Treasury Department Makes Unprecedented Iran Sanctions Move
For the first time, the Treasury Department has issued a letter of comfort to a foreign financial institution conducting sanctions exempt trade with Iran. This move, made in accordance with the launch of a new Swiss channel for humanitarian trade with Iran, could introduce a new tool for U.S. authorities which have struggled to provide credible sanctions relief.
On Thursday, Swiss authorities announced that they had processed a pilot transaction through the Swiss Humanitarian Trade Arrangement (SHTA), a new payment channel that intends to ease the sale of food and medicine to Iran by Swiss companies. Work on this channel began in late 2018 following the Trump administration’s reimposition of secondary sanctions on Iran.
Expectations around the mechanism should be tempered with caution. The Trump administration dragged its feet for over a year before supporting the mechanism, despite clear evidence that sanctions were causing humanitarian harm. Additionally, Iranians might be reluctant to use the mechanism. There are concerns that some of the conditions imposed on the SHTA by the Treasury Department could be used as a part of a “fishing expedition” for information that could be used to interfere with routine trade.
But hidden in the mechanics of SHTA’s initial 2.3 million-euro transaction is an unprecedented provision that could help address growing concerns that the Trump administration’s “maximum pressure” sanctions campaign will be impossible to lift even in the aftermath of new negotiations with Iran.
The relevant provision is hidden in the jargon of a statement issued last October describing Treasury’s framework for SHTA: “Provided that foreign financial institutions commit to implement stringent, enhanced due-diligence steps, the framework will enable them to seek written confirmation from Treasury that the proposed financial channel will not be exposed to U.S. sanctions.”
A press release on the SHTA released by Swiss authorities confirms that the initial transaction was processed on the basis that the Treasury Department “has given the necessary assurances to the Swiss bank involved for this specific transaction.”
Such assurances, when provided in written form, are called “letters of comfort.” This is likely the first ever transaction in which the department addressed the concerns of a foreign financial institution by providing a letter of comfort, despite the fact that the transaction was technically sanctions exempt.
This is highly significant, given that the architects of the Trump administration's Iran policy have spoken publicly about their efforts to build a “sanctions wall.” Building the wall involves creating a web of complex designations related to Iran’s role as a “state sponsor of terrorism, including its terror-financing central bank; its missile program, which is progressing toward an intercontinental ballistic missile; and its human-rights abuses and corruption.” The intention is to heighten the risk perception of banks and businesses in order to keep them from doing business with Iran even if a new deal is stuck.
For those who do want to do business in Iran, this problem first surfaced during the Obama administration. In the months immediately following the implementation of the nuclear deal with Iran, U.S. officials toured Europe and encouraged companies to go ahead with their plans for Iran, and financial institutions to process Iran-related payments on behalf of their clients. But companies found themselves hitting a wall as banks remained reticent to offer the required services.
Bankers were anxious about what was and wasn’t allowed, and made their concerns known at a meeting with Secretary of State John Kerry. But the Obama administration resisted calls from European bankers and officials to provide letters of comfort, relying instead on the technical permissions afforded under sanctions relief and their verbal encouragement.
This approach might have sufficed had more time been available for economic operators to develop a new understanding of the compliance risks emanating from Iran, but the election of President Donald Trump and his campaign promises to discard the Iran nuclear deal cut short any such period of recalibration. Had the Obama administration employed comfort letters, more trade and investment could have been completed in the period between the nuclear deal’s implementation and Trump’s inauguration.
Here, the launch of SHTA establishes an important and hopeful precedent, and may improve the prospects of negotiations toward an end to the U.S.-Iranian standoff. Fears of a “sanctions wall” have contributed to Tehran’s unwillingness to enter any talks. But if Trump or any future president credibly combines quick and decisive sanctions relief with letters of comfort, it would be a game-changer for multinational companies engaged in Iran and the banks on which they rely.
Photo: Wikicommons
Autoneum Deal Underscores Huge Potential in Iranian Auto Parts Industry
◢ Swiss auto parts company Autoneum has entered into a new license agreement with Ayegh Khodro Toos to manufacture components for a new locally-produced Peugeot SUV beginning in 2019.
◢ The deal points to the potential in Iran's auto parts sector, where private sector companies, which are often SMEs with specific areas of expertise, dominate. Projections suggest exports of Iranian auto parts could rise to USD 6 billion by 2025.
Switzerland’s Autoneum, a world leader in the acoustic and thermal insulation for automotive applications, has signed a new exclusive license agreement with Ayegh Khodro Toos (AKT), an Iranian auto parts company that specializes in noise and vibration damping materials.
Autoneum and AKT will establish a new production like at AKT’s facility in Mashhad in order to begin producing carpet systems and dashboard parts. The first parts will come off the production line in 2019. According to company materials, AKT employs 95 technicians and controls 75% of the market for automotive insulation.
These parts will support the production of a new "SUV" by IKAP, the joint venture between Iran Khodro and Groupe PSA. The unnamed vehicle is most likely the Peugeot 3008, for which imports to Iran of complete vehicles will begin in early 2018.
Commenting on the new agreement, Martin Hirzel, CEO of Autoneum, highlighted Iran’s potential as “a central automotive hub for the Middle East, Far East and the Caucasus region.” Hirzel sees “strong sales potential” as the company seeks to meet the needs of customers in this regional market.
The new licensing agreement follows a common model in the Iranian auto parts industry, in which a foreign company brings technology and manufacturing specifications to a local partner, in order to supply the Iranian joint-ventures or CKD contract manufacturing agreements of the likes of PSA Groupe, Renault-Nissan, and Daimler. These parts are the lifeblood of a burgeoning Iranian automotive sector, which produced over 600,000 vehicles in the first half of 2017, registering 18% year-on-year growth.
The Iranian Auto Parts Manufacturers Association (IAPMA) estimates that there are 1200 parts manufacturers in the country generating USD 8 billion in annual sales. IAPMA ambitiously projects that Iranian auto parts market could generates sales of USD 32 billion by 2025. A major contributor of growth will be an expansion in exports, which are currently less than USD 200 million, but are expected to rise to USD 6 billion by 2025, a thirty-fold increase.
Major Iranian auto parts manufacturers such as Ezam and Crouse manufacture under license for global players such as Bosch, Mahle, Mando, and Valeo. The new agreement between AKT and Autoneum shows the potential for smaller, specialist parts manufacturers to strike similar deals that improve the quality and sophistication of the parts available for the local market and for export.
Photo Credit: Autoneum
