Iran’s Global Banking Challenges Escalate Amid Trump and Brexit Developments – Reuters

By Jonathan Saul and Parisa Hafezi

LONDON/ANKARA – The decision by the UK to leave the European Union, coupled with the ascent of U.S. presidential candidate Donald Trump, has stalled the efforts of Western governments to persuade international banks to engage with Iran.

The ongoing uncertainty hampers Tehran’s ambitions to attract foreign investment aimed at rejuvenating its ailing economy, as concerns grow over the future of Britain’s political landscape, the possibility of Trump securing the presidency while vowing to dismantle a nuclear agreement with Iran, and fears that banks could face U.S. sanctions for handling transactions with the Islamic Republic.

Despite the lifting of international financial sanctions under the nuclear deal signed over a year ago, Iran has struggled to establish significant banking relationships, achieving only limited engagement with smaller foreign institutions.

A senior Iranian official noted that Tehran is exploring alternative partnerships. “Iran will continue to collaborate with smaller banks and institutions while major European banks are hesitant to re-enter the market,” the official stated. “We anticipate that this uncertainty will persist for several years. Discussions are underway with various countries, primarily China, Russia, and several African nations, to expand our banking cooperation and address existing financial issues.”

U.S. banks remain prohibited from engaging with Iran due to ongoing domestic sanctions, and European financial institutions face challenges, notably concerning restrictions on dollar transactions that must pass through the U.S. financial system.

The wariness of banks has been heightened following significant fines imposed by U.S. authorities, including a $9 billion penalty on a French bank in 2014 for violating U.S. financial sanctions.

The UK maintains its commitment to addressing the banking sector’s concerns, while the U.S. Treasury has indicated it will not obstruct legitimate business dealings with Iran. However, officials in Iran and foreign bankers believe that the political volatility in the UK following the recent referendum has diverted attention from Iran, making banks more cautious amidst fears of a potential recession in the British economy.

“Concern over Brexit’s economic implications has made the UK and other European nations more cautious in their dealings with Iran. Many have adopted a ‘watch and see’ approach,” explained another senior Iranian official.

“UK banks and authorities are currently facing significant challenges and have shown a markedly reduced interest in engaging with Iran since the vote. However, we still believe there is potential to work with British banks.”

European banks have referred to the upcoming U.S. elections as a source of political risk, without offering detailed insights on how a potential Trump victory could influence their business operations.

Another Iranian official expressed that the uncertainty surrounding the election, especially Trump’s stance on the nuclear deal, complicates Tehran’s attempts to secure banking partnerships. “Major European banks are uneasy about the election’s outcome. A representative from a German bank informed us recently that they could not afford to engage with Iran, particularly while Trump remains a candidate,” the official stated.

Many large banks are also concerned about inadvertently violating the remaining U.S. restrictions concerning dealings with the Islamic Revolutionary Guards Corps (IRGC), a military entity with extensive business interests. “Banks appear increasingly reluctant to engage with Iran,” said a sanctions manager at a UK bank. “The unclear IRGC connections raise significant reputational risk.”

In June, the Financial Action Task Force maintained its designation of Iran as a high-risk country despite acknowledging Iranian commitments for improvement and calling for some restrictions to be suspended for a year, yet this has done little to alleviate banks’ apprehensions.

It remains difficult to assess the extent of financing flowed to Iran since sanctions were lifted, but reports suggest that the amounts have been modest by global standards. “We do not expect meaningful economic improvements before 2019, assuming everything proceeds smoothly,” one official remarked, stressing that the situation is debilitating the economy and hindering government economic plans.

In Iran, hardliners are criticizing President Rouhani’s faction for the lack of immediate benefits from the nuclear deal amidst low oil prices and unfulfilled foreign investment pledges. “The government is facing pressure both at home and abroad. Opponents of the President are intensifying their efforts to undermine him by highlighting the slow pace of economic progress,” commented another official close to Rouhani.

Seeking alternatives is vital, and top advisors to Iran’s Supreme Leader have been visiting Russia, while Foreign Minister Mohammad Javad Zarif has recently traveled to Africa to discuss enhancing economic ties.

Chinese President Xi Jinping’s visit to Iran earlier this year emphasized trade opportunities, and a top Iranian central bank official mentioned interest from a major Chinese bank to establish branches in Iran.

Failure to revitalize the economy could empower hardliners who are less favorable towards the West compared to Rouhani’s administration. However, pressure from Western governments on banking institutions appears to have had little impact.

Some banks, including significant UK ones, have expressed caution in their dealings with Iran, highlighting the enduring risks associated with the country. A source at Barclays noted that several U.S. citizens hold key positions there, which influences their business decisions regarding Iran.

Despite the German government urging its banks to engage more actively with Iran, some institutions remain conservative in their approach. An official affirmed the government’s discontent with the cautious stance of its banks, noting the risks of increased hardliner influence in Iran if insufficient progress is made.

A representative from the U.S. Treasury asserted that officials are committed to facilitating permissible business activities with Iran, including global outreach to provide guidance for governments and financial entities.

However, the UK Foreign Office acknowledged a postponement of a planned meeting involving Iran’s central bank, British officials, international banks, and the U.S. Treasury due to the political reshuffling following the Brexit vote.

With shifting priorities prominent in the new government, the focus on Iran may take a back seat. “The new administration has its hands full with Brexit-related issues, which may delay the banking discussions. Changes in cabinet positions due to Brexit could also influence Iran’s relationship with the UK,” a Western source indicated.

While a British trade visit to Iran was rescheduled, concerns from bankers about participating in the trip remain evident. A UK official expressed optimism for the visit’s success later this year, yet skepticism prevails among industry insiders regarding the likelihood of substantial engagement.