European banks have a new business development team: the U.S. Department of State. In response to Iranian pressure, Secretary of State John Kerry and his staff are plumping up their frequent flyer accounts visiting incredulous bankers with the message that it’s okay to bank with Iran. Why now? The Joint Comprehensive Plan of Action (JCPOA), which put limits on Iran’s nuclear program, also allows some financial transactions, which so far have been few on the ground in Tehran. The State Department won’t be giving the same message to American banks, though, because it’s illegal for U.S. banks to do what the State Department is suggesting European banks do. “After you, my dear Alphonse,” indeed.
A State Department official recently told a business group in Dubai that the involvement of the Revolutionary Guards, whose leaders are under U.S., UN, and EU sanctions, in the Iranian economy is “one factor that companies need to embed in their risk analysis.” How helpful.
Kerry made a special effort to sell the opportunity to the Europeans saying, “when people have a question, we are available to answer those questions.” Lawyers in the sanctions trade reply that responses from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) to their questions are “vague and noncommittal.” Mr. Stuart Levy, chief legal officer of HSBC Holdings and former under secretary for terrorism and financial intelligence at the U.S. Treasury Department, took to the pages of The Wall Street Journal where he noted Kerry’s “peculiar message” and confirmed “HSBC has no intention of doing any new business involving Iran.” Here is what the bankers understand: the only opinions that matter are those of the U.S. Department of Justice and OFAC.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
The U.S. government needs to stop offloading this “opportunity” on anyone else, as the involvement of the Revolutionary Guards and other sanctioned entities and individuals in Iran’s economy won’t change in the near- to mid-term. Sanctions expert Mark Dubowitz recently told the Senate Banking Committee, “the administration is allowing Iran to hold the U.S. responsible for delivering financial and economic outcomes.” What to do? Simple — the United States needs to lay out the clear steps that, when made in good faith, won’t result in prosecution and fines, then back off and let the banks make business decisions that mitigate the risk of working in a corrupt, bureaucratic environment. The “sanctions-industrial complex” needs to learn that just because General Qasem Soleimani’s driver’s uncle’s neighbor’s mother may make a buck, America hasn’t suffered a political reverse. This calls for clear guidance from the White House; however in the wake of Obama aide Ben Rhodes’ tell-all about how the administration “retailed” the JCPOA, White House guidance may be viewed as damage control, not real policy.
The negative effects have arrived quickly. After the JCPOA was agreed to, the Iranian transport minister said a priority was upgrading Iran’s stable of commercial airliners, a prize Boeing and Airbus would likely share. Less than six months after JCPOA Implementation Day, January 16, 2016, Boeing has said maybe it would do a deal denominated in euros, which will likely prove less profitable than one in dollars, while the Airbus CEO said the international banking issues must be sorted out soon “otherwise there will be no deals.” Aircraft sales are usually denominated in dollars, but dollar transactions are still banned, so Airbus is looking at a potential loss of $27 billion on a sale of 118 aircraft. Media reports of a possible 100 plane deal between Iran and Boeing may stay just that if the banking isn’t sorted out. And lesser companies will surmise that if the national champions — Boeing and Airbus — can’t surmount the banking obstacle, what hope do they have?
Another possible effect of the slow pace of economic engagement with Iran surfaced in May when Ayatollah Ahmad Jannati, who heads the Guardian Council of the Constitution, which vets all legislation, was elected to head Iran’s Assembly of Experts, the group that will select the successor to the Supreme Leader, Ayatollah Ali Khamenei. A hard-liner? No, a hard-hard liner who accused the West of creating al-Qaeda and called U.S. forces in Iraq “bloodthirsty wolves.”
And the conspiracy-minded aren’t just in Iran. Might the United States, some European businessmen are thinking, be working to block them from an untapped market of 80 million people? The pickings are rich enough: according to the U.K. Foreign Office, “EU trade with Iran currently stands at around $8bn and is expected to quadruple in the next 2 years.”
EU finance ministers recently asked the U.S. for clear guidance on sanctions policy but none was forthcoming. French representatives are currently discussing sanctions with OFAC but probably won’t fare any better. The bankers want clarity, but Washington is reluctant to surrender the only tool it has for dealing with Iran. The United States will try to calibrate sanctions relief to support President Hassan Rouhani in his struggles with the hard liners, while frustrating economic entities such as the Revolutionary Guards-affiliated engineering company Khatam al Anbia, which controls at least 812 affiliates and has been sanctioned by the U.S. as a proliferator of weapons of mass destruction.
A long-term American aim may be to grow an alternative Iranian economic sector that will press its government to cooperate with U.S. goals for regional security and for Iran’s internal social order. Or as a “senior administration official” put it, “Over time that could help strengthen some of the forces inside of Iran that would like to take their country in a different direction.”
Complicating the bankers’ decisions are the positions of the two leading candidates to be the next president of the United States. Donald Trump calls the Joint Comprehensive Plan of Action “catastrophic for America, for Israel, and to the whole Middle East” and has threatened to repudiate it. Hillary Clinton has called for new sanctions against Iran in response to recent missile tests. Electoral uncertainty coupled with the “snap back” provision counsels a policy of wait-and-see as the penalties meted out to BNP Paribas ($9 billion), Credit Suisse ($536 million), and ING ($619 million) for violating sanctions mean more than arguments from officials who won’t be around in the future when the guys with badges show up. Remember: when someone with diplomatic immunity says, “No problem!” you’re gonna have problems.
Kerry isn’t in this place by choice. Over the last 37 years, the United States has led the enactment of a thicket of sanctions against Iran for terrorism, human rights abuses, weapons proliferation, and just general bad behavior. The administrations, the Congresses, and lobbyists who generated an endless stream of sanctions against Iran probably never considered that banks and businesses would actually have to deal with the target of the sanctions one day. The rosy scenario was probably: regime collapse, triumphant return of the diaspora moderates/Green Card holders to Tehran, 51st state! Well, I saw that movie in Baghdad…
What is the way forward?
First, understand the problem. The Congressional Research Service, which provides studies and analyses to the U.S. Congress, recently published a sober report, Iran Sanctions, that should be read in its entirety to understand the sanctions jumble the United States, UN, and EU have bequeathed to the business sector. Compared to another sanctions target, Iran isn’t Iraq, a petroleum monoculture. It is the 18th largest economy in the world, though its per capita GDP is low. It has an educated population, but its economy is less competitive, ranking behind much smaller economies like Jordan. Iran is an upper middle income country with elements of sophistication in the nuclear and IT areas, but Iran’s Resistance Economy is by its nature opaque, which you means you must…
Second, decide how much risk you can accept. Yes, some bad guys with money will make more money. The people who are tough enough to succeed in the Islamic Republic spent their formative years fighting Iraq, which was supported by the U.S. and the wealthy Gulf Arabs, from 1980 to 1988, then weathered 30-plus years of sanctions. Despite what some in the U.S. may hope, the hard-liners are the ones who think they’re winning. And don’t expect returning Iranians who just want to do business to roll the hard liners, who probably consider an Iranian-American from Los Angeles or McLean to be an active participant in what Ayatollah Khamenei calls the “soft war” against Iran.
Third, promote commonsense solutions that will work most of the time. Barbara Slavin of the Atlantic Council put forth “Five Ways to Make the Nuclear Deal Work for Iran,“ which outlines steps to facilitate transactions allowed under the Joint Comprehensive Plan of Action (JCPOA). Simple things like allowing u-turn transactions, which use a New York clearing bank when converting large sums of foreign currencies into euros, or sending U.S. technical experts to Iran to advise on ways to improve its banking system to help it prevent money laundering and terrorist financing, will demonstrate to the private sector and Iran that the American government is committed to making the JCPOA work, or at least to not getting in the way.
Now America needs to get cracking.
James D. Durso is the Managing Director of Corsair LLC, a supply chain consultancy. He was a professional staff member at the 2005 Defense Base Closure and Realignment Commission and the Commission on Wartime Contracting in Iraq and Afghanistan. Mr. Durso served as a U.S. Navy officer for 20 years. His overseas postings were as a military advisor in Kuwait and Saudi Arabia, and in Iraq as a civilian transport advisor with the Coalition Provisional Authority.