the draft by Russia’s government and the announcement of a date for the summit indicate that the meeting will take place and, most likely, will bring about the long-awaited convention. 

Photo Credit: Russian Press Service

Three Years Later: Europe’s Last Push on the Iran Nuclear Deal

This article has been republished with permission from the European Council on Foreign Relations. 

The Iran nuclear agreement marked its third anniversary in a gloomy state. Despite repeated attempts to keep him on board, US President Donald Trump withdrew the United States from the deal – signed on 14 July 2015 under the formal title the Joint Comprehensive Plan of Action (JCPOA) – and thereby pulled the rug from under Europe’s feet. European policymakers are now focused on salvaging the agreement. For a growing number of European corporate decision-makers, the deal is already dead. In reality, the JCPOA is on life support and the next few months could open either its next or final chapter. Despite the significant challenges they face, European governments have some limited time to avert the deal’s collapse.

In 2015, global powers unanimously hailed the agreement as a historic achievement that proved the effectiveness of multilateral diplomacy. Indeed, the JCPOA provides unprecedented oversight of Iran’s nuclear programme. Furthermore, the agreement states that parties anticipate it will “positively contribute to regional and international peace and security." Many hoped that the resolution of the nuclear dispute would result in a new understanding between the West and Iran, opening a pathway for detente rather than confrontation. Relations between Europe and Iran have certainly made gains in this direction, but the Trump administration’s maximalist stance on Tehran has created an extremely hazardous environment for all remaining stakeholders in the nuclear deal.

Washington's Pressure Package

Since the formal US exit from the agreement in May this year, the Trump administration has sought to sabotage European efforts to sustain the agreement. This has involved a policy of relentlessly threatening and otherwise pressuring any country or company inclined to maintain economic channels with Iran, by weaponising US secondary sanctions. Reportedly, the US administration recently rejected an appeal by the EU foreign ministers to negotiate broad exemptions to such sanctions for European companies. The US clearly intends to specifically target European trade with Iran – although there remain questions about its ability to do so and the reach of US enforcement.

Together with its allies in the Middle East – particularly Israel, the United Arab Emirates, and Saudi Arabia – the Trump administration is increasing its efforts to squeeze Iran on multiple fronts. As a new report by the European Council on Foreign Relations outlines, this anti-Iran front views the collapse of the JCPOA as the trigger for a wider policy aimed at confronting Iran. The policy seeks to cause a deep economic crisis in the country, creating domestic divisions intended to bring about regime change. As part of this, the Trump administration has signalled its willingness to go further than any previous administration by choking off Iran’s oil exports. 

European Resistance to US Sanctions

European leaders’ have repeatedly stated their commitment to upholding the JCPOA. Policymakers are making genuine efforts to find an economic package that minimises the impact of looming US secondary sanctions to sustain Iranian compliance with the deal. But these efforts have yet to generate an environment in which a reasonable number of European entities can make a firm commercial decision to continue doing business with Iran.

Although the European Union’s leaders remain unified in their support of the JCPOA, divisions are emerging between the 28 member states over how far they are willing to test the limits of US secondary sanctions. Moreover, several proposed ideas for safeguarding European companies against extraterritorial US sanctions would require months or even years to implement, as they require alternative financial mechanisms that are ring-fenced from US exposure. European governments are also falling short in the political momentum needed to salvage the nuclear deal. For instance, Germany and the United Kingdom are now far more preoccupied with challenges at home than they were in 2015, and EU institutions are focused on averting further transatlantic divide on trade and NATO.

Unsurprisingly, many European firms have little confidence that European policymakers will create the conditions necessary to protect them from US secondary sanctions, including by providing alternative mechanisms for doing business with Iran that are compliant with US sanctions. This has resulted in a wave of pre-emptive corporate overcompliance with impending US regulations and a decline in European business with Iran even before sanctions come into force.

Iran's Patience Wearing Thin

This month, the foreign ministers of France, the UK, Germany, Russia, and China (the E3+2) met with Iran to discuss political and economic pathways through which they could safeguard the JCPOA. And Iran’s president, Hassan Rouhani, visited Austria and Switzerland to deliver two overarching messages. The first was that Iran’s patience was wearing thin and its full compliance with the JCPOA was only feasible if it continued to receive tangible benefits from the agreement. The second was that Tehran would abandon the agreement if it became unable to maintain oil exports and, accordingly, its share in global energy markets.

Rouhani’s visit followed a tense OPEC meeting, Trump’s call for Saudi Arabia to increase oil production, and weeks of speculation about the extent to which the US could pressure other countries to halt exports of Iranian oil. In Europe, Rouhani stated: “assuming that Iran could become the only oil producer unable to export its oil is a wrong assumption”. 

The leader of Iran’s Islamic Revolutionary Guard Corps (IRGC) was quick to emphasise that elite forces were prepared to act on Rouhani’s words, noting: “we will make the enemy understand that either everyone can use the Strait of Hormuz or no one”. Iran has issued such warnings in the past, including during the 1980-88 Iran-Iraq war and in 2011 in advance of the EU and US embargo on Iranian oil. Iran may retaliate against any US attempts to curb its oil exports by disrupting regional crude shipments in the strait, through which 35% of all seaborne oil exports pass. Such measures seem unlikely for now – given the risk of military escalation with US and regional naval forces, and of damaging relations with China and Russia, which wish to keep energy markets stable.

Rouhani’s statement suggests that Iran is hardening its position. Qassem Suleimani, commander of the IRGC’s Quds Force, unexpectedly welcomed Rouhani’s threat.

Despite the significant political and economic challenges shaping Iranian domestic politics, the Trump administration’s maximalist posture may inadvertently lead to a consensus between the Rouhani government and the military elite on how to respond to national security threats. This may abruptly or gradually prompt the Iranian political establishment to shift away from diplomacy with Europe and towards confrontation with the US. Calculations on whether the JCPOA can be sustained will heavily influence this decision.

Iran is likely to continue implementing the JCPOA and engaging in diplomacy with Europe for at least a few more months, as it assesses the impact of US sanctions on its economic relations with Europe, China, and India (particularly in relation to oil exports), as well as the likely trajectory of US domestic politics in the aftermath of midterm elections.

Necessary European Action

Unless one side backs down, Tehran and Washington will escalate their dispute in a manner that poses real risks to European interests in non-proliferation, security in the Middle East, and global energy supply. It is imperative that in the coming weeks and months European governments redouble their efforts to sustain the nuclear agreement and ease regional tensions.

Firstly, they should continue to explicitly warn the US and their partners in the Middle East that they will not support a strategy aimed at destabilising Iran internally or pursuing regime change in the country. Such an approach risks destabilising a country of 80 million people close to Europe’s border. At the same time, European governments should address their many areas of disagreement with Iran – most urgently, those involving regional security. As ECFR’s new report recommends, this should be done in a strategically careful manner that avoids fuelling further conflict in the Middle East.

Secondly, European governments must strive to fulfil their commitments under the JCPOA. They have made a good start by incorporating US secondary sanctions into the EU Blocking Regulation, due to be amended in August. But they need to quickly implement more practical solutions that will affect companies’ calculations on Iran (for a detailed list of recommendations, see the box below). Otherwise, there will be an exodus of European firms from the Iranian market.

European efforts to keep Iran in the JCPOA will face major challenges, including US attempts at sabotage. The Trump administration will look to use the JCPOA as a bargaining chip in its bilateral negotiations with Europe, China, and Russia on trade policy, tariffs, and sanctions. Therefore, European leaders must make important decisions about how far they are willing to go to secure a nuclear agreement borne out of more than a decade of diplomacy. They can only do so if they act collectively and firmly. Yet they must do so to prevent escalation between the West and Iran that will have disastrous consequences for global security.

Recommendations

1. The EU/E3 should accelerate measures to establish a foundation for sustaining financial channels (including SWIFT) with Iran before November, when the US will introduce secondary sanctions designed to hit Iran’s oil and banking sector. In this, European central and state banks will have act as a bridging mechanism. While there are ways of moving funds to and from Iran, state banks will have to engage in operations that provide settlement and clearing facilities. At the same time, European governments should remind Iran that their banking relationship can only continue if the country follows the Financial Action Task Force’s road map.

2. The EU and member states should devise a financial framework within which European companies (particularly small and medium-sized enterprises) can do business with Iran while complying with US sanctions. Technical experts have called for the creation of special purpose vehicles or “gateway banks” (supported by European state banks). These mechanisms will need to avoid direct links between Iranian entities and European private banks. Cooperation on this should extend into a larger structure that crosses a coalition of willing member states, thereby sharing risk between them.

3. The EU and member states (particularly leading importers of Iranian oil such as France, Greece, Italy and Spain) should increase their coordination with China and Russia on measures to minimise the impact of US secondary sanctions on Iranian oil exports. European countries should firmly reject any proposed US framework for significant oil reduction from Iran in return for waivers to continue limited oil exports. This would amount to legitimising the US secondary sanctions architecture. Russia and Iran are already in talks over significant Russian investment in the Iranian energy market, which could reportedly involve increased purchases of Iranian oil that could be reprocessed for global distribution via Russia. The E3 and China, together with other relevant private sector entities, should investigate whether it is feasible to offset potential reductions in Iranian oil exports through oil-swap arrangements with non-signatories to the JCPOA such as Turkey and Iraq.

4. The European Commission should incorporate clear guidelines for European companies into amendments to the EU Blocking Regulation. The regulation includes a compensation mechanism (Article 6) that allows European entities to seek compensation if they become subject to extraterritorial US financial penalties. As this mechanism has rarely been enforced, its limits remain unclear. The European Commission should work with member states, regulators and the private sector to clarify and facilitate access to compensation, particularly for small and medium-sized enterprises that do business with Iran.

5. The European Commission should mandate a competent body to facilitate legitimate European business with Iran. The body should provide comprehensive oversight of the US Treasury’s enforcement of extraterritorial sanctions. This should involve a reporting mechanism that assesses the legal and other tactics the US Treasury adopts against European companies, pursuant to secondary sanctions. The body should also assist European companies subject to US investigations.

6. The European Commission should address discrimination and overcompliance relating to trade and investment with Iran in the European banking sector. As this problem is a direct consequence of US secondary sanctions, European leaders should primarily address it through regulatory measures that set a burden of proof requiring company boards to certify that their decisions are legally grounded under European law. The Blocking Regulation can provide a foundation for such measures. European regulatory bodies should provide greater oversight of European commercial banks’ decisions to block the flow of funds relating to Iran, reducing the likelihood that such decisions will be arbitrary.

7. The E3/EU should not invest heavily in attempts to negotiate with the US administration on exemptions from secondary sanctions, given the Trump White House’s clear lack of interest in treating European allies amicably. The E3/EU should shift to a more firm and robust negotiating posture similar to their stance on US trade tariffs. They should warn the US about the costs for Western energy consumers of reducing purchases of Iranian oil at a time when Libyan, Venezuelan, and Nigerian exports have been disrupted, given that it remains uncertain whether Saudi Arabia and Russia will increase production to offset this disruption. European governments should limit the US Treasury’s space to demonstrate the power of sanctions in Europe. EU member states should urgently engage in private consultations to prepare countermeasures against US attempts to pressure SWIFT and its board members or to target European entities – using specially designated nationals lists – for doing business with Iran deemed legitimate under EU law.

Photo Credit: IRNA

Could Trump Deliver Iran an Oil Windfall?

This article is republished here with permission from the Columbia University Center of Global Energy Policy.  

The president’s recent statement that OPEC should reduce their prices may merely be an attempt to assign blame for rising gasoline prices in the midst of the US driving season or an even more cynical attempt to rally his political base in opposition to globalism. Or, it may have something to do with the president’s own decision to create a crisis with Iran. While attention is duly paid to how much Americans have to pay at the pump, a more subtle and complicated story will soon play out with respect to Iran and the reapplication of US sanctions ordered by Trump on May 8, 2018. In fact, unless oil prices are contained, the primary result of the president’s action may be to ensure that Iran profits from the oil market risks that sanctions have created.

In Theory

A simple chart helps to bear out the point. Figure 1 is a representation of three important data points: how much oil Iran might be able to export on a given day, the price of its oil, and its daily revenue. On May 8, Iran exported approximately 2.4 million barrels per day (bpd) of oil. On that day, oil was trading at approximately USD 75 per barrel. As a result, we can assume that Iran’s oil revenue for that day was USD 180 million (as reflected by the red line).

Figure 1: Daily Oil Revenue at Various Prices and Export Volume

If instead oil had been trading at USD 130 per barrel on that day, Iran would have earned over USD 310 million. And if oil had been trading at USD 50 per barrel, Iran would have earned only USD 120 million—in all, a fairly straightforward math problem to solve.

Where things get more complicated is when one takes into account falling Iranian oil exports and potentially rising oil prices.

Naturally, if oil prices remain roughly the same, every lost barrel of Iranian oil exports means a real economic loss to the Iranian government. If Iranian oil exports decrease from 2.4 million bpd to 1.5 million bpd, Iran will experience a loss of approximately USD 67 million in its revenue stream. Taken over the course of a year, this would mean lost national revenue approaching USD 25 billion, a substantial sum for a country with significant economic problems and strained liquidity.

However, if oil prices go up, then—as Figure 1 shows—the immediate revenue impact of sanctions can be mitigated, potentially entirely. The red line’s intersection with various price curves shows this: at USD 130 per barrel, Iran need only export 1.38 million bpd to average the same daily revenue as at USD 75 per barrel with 2.4 million bpd in exports. With a more conservative oil price increase—for example, to only USD 100 per barrel—Iran would generate the same revenue if it exported only 1.8 million bpd.

But of course, the effects are magnified when an entire year’s worth of sales is factored in, as Table 1 demonstrates.

Table 1: Annual Revenue for Average Export Rates

Even if the Trump administration is able to reduce Iranian oil sales to 1 mbpd, at higher oil prices, Iran’s ability to compensate is substantial. A more meager reduction, matched by higher prices? Iran might profit.

In Practice

There are myriad reasons why a simple mathematical abstraction is incapable of capturing the diversity of reactions and feedback loops that will determine Iranian oil sales and revenues. It is worth noting in this context that US officials had similar concerns that removing Iranian oil from the market would cause prices to go up during the 2011–2013 Iran sanctions experience and that these fears were ultimately unfounded. Arguably, this came because of the moderation shown by the Obama administration in its demands for reductions—20 percent every 180 days—and the revelation of US shale oil production. But still, it is an indication that unexpected forces can intervene.

To start, prices are in part set by supply and certainly by expectations of supply. To the extent that Iranian supply is not taken off the market, then this will have a moderating impact on prices, slowing their rise and ensuring that Iran bears the brunt of the sanctions pressure. The same would apply if additional supply were to be added by other producers, though finding 2.4 million bpd to add to the market by November 4 is not possible. By the same token, if the United States were able to prevent Iran from exporting any oil, then any increase in price would also not be enjoyed by Iran, no matter how high prices might go. Of course, the higher prices would be felt elsewhere in the global economy and back home in the United States. But from the simple perspective of “putting pressure on Iran,” such a scenario would mitigate the dynamics discussed here.

Moreover, oil revenue is not a perfect proxy for sanctions pressure on Iran. One of the elements of US sanctions against Iran is that Iran is barred from freely accessing its revenues held in foreign banks. Instead, per US law, banks are required to make Iran’s funds available only for bilateral trade or for the purchase of humanitarian goods. Any banks that fail to abide by these restrictions can be prohibited from opening or holding correspondent bank accounts with U.S. financial institutions – effectively banned from doing business in the United States. With this in mind, even higher oil prices and record Iranian oil revenues might not meaningfully buttress the Iranian economy if those revenues are locked up in foreign banks. But this in turn requires assumptions to be made about the level of cooperation that the United States might enjoy in sancitnos implementation. Many banks in Europe and in Asia will resist provoking US sanctions and isolation. Some, however, may decide it is worth the risk, as Chinese Bank of Kunlun did in 2012 when it was sanctioned by the United States. It remains a reasonably profitable institution, notwithstanding US sanctions, and may even become more so if other Chinese transactions with Iran were to flow through it. There is nothing in particular to stop other banks in other countries from pursuing the same path, if they determine the cost is worth the benefits.

This in turn informs another important element: whether all of this will matter in affecting Iranian behavior. From 2012–2013, the United States denied Iran over $50 billion in oil sales and prevented it from using billions more that were held in banks around the world. The result, at least in part, was the negotiation and implementation of the Joint Comprehensive Plan of Action (JCPOA). That might not be the result of another round of sanctions. Diplomacy with the United States has lost its luster in Iran, and its leaders are now talking about the possible use of military instruments to blockade the Persian Gulf, as they have in the past. Even if this extreme scenario does not come to pass, the idea that Iran’s response to renewed economic pressure would be to deal with the United States and to offer further concessions than in 2013–2015 is, at this point, hopeful speculation. There are many different factors that could undermine this hope, from the practical (Will any US partners work with the United States on sanctions?) to the theological (Would Iran be prepared to negotiate with the "Great Satan" again?). Even more importantly, these factors will interplay with one another in ways that we may not be able to anticipate at the outset.

One factor, to be sure, will be the effect of sanctions on oil prices. Given the risks of this strategy, one need hope the United States has a better plan than badgering OPEC.

Photo Credit: EPA/Shutterstock