Executives Describe Bottlenecks, Red Tape in Iran's Pharmaceutical Sector

Iran has made strides in the development of its domestic pharmaceutical sector. When measuring by dosage, just 3 percent of pharmaceutical products consumed last year were imported. But when looking to sales value, imports accounted for USD 1.6 billion of the USD 3.6 billion in total sales last year. Many of the pharmaceuticals that Iran imports are expensive therapies, having been produced using advanced technology that Iran currently does not possess.

Given the importance of many of these imported medications are for the treatment of life-threatening diseases, Iran’s Ministry of Health and Medical Education (MoHME) regularly publishes a list of pharmaceuticals that the country needs and is allowed for import. The list for August included pharmaceuticals needed to treat a range of life-threatening diseases, including Lymphoma, Morquio syndrome, Crohn’s disease, and prostate cancer.

US sanctions have made the import of these pharmaceuticals and the raw materials needed to domestically manufacture more basic pharmaceuticals increasingly challenging. While US sanctions ostensibly do not target the humanitarian sector, international financial institutions remain wary of processing humanitarian transactions with Iran due to fear of falling foul to US sanctions, contributing to medicine shortages.

I interviewed two individuals working in Iran’s pharmaceutical sector in late August to discuss medicine shortages and some of the challenges that foreign and local companies operating have faced since the reimposition of US sanctions. Both interviewees, while highlighting an acute need for some medicines, shed light on some of the regulatory, operational and integrity risks that foreign pharmaceutical companies face on the ground. 

Ara (A) owns a pharmacy and is a business development specialist for a company that manufactures pharmaceutical products. Fariba (F) works in pharmaceutics in the manufacturing and production of drugs. Their names have been changed to protect their identities.

Has there been an increase in medicine shortages in recent years?

F: Before, it was very easy to import some medicines like Paladix or Aspirin, but now their import is very limited. Branded pharmaceuticals are limited in availability. A lot of the products that are available in pharmacies are from prior to the reimposition of sanctions.

Do you have an example of a pharmaceutical product that witnessed a shortage in the market in recent years?

F: We had massive problems importing insulin pens, which used to be imported through a foreign pharmaceutical company because they cannot be manufactured in Iran. I believe we are still having problems importing them. When you go to pharmacies nowadays it’s very difficult to find insulin pens. We were forced to tell people who had diabetes and needed the pens to go back to their old ways of injecting insulin so that they don’t use insulin pens anymore. Now, Iran is moving towards the direction of manufacturing insulin domestically.

Are shortages of raw materials needed to produce pharmaceutical products contributing to medical shortages?

A: It’s even become more challenging for domestic companies to manufacture pharmaceuticals for which there is a shortage of in the market because they are having difficulty obtaining the raw materials needed to manufacture finished pharmaceutical products. Foreign companies have been less willing to send us raw materials. India and China are some of the big suppliers, but even importing raw materials form China has become increasingly difficult in the past year. Indian companies are better, but if we want to import raw materials from Europe or elsewhere, it’s very difficult. So even if companies have active licenses to manufacture a product, they are unable to because they don’t have the raw materials needed, causing medicine shortages. However, despite these shortages due to the inability to import raw materials, the IFDA [the Food and Drug Administration of Iran] sometimes won’t allow the finished product to be imported, citing companies that have an active license to manufacture the product in Iran. Part of the reason the IFDA does this is that it wants to spur domestic production—including for raw materials—in the pharmaceutical sector.

F: A huge problem is the import of the raw materials that we need. A lot of raw materials are made by our own chemists, but sometimes we don’t have the products we need to manufacture the finished pharmaceutical product (i.e tablets). For example, for my own work, I order some of my products from two foreign pharmaceutical companies, but it’s become harder for us to import it from them. The shipping times have become longer and there’s also the issues of sanctions and COVID-19. In another example, I wanted to work on Posaconazole, an anti-fungal medication for which the needed raw material is expensive. Posaconazole is needed for people who are in the ICU because they have a fungal infection that isn’t responding to routine medication. We are looking for a company that will be willing to ship it to us, even in small quantities, but we can’t find any willing company. Posaconazole is not being manufactured in Iran, and with the countries that do produce it, there are problems with the shipping and exchange rate. Before the sanctions, we were going to order some products from Spain, Italy, and Holland, but when the sanctions were re-imposed, all of these got cancelled.

Has it become more challenging to import drugs from foreign manufacturers in the past two years?

 A: Yes. Foreign companies need to look at the list of pharmaceuticals published by the MoHME that Iran needs and is allowing to be imported. It has become very hard for pharmaceutical companies operating in Iran to import drugs that are manufactured in the country and the chances of importing them is very low. For the drugs that the country needs, like drugs that they cannot locally manufacture because they use advanced technology, IFDA will usually issue companies a conditional license to import the product. For example, the IFDA will issue a company a conditional license in which it will allow the import of a pharmaceutical product for a short period of time on the condition that next year the company will manufacture the product domestically. In some instances, when the renewal time comes for an active license to import a pharmaceutical product, if it is now being manufactured in Iran, the ministry will not renew the license.

F: The MoHME’s budget is now going more towards hospitals and ensuring that they have what they need to combat COVID-19, so the import of some drugs has reduced, especially the ones that can be manufactured in Iran generically.

Has it become harder for foreign companies to get the necessary license and permits for their operations and has it become easier for domestic companies in recent years?

F: No, you can’t say that exactly. It’s true that we are trying to locally manufacture some drugs, but for some drugs while we have the ability to manufacture the medicine, we currently don’t have the technology needed for the device needed to deliver the drug. For example, for insulin pens, the problem isn’t the medicine, it’s the technology of the pen. Sometimes, it’s not that that it’s too hard to locally manufacture a drug that’s the issue, it’s that it’s too expensive to produce, so it’s not worth it for the manufacturers to produce. However, when sanctions were re-imposed, local manufacturers were forced to try and make some drugs that they otherwise wouldn’t pursue, because there is a need.

What are some things that Iran has been doing to strengthen domestic production in the pharmaceutical sector? 

A: If a company now wants to import a pharmaceutical product, the MoHME will sometimes, for example, give the company a license to import only 5 percent of the drug’s market share. In other words, they won’t let one company take control of the whole market for a drug. Before, it was more common that when domestic companies were manufacturing a drug that some companies could import the drug alongside it. But now, the ministry has made it much more difficult to do this. Because of this, the underground market has also become stronger.

 F: One way that the government has been trying to drive domestic production of pharmaceuticals that we currently cannot manufacture is through a program called markaze roshd [Growth Center]. If university students have an idea to manufacture a pharmaceutical product, some public universities will provide them funding for up to two years to create it. The University of Tehran and Shahid Beheshti University currently have this program. If the students are not successful in creating the product, it is okay, but if they are successful, they will have to give the university a portion of their profits.

Has the underground market for pharmaceuticals become stronger in the past two years?

A: On the one hand, it’s become harder to import products, but on the other hand, the underground market has thrived in the past few years. Many doctors continue to only approve branded products, so when they prescribe patients pharmaceuticals, they’ll advise their patients to definitely opt for the branded version. Since branded products have become less available in pharmacies, the patient goes towards the underground market to find the product, which could pose a reputational risk to those brands.  

How do pharmaceuticals enter the underground market? 

A: A lot of kolbars [Kurdish porters who smuggle goods between the Kurdish areas of Iran, Iraq, Syria and Turkey] bring products from Kurdistan in neighboring Iraq. A lot of the products in the underground market come from Turkey, since the price for them is low there. Some travelers from other countries bring products to sell. There are many ways.

Photo: IRNA

After UN Showdown, INSTEX Can Help Sustain Iran Nuclear Deal

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

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

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

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

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

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

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

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

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

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

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

Photo: IRNA

Dysfunction at the Border Jeopardizes Growth of Iran-Iraq Trade

When the United States re-imposed secondary sanctions on Iran in November 2018, the Rouhani administration belatedly decided that increasing the country’s non-oil exports, particularly to Iran’s regional neighbors, would become a central aim of economic policy.

In 2019, Hossein Modarres Khiyabani, currently the acting industry minister, stated that Iran’s neighboring countries currently import USD 1.2 trillion worth of goods each year, of which Iran accounts for USD 24 billion, equivalent to a 2 percent share. The government aims to grow regional exports to USD 48 billion by the Iranian calendar year ending in March 2022.

Among these countries, Iraq has emerged as Iran’s leading regional trade partner. Iran and Iraq share religious and cultural connections and a border nearly 1,500 kilometers long. But it is Iraq’s large consumer market that makes it ideally suited to play a role in Iran’s non-oil trade agenda. The quality of products produced in Iran is compatible with standards in the Iraqi market, which means a wider range of Iranian producers can target exports to Iraq. This also makes Iraq an arguably more important export destination than China.

While exports to China totaled USD 9.5 billion in the Iranian calendar year ending in March 2020, exports to Iraq were a close second at USD 8.9 billion. Yahya Ale-Es’haq, Chairman of the Iran-Iraq Joint Chamber of Commerce, notes that the composition of trade with China is dominated by raw materials, whereas trade with Iraq includes value-added goods that generate employment in Iran.

“Iran and Iraq set a 5-year target to increase bilateral trade to $20 billion per year in 2018. This has been hampered this year to some extent, partly due to the trade restrictions caused by the COVID-19 outbreak and partly because of Iraq’s reduced purchasing power, a consequence of depleting global oil prices,” Ale-Es’haq told Bourse & Bazaar.

In response to economic pressure at home, Ale-Es’haq explained, Iraq is trying to be more frugal and to address public demands to deal with rampant corruption.

“In reopening Mandali border crossing earlier this month, Iraqi Prime Minister Mustafa Al-Kadhimi said he aims to launch a full-throttle battle against corruption in the borders and customs offices. This is because the central government is not being given its share of customs revenues.”

Officials at the Islamic Republic of Iran Customs Administration (IRICA) describe the Iraqi prime minister’s vow to fight corruption as an internal matter.

“Our customs offices and checkpoints are disciplined and every step and procedure is documented in our electronic system. The Iraqi PM was addressing a matter of national governance as Iraq is a nation made up of different ethnic, religious, tribal and political groups. Each of these have their own regulations and practices which, of course, extend to economic activities of which all groups claim a share,” a spokesperson for IRICA stated.

But Iranian exporters feel that their own government should be doing more to support trade.

Ali Hosseini Sakha is the owner of Nasl-e-Jonoub-e-Karoun Trading Company, based in the southern province of Khuzestan. The company maintains an office in the Iraqi city of Basra. Sakha has been trading in Iraq for over 25 years and last year exported nearly USD 22 million worth of foodstuff, construction material, and minerals across the border.

Sakha also runs a research center under the auspices of the Trade Promotion Organization of Iran, an agency of the Ministry of Industry. He conducts market research and organizes trade forums to try to facilitate greater cooperation and trade on both sides of the border.

“Based on our latest research, the share of Iranian commodities in the Iraqi market amounts to no more than 3 percent. You can hardly find Iranian goods when walking through supermarket aisles in Iraq and that’s a shame,” he said.

Sakha points to a lack of coordination among government agencies. While the government provides a budget to wide range of agencies and to each Iranian province for export promotion activities, the funds are largely squandered on forums and meetings or allocated to those with “special interests.”

Moreover, Sakha explained that Iranian exporters are increasingly reliant on unreliable middlemen in the hopes of getting their products into the Iraq market without having to do the hard work of distribution themselves.

“Iranian exporters take their goods to the border for sale and usually end up making deals with middlemen because that’s how they think they can ‘get ahead in the game.’”

The unregulated middlemen then sell goods on to “the real Iraqi merchants.” Sakha noted that it is not uncommon for middlemen to disappear without having made payment for the goods they have just taken across the border.

He believes that customs officials and the joint Iran-Iraq chamber of commerce could do more to ensure exporters are engaging reliable Iraqi merchants and trading companies. “None of this takes place. The joint chamber is there and has no other business than to serve the interests of certain groups and individuals.”

Sakha’s sentiments were echoed by Hemmat Shahbaz-Beigi, owner of Arshia Gostar Trading Company in Kermanshah province’s Qasr-e-Shirin County. The company exports everything from construction materials, to home appliances, and even vegetables.

Shahbaz-Beigi did not hold back in complaining about the lack of support for Iranian exporters.  

“There are rules and regulations, yet, there is no guarantee that any of them will be executed or applied to your case if you ever come across a problem,” he said.

Shahbaz-Beigi recounted the saga of a USD 200,000 order fulfilled in 2015 than went unpaid. Five years year later, he has spent USD 40,000 in pursuit of payment but “hasn’t gotten a penny back.”  

Shahbaz-Beigi has met with Iran’s consulate general in Iraq but was “not to spend any more on the case and forget about my money altogether.”

He has also been unable to get help from the joint chamber of commerce. “This is just frustrating,” he lamented.

In a recent tweet, Ali Shariati, a board member of the Iran Chamber of Commerce, the nationwide body representing the interests of the country’s private sector, claimed that the Iran-Iraq Joint Chamber of Commerce had been operating without a statute for 16 months and that the chamber no longer comprises of individuals with an interest in developing bilateral trade.

The failure of the joint chamber to support bilateral trade is not unique to the experience of Iranian exporters in Iraq.

“This is how most of our joint chambers are functioning,” explain Farhas Ehteshamzad, former head of Iran Auto Importers Association and a respected figure in business circles. “If these bodies are not made to fulfill their responsibilities towards the private sector, they will not only hamper trade but the members will probably end up monopolizing trade in their areas of interest.”

When asked to comment on the matter, Hamid Hosseini, former general secretary of Iran-Iraq joint chamber and current member, described the complaints of Shariati, Ehteshamzad, and others as “their take on the issue.”

Responding to Shariati’s tweet regarding the join chamber’s statute, Hosseini noted that the statute must be renewed every year during an “assembly with two thirds of the members are present.”

“We have more than 400 members and most of them live in the provinces bordering Iraq. So it’s been hard organizing such an assembly given that we are currently experiencing a pandemic. But we’ve recently been given the permit to hold the assembly online and this will solve the problem,” he explained.

Hosseini added that the joint chamber has an arbitration center with Iraq where disputes are settled, but the problem is that trade between Iranian and Iraqi partners is usually carried out traditionally on the basis of mutual trust rather than robust contracts.

“In such cases, no contracts are signed and there are no documents proving that a commercial interaction has taken place. That’s why these merchants can’t win their cases and the joint chamber should not be made to take the blame for this.”

Despite these challenges, companies committed to export growth can persevere with the right mindset, argued Ali Dorhi, a senior executive at Dina Food Industries, which produces Iran’s beloved “Cheetoz” cheese puffs.

Dorhi believes most Iranian enterprises lack an “export-oriented mindset” and that only “30 percent” of the problems facing Iranian firms eyeing export opportunities can be attributed to bureaucracy and red-tape.

“There is often no market research and trade takes place at the very gates of the borders. Products are not customized or at least adapted a bit to suit the tastes of the destination markets,” Dorhi noted.

“In Iraq, for example, customers demand that product information be written in Arabic on boxes and containers. Many Iranian producers will not meet that request. This is why we end up having an insignificant share of less than 2 percent in Iraq’s lucrative food industry market.”

With oil exports having earned Iran just USD 8.9 billion dollars in the Iranian calendar year that ended in March 2020, the government is finally recognizing the importance of non-oil exports. But what has been neglected, particularly in the case of trade with Iraq, is the need to support exporters with better regulations, better market research, and more responsive trade bodies and chambers of commerce.  

During Al-Khadimi’s recent trip to Iraq, Hassan Rouhani reiterated that Iran and Iraq intend “to expand bilateral trade ties to USD 20 billion”—a figure that reflects the effective doubling of Iranian exports to Iraq. Whether the two countries can reach that lofty goal will depend on whether Iranian authorities and exporters can address the dysfunction at the border.

Photo: IRNA

Europe-Iran Trade Mechanism Completes Landmark Iran Sale

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

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

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

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

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

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

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

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

Photo: IRNA

New European Limits on Medical Gear Exports Put Iranians at Risk

As the world grapples with shortages of the medical equipment needed to fight the COVID-19 pandemic, the European Commission has announced a new regulation that will establish export controls for Personal Protective Equipment (PPE), a category of goods that includes the face shields, gloves, masks, and other protective gear that help medical professionals limit their exposure to bacteria and viruses. The regulation will limit the sale of these PPE items to countries outside the European Union (EU)—exports of these items were valued at USD 12 billion last year. 

Analysis by Chad Bown of the Peterson Institute for International Economics makes clear how the European Commission’s move could have significant consequences for non-European countries that largely supply their healthcare systems with protective equipment made by European firms. Bown argues that the new policy could prove “self-defeating,” both because it may serve to “disrupt supply chains” and also because the new act could “block EU exports of vital equipment to the world’s poorest victims of the pandemic.”

The European Union is home to many of the world’s largest producers of medicine and medical equipment. With the support of their governments, these firms have encouraged “developing countries to open up their markets to imports, facilitating a system in which these countries have come to rely on EU suppliers for their essential medical equipment.” Iran is one such country. 

When looking at EU exports to Iran of the PPE items specifically covered under the new regulation, two things become clear. First, Iran was importing significantly more of these goods prior to the Trump administration’s reimposition of secondary sanctions beginning in May 2018. Total exports to Iran fell from EUR 39 million to just EUR 13 million last year, suggesting that Iran’s healthcare system was already grappling with limited inventories of face shields, gloves, and other protective equipment even before the COVID-19 outbreak. 

Second, despite the fall in trade, it is clear that EU is a significant supplier of PPE items to the Iranian healthcare system—a fact that leaves Iranian doctors and nurses vulnerable as the bloc begins to enforce the newly announced export controls. This vulnerability is made more clear when looking to EU exports in proportion to exports from Iran’s other leading trade partner: China. In the category of face shields, which account for around half the total value of world PPE exports to Iran, 35 percent of exports were dispatched from the EU. 

This figure is lower than the proportion identified by Bown for many countries that trade with Europe, reflecting how sanctions have deterred European suppliers from the Iranian market over the last decade, enabling Chinese suppliers to expand market share. Nonetheless, the EU accounts for about one-fifth of all PPE exports in value terms, meaning that Iran’s healthcare system will be hit as the new export controls are implemented. Already struggling to procure goods through existing supply chains, Iranian importers—and the hospitals that depend on them—may find the supply chains cut altogether.

Moreover, the administrative burden of complying not only with the new export control regime but also with new sanctions regulations will put Iranian buyers at the back of the line for any sales that are to be licensed. European manufacturers of personal protective equipment will want to get whatever limited inventory available for sale to third party countries to the buyers who can make payment and take delivery in the shortest amount of time—Iranian importers are not those buyers.

The new regulation does indicate that some accommodations will be made for the provision of European aid. The regulation states, “exports of certain quantities of specific products may be authorized under specific circumstances such as to ensure assistance provided to third countries.” Iran has already received aid from France, Germany, and the United Kingdom as well as assistance provided by the EU itself. But the regulation has the effect of cutting long-standing commercial relationships between European manufacturers and importers in countries like Iran, and replacing them with a highly political procurement channel. It is not clear how European policymakers will prioritize who receives aid including PPE items—will it be the countries currently facing the most acute outbreaks, such as Iran, or will it be the countries where Europe sees the most favorable political and economic relations, such as Norway. 

In the face of such uncertainty, China has mobilized resources to increase aid shipments and commercial sales of medical equipment to countries around the world, including Iran. But Chinese suppliers cannot replace European suppliers in each and every country as the COVID-19 pandemic spreads. As Bown, concludes, “to ensure the hospital equipment to fight the pandemic arrives where and when it is needed the most, policymakers must coordinate and cooperate globally.” The European Union is the only global actor that could effectively marshall such an approach.

As a country with a large manufacturing base, Iran can be part of the solution. Iranian firms have already taken steps to increase production of face masks, disinfectants, hospital beds and other products and equipment for which there is growing global demand. Rather than seek to cut its supply chains with non-EU countries, European authorities could seek to increase imports of basic PPE items such as surgical masks or gowns from countries like Iran, leaving European firms to focus on ramping up production of more advanced equipment such as face shields, generating a surplus for export. In short, the same notions of comparative advantage that led to the creation of today’s complex supply chains should inform their retooling during the COVID-19 crisis. Abandoning economic interdependence will put everyone at greater risk.

Photo: IRNA

Iran's Urgent IMF Loan Request Challenges Trump Policy

This article was originally published by Responsible Statecraft.

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo: IRNA

Iran Looks to Central Asia in Effort to Grow Exports

Over the past year, Iran has faced disruptions in its foreign trade relations following the withdrawal of the United States from the Joint Comprehensive Plan of Action.  Trade with partners like Europe and China has suffered because of U.S. secondary sanctions. In the face of these uncertainties, Iran has adopted a “neighborhood policy” as it seeks to protect trade flows. The policy has been recently expanded to Central Asian states, which serve both as an export market as well as the geographic bridge as Iran seeks to strengthen integration with Russia and China. For the landlocked Central Asian states, Iran is a vital conduit to international waters. In a May 2018 speech, President Rouhani described closer ties with Central Asia as a “fundamental policy.” The policy is now in the early stages of implementation.

At the beginning of December, Tehran hosted two economic summits with Tajikistan and Kyrgyzstan, the first such meetings in two and three years respectively. A week later, an Iranian delegation traveled to Tashkent in an effort to deepen trade ties.

On December 2, a joint commission of economic cooperation was held between Iran and Tajikistan. Iranian energy minister Reza Ardakanian presided over the meeting, which focused primarily on cooperation in energy and transportation projects. Iranian contractors have a history of infrastructure development in Tajikistan, such as the Anzob Tunnel completed in 2015 and Sangtuda 2 hydroelectric power plant. But discussions at the joint commission focused on new projects that would improve Tajikistan’s links to export markets through Iran, and also help support increased bilateral trade, such as the construction of warehouse facilities at Chabahar Port, and the completion of a railway corridor that would link Tajikistan and Turkey through Iran as part of the integration efforts of the Economic Cooperation Organization. 

As part of a broader effort to reset political relations, Iran’s President Rouhani made a state visit to Dushanbe in March 2019. Tajik President Emomali Rahmon may soon make his first visit to Iran in six years.

Just a day after the summit with Tajik officials, Iran held a similar high-level commission with Kyrgyzstan. Mohammad Eslami, Iran’s minister of roads and urban development, led the Iranian participation in what was the first commission meeting in three years. The negotiations, which resulted in an extensive memorandum, included a focus on banking ties and transport links.

In the area of banking the Iranian and Kyrgyz officials discussed the establishment of a protocol to ease trade conducted in national currencies among commercial banks. Iranian economy minister Farhad Dejapsand and his Kyrgyz counterpart, Hukan Batov, also discussed the establishment of a joint export bank and export credit agency to help facilitate trade. In the area of transit ties, Iranian and Kyrgyz officials continued dialogue on the use of Iran’s Chabahar port, where Kyrgyzstan has owned land since 2007 following a land swap with Iran, but has yet to develop warehouses or other infrastructure at the site. Iran has sought expanded ties with Kyrgyzstan in recent years. Kyrgyzstan so far is the only Central Asian state to have agreed a 10-year strategic roadmap with Iran—the agreement was signed in December 2016.

A week after the Tajikistan and Kyrgyzstan summits, Iranian industries minister Reza Rahmani led a delegation of over 50 Iranian companies for a two-day business summit in Tashkent, Uzbekistan. Like Tajikistan and Kyrgyzstan, Uzbek companies use Iranian ports to get their goods to global markets. But with a population of 33 million, Uzbekistan also represents a significant potential market for Iranian exporters. Iran’s Zagros Airlines has re-established a direct light between Tehran and Tashkent, after a three-year hiatus. Bilateral trade between Iran and Uzbekistan grew 40 percent in 2018.

Increased trade with neighbors such as Iraq and Turkey has been a key contributor to Iran’s economic resiliency over the past decade, particularly as sanctions depressed exports to markets like Europe and China. In this regard, improved relations with Central Asian states have a strategic importance for Iran in the face of the U.S. “maximum pressure” sanctions companies. Moreover, the Central Asian states will also play an important role in China’s growing sphere of economic influence and as part of the Russian led Eurasian Economic Union, with which Iran has recently concluded a free trade agreement. If the plans discussed by Iran with its Central Asian neighbors are properly implemented, a new pathway for regional economic development will be opened in the medium-term.

Photo: Railnews.ir

Europe’s Trade With Iran Is Worth Saving

Can trade between Europe and Iran be saved? French President Emmanuel Macron’s $17 billion Hail Mary pass came up short. Instex, the so-called “special purpose vehicle” to evade American sanctions, is stuck in the doldrums. Most European companies are steering clear of business with Iran. European imports of Iranian oil have dropped to zero.

As the Trump administration’s “maximum pressure” sanctions campaign rolls on, it might seem like Europe not only lacks the means to defend its trade with the Islamic Republic, but also that there’s little left to defend. 

But a closer look at the trade data tells a different story. European technology is deeply embedded in Iran’s economy, particularly in the country’s large industrial sector, which employs around one in every three Iranian workers. (By comparison, the oil sector employs around one in every 200.) The export of European parts, machinery, and transport equipment—captured under Chapter 7 of the Standard International Trade Classification system—is arguably a more important indicator of Europe-Iran trade relations than Europe’s purchases of Iranian oil.

The value of European SITC 7 exports to Iran has halved since the Trump administration reimposed secondary sanctions in November 2018. Looking to European Union totals, the average monthly export value was $970 million in the 12 months prior to the reimposition of sanctions, falling to an average of $433 million in the subsequent 10 months for which data is available. Iran’s industrial sector is largely dominated by state-owned enterprises, most of which are included in the U.S. Treasury Department’s sanctions list and therefore off limits for European firms that want to maintain commercial links with the U.S.

But even with these significant barriers, Europe continues to export billions of dollars of parts, machinery, and transport equipment to Iran. Exports to private companies are not proscribed under U.S. sanctions where sector-wide sanctions, such as those on Iran’s energy sector, are not in place. This means that so long as European firms are able to find a bank willing to accept payment for exports—an increasingly difficult task—trade can take place.

This trade is worth defending and European officials should not be disheartened by their recent struggles to sustain bilateral trade in the face of American sanctions. The persistence of this trade also makes clear that Iran, cannot simply give up on Europe, despite the political rhetoric of Supreme Leader Ali Khamenei.

There is a common misconception that the multilateral sanctions campaign which ran from March 2008 to January 2016, and which included EU sanctions, forced Iran to turn away Europe in favor China. While Iran’s trade with China grew considerably in this period—Chinese exports of parts, machinery, and transport equipment grew from $2.9 billion in 2007 to $7.8 billion in 2015—similar growth can be seen in most industrializing countries of the world. After all, the sanctions period corresponded with the emergence of China as a major exporter of high-value manufactured goods.

However, European exports to Iran rebounded immediately after sanctions were lifted. The relative proportion of Chinese-to-European exports in the SITC 7 category fell from 2.58 in 2015 to 1.13 last year. Despite China’s newfound dominance, Europe was able to win back much of its share of Iran’s imports of parts, machinery, and transport equipment.

Why? Because of a kind of path dependency. When Iranian industry went through its last major phase of modernization, in the early 2000s, European firms took the lead in establishing factories and transferring technology. French engineers got Iran’s automotive sector in gear, German engineers got locomotive manufacturing on track, and Italian engineers got the food industry cooking.

To keep those assembly lines running, Iran needs European inputs. Even if Chinese firms have become major suppliers, they have not yet been able to wean Iranian industry away from dependency on Europe. In large part, this is because the previous round of sanctions was at its peak intensity for only 20 months—from January 2012 to November 2013, when the nuclear negotiations resulted in some initial sanctions relief, including the suspension of sanctions on the automotive sector.

As a result, Iran’s industrial sector has never felt it had to fully eliminate its reliance on European parts and technology. It takes years to set up factories and supply chains; it will take years for sanctions to undo the path dependencies established through historical trade ties.

Even if the overall value of European trade with Iran has fallen in both absolute and relative terms, Europe retains a crucial and assured role in the future of the Iranian economy. Iranian politicians—however disappointed with European efforts to withstand U.S. sanctions—cannot simply cast aside relations with the West. This gives Europe unique leverage.

As Iran announces further reductions of its commitments under the nuclear deal, some in Europe will call for the reimposition of EU sanctions, which would devastate industrial trade with Iran. Iranian authorities no longer believe that the U.S. can impose meaningful economic pressure on Iran—but Europe can.

This makes Europe a more consequential party to any negotiations than is widely appreciated. Whereas the U.S. reimposed sanctions and then sought talks, Europe ought to take a different approach. Rather than making the future of the nuclear deal beholden to a $17 billion credit line or the innovations of Instex, Europe should put its regular trade with Iran at the center of its diplomacy. The practical need for parts, machinery, and transport equipment can inspire pragmatism at a time of rising tensions.

Photo: MAPNA

China’s Declared Imports of Iranian Oil Hit a (Deceptive) New Low

New data from China’s customs administration show a significant drop in purchases of Iranian oil. The declared value of September imports was just USD 254 million, down 34 percent from August and down 80 percent from the same month last year.

The September data appears to end a period of relative stability for Chinese imports of Iranian oil following the Trump administration’s revocation of a key sanctions waiver in May, since when China has continued to purchase Iranian oil in direct violation of U.S. sanctions.

But the decline in purchases of Iranian oil was not matched by a decline in Chinese purchases of non-oil goods. Non-oil imports from Iran exceeded USD 500 million in September, a level of monthly trade that has remained stable since April of this year and which is consistent with the monthly average observed over the last two years.

This suggests that the fluctuation in oil purchases is not related to a system-wide disruption in China-Iran trade such as the banking difficulties that stymied commerce late last year. Additionally, Chinese exports to Iran did not decline month-on-month in September.

According to data provided by TankerTrackers.com, fewer barrels of oil were observed departing Iran in August than in July. Observed exports amounted to around 670,000 bpd in August, down by about 130,000 bpd from the previous month. This drop in observed exports offers one explanation as to why Chinese declared imports of Iranian oil were lower in September than in August—export levels in a given month tend to appear as declared imports in the following month given the four week journey of tankers at sea.

Notably, any decision to scale back imports of Iranian oil in September would have predated the Trump administration’s move to sanction tanker subsidiaries of Chinese state shipping giant COSCO involved in the transport of Iranian oil. The Chinese government has reportedly asked the Trump administration to remove sanctions on COSCO as part of its ongoing trade negotiations. 

In July, U.S. officials had publicly expressed concern about continued Chinese purchases of Iranian oil, suggesting that China was given prior warning that its tanker fleet could be targeted with sanctions designations. This may have spurred China to reduce the use of its own VLCC tankers in the transport of Iranian oil. The fleet of the National Iranian Tanker Company (NITC) has long been the primary means by which Iranian oil is exported to China, but having fewer Chinese tankers picking up oil from terminals in Iran would nonetheless reduce export capacity, depressing overall imports. 

However, data on observed exports from Iran does not correspond to the drop in declared imports in September’s customs data. The value of the observed exports is considerably higher than the USD 250 million in Chinese purchases declared for September. The market value of Iran’s August exports is over USD 1.2 billion. Syria is the only other customer currently purchasing Iranian oil and imports significantly less than China. So where is the additional oil going?

Some tankers which departed Iran for China in August are still in transit, waiting for ship-to-ship transfers that will take the Iranian crude to its final port destination. Other tankers may have delivered their oil into bonded storage, meaning that the oil has not yet been sold to China and is therefore not captured in the customs data. 

But the most obvious explanation for why declared imports lag observed exports is actually captured in the customs data—just not in the entry for Iran. Reports earlier this summer noted ship-to-ship transfer activity off the coast of Malaysia that appeared to be tied to exports from Iran. Chinese customs data from the last few months illustrates how the drop declared imports from Iran is concurrent with a marked increase in imports from Malaysia.

Since May of this year, Malaysia has exported an average of USD 1.2 billion worth of oil to China each month. The monthly average in the twelve months leading up to May was just USD 1 billion. Re-export of Iranian oil via Malaysia allows China to overcome the capacity problem introduced by the threat of sanctions on major players like COSCO. China can use smaller tankers for the final leg of the journey from Iran, picking up oil from Iranian VLCCs.

Looking ahead, TankerTrackers.com has reported total Iranian exports of around 485,000 bpd in September, a decline of 185,000 bpd when compared to the previous month. With less crude at sea, the value of oil imports declared in China’s October customs data may even fall below the September level. Yet there is little evidence that China is making a strategic decision to further decrease imports of Iranian oil. On the contrary, the strategy to sustain a baseline of imports appears to be growing more sophisticated.

Photo: Depositphoto

Iran Trade Deal with Russia-Led Bloc Warrants Cautious Optimism

On September 30, Iranian President Hassan Rouhani arrived in Yerevan, Armenia to attend the Eurasian Economic Union (EAEU) Summit. A free trade agreement (FTA) between Iran and the EAEU will come into force on October 27, creating conditions for preferential trade between Iran and the current EEAU members: Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. The FTA will give Iran access to a single market comprised of 183 million people and with an aggregate GDP of USD 4 trillion.

Iranian policymakers have welcomed the FTA with cautious optimism. With parliamentary elections fast approaching, the Rouhani administration and parliamentarians alike are eager to implement policies that may help bolster Iran’s economy as sanctions cause a sharp recession. Reza Rahmani, Iran’s industry minister has stated that the FTA could help counteract Iran’s isolation in the face of U.S. sanctions. Mohammadreza Jahanbiglari, an economist and member Iran’s Chamber of Commerce, has predicted that if properly implemented, the FTA could see Iran’s trade turnover with EAEU member states quadruple to reach USD 10 billion within one year—a view echoed by Mehdi Mirashrafi, the head of Iran’s customs administration. The Iran Chamber of Commerce has been invited to establish a specific body to support exchanges with EAEU counterparts.

However, the highly regarded Islamic Parliament Research Center, the research arm of the country’s legislative assembly, has issued a more conservative assessment, outlining in a June 2019 report that the “low level of Iran’s commercial complimentary” with EAEU member states will result in a “minor impact from the FTA on the country's economy.”

The Parliament Research Center nonetheless concluded that the FTA could help Iran develop its non-oil exports, a central aim of the doctrine behind the “Economy of Resistance” called for by the Supreme Leader, Ali Khamenei. Under the FTA, a list of 502 goods will enjoy preferential tariffs when exported to the EAEU. 

Utilization of the so-called “soft infrastructure” represented by the FTA may also spur the development of Iran’s geo-economic position in the Middle East through the creation of new “hard infrastructure.” Russian leadership of the EAEU is complimentary with its “Pivot to the East” strategy. In this context, Iran can provide the shortest, safest, and cheapest route for Russian goods to the Indian Ocean as envisioned in the International North–South Transport Corridor (INSTC). During the Yerevan summit, Iranian foreign minister, Mohammad Javad Zarif highlighted the pivotal role Iran can play in these plans, tweeting, “With parallel work on North-South & South-West Transit Corridors, ground paved for expansion in regional trade & cementing of our role as vital transit hub.”

Despite practical concerns about the facilitation of trade in the face of US secondary sanctions, Iran will also likely find a sympathetic group of countries among the EAEU, which has an anti-sanctions outlook. The EAEU Treaty was signed on May 29, 2014, after the first round of sanctions were imposed against Russia. Like Iran, Russia has seen the expansion of trade among the countries of the former Soviet Union as a possible bulwark against sanctions.

Before leaving Iran for the Yerevan summit, President Rouhani highlighted the potential for the FTA with the EAEU to help Iran mitigate the effects of U.S. sanctions. One of the key issues barriers for Iran’s cross-border trade is the absence of reliable banking channels. Iran and Russia have been exploring the use of local currencies in bilateral trade as well as the use of a new Russian bank messaging system called SPFS, which is intended as an alternative to SWIFT. Abdolnasser Hemmati, the governor of Iran’s central bank, has stated that Russia has agreed to Iran’s proposal to expand SPFS to the countries of the EEAU. 

Beyond banking, Iranian business leaders are concerned about the harmonization of the trading regimes. For example, while EEAU countries use the more detailed 10-digit “Harmonized System” (HS), Iran uses the 8-digit version. Proper harmonization will require input from a wide range of Iranian regulatory bodies, including the customs administration, the National Standard Organization, the Veterinary Organization, and the Food and Drugs Administration. Aside from the administrative challenges on the Iranian side, there are also concerns around the internal dynamics of the EAEU, in which economic ambitious have not been matched with the kind of political frameworks that have made the European Union customs union so successful. The FTA between Iran and the EAEU is an interim agreement that will remain in force for three years—a short period to overcome a wide range of bureaucratic hurdles.

While Iran might not find drastic gains by joining the EAEU, it certainly has nothing to lose. Over time, if enabled by the creation of more robust banking channels and investment in new transport infrastructure, Iran’s non-oil trade with the EAEU could prove a real boon for the economy.

Photo: Kremlin.ru

Why Iran Pays More for Each Kilogram of European Medicine

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo: IRNA

No, China Isn't Giving Iran $400 Billion

A recent report from the London-based publication Petroleum Economist offers a cautionary tale of “fake news” having spurred an unprecedented debate in about Sino-Iranian relations.

Quoting an anonymous senior source “closely connected” to Iran’s petroleum ministry, the article claims the existence of a major new agreement between Tehran and Beijing that could reflect “a potentially material shift to the global balance of the oil and gas sector.” The figures presented to back up this claim are astronomical—China will invest a total of $400 billion in Iran over the next 5 years, split between $280 billion in the development of Iran’s energy sector and $120 billion for infrastructure projects. This first round of investments is claimed to be part of a 25-year plan with capital injected in the Iranian economy every five years. Despite the attention that the report garnered, with follow-up articles in Forbes and Al Monitor among other publications, Petroleum Economist’s figures do not appear plausible.

China and Iran signed a comprehensive strategic partnership, the highest level in the hierarchy of Beijing’s partnership diplomacy, in 2016. On the occasion, Xi Jinping and Hassan Rouhani signed a comprehensive 25-year deal which included a series of multi-sector agreements intended to boost bilateral trade to $600 billion within a decade. Even considering the potential for trade following the listing of international sanctions after the implementation of the JCPOA, the goal was extremely ambitious, if not totally unrealistic.

Indeed, the re-imposition of US secondary sanctions in November 2018 has deeply impacted the level of China-Iran trade. As detailed in a Bourse & Bazaar special report, in the last trimester of 2018 Chinese exports to Iran dropped by nearly 70 percent, falling from the already low figure of $1.2 billion in October to a dramatic low of $400 million in December. Exports to Iran have now stabilized at just under $1billion each month.

Meanwhile, the flow of crude oil from Tehran to Beijing—undoubtedly the engine of Sino-Iranian trade—suffered a major slowdown due to the revocation of US oil waivers expired in May 2019. Despite China continuing buying Iranian oil in defiance of US sanctions, using ship-to-ship transfers and ghost tankers, the level of imports remain about half of pre-sanctions levels.

Post-November 2018 trade figures show a clear picture. Although China remains Iran’s most important foreign partner, Beijing has adopted a mixed policy vis-à-vis US sanctions—certainly bolder than European states, but still cautious. In short, the pattern of China-Iran trade suggests that a five-year, three-digit investment program is not credible, especially with oil imports at their minimum, secondary sanctions in place, and the poor record for project delivery of Chinese infrastructure projects in Iran. Moreover, it is unrealistic that Iran’s suffering economy could absorb such a massive injection of capital.

Petroleum Economist’s figures look even less realistic if looked from a broader perspective. According to Morgan Stanley, the total Chinese investment in the Belt and Road Initiative could reach $1.2-1.3 trillion in 2027. In May 2017, Ning Jizhe, the vice-chairman of China’s National Development and Reform Commission (CNDR), declared that Beijing’s investments in the BRI for the following five years (2017-2022) were expected to be between $600 billion and $800 billion. Therefore, it is hard to believe that China will invest almost the equivalent of two-thirds of its planned budget for its most ambitious and largest foreign project in Iran alone. If the Chinese were indeed set to spend $400 billion on Iran, the recent French proposal to extend a $15 billion credit line to restore JCPOA’s economic benefits would be completely useless given Chinese largesse.

The anonymous source painted an idealistic picture for Petroleum Economist, claiming that China has agreed to keep increasing its import of Iran’s oil in defiance of the United States and “to put up the pace on its development” of Phase 11 of South Pars gas field—which, ironically, represents one the clearest examples of Beijing’s difficulties in delivering its projects.

Most perplexingly, the source claimed that the deal “will include up to 5000 Chinese security personnel on the ground in Iran to protect Chinese projects.” Such a claim directly contradicts Beijing’s strategy of remaining disengaged from the Persian Gulf, especially considering the current tensions. Indeed, China’s apolitical approach to the region and good relations with Saudi Arabia and the UAE—with which China has comprehensive strategic partnerships—would be severely undermined by the presence of a Chinese armed contingent on the ground in Iran. The presence of foreign troops is also a political impossibility in Iran, where the refueling of Russian bombers at an Iranian airbase caused a political scandal last year.

With the exception of a Fars News piece quoted by Middle East Monitor, practically no Iranian nor Chinese official and semi-official news outlet have reported or confirmed the figures presented by Petroleum Economist. State news agency IRNA, which launched its Chinese channel only days before the news came out, had no corroborating report. When asked, Iran’s oil minister Bijan Zanganeh denied rumors about the $400 billion investment plan, succinctly stating: “I have not heard such a thing.” The head of the Iran-China Chamber of Commerce called the reports “a joke” and urged people to be more careful about the news they share.

The figures quoted by Petroleum Economist do not accurately reflect the future of Chinese investment in Iran. Nevertheless, the news achieved what could be assumed to be its original goal— to bait clicks.

No doubt, Iran is trying to put some pressure on the West, and perhaps on China itself, by reinforcing the idea of a strong, growing, and unique relationship between Tehran and Beijing. It should also be noted that before his trip to China at the end of August, Iran’s foreign minister, Javad Zarif published an op-ed in Global Times—a practice that is typical of Xi Jinping—calling, with quite unprecedented audacity, for a new phase in Sino-Iranian relations.

However, ties between Iran and China should not be overestimated and deserve careful consideration. In the short-term, Beijing represents Iran’s minimum insurance against US sanctions; in the long-term Tehran may be forced to more expansive eastward shift. But this will happen at the pace of China’s “strategic patience,” and there will be no $400 billion bonanza.

Photo: IRNA

India’s Iran Port Plans Languish Despite US Waiver

A year has passed since the US reimposed sanctions on Iran. During this time, the Trump administration exempted India’s investments in the Iranian port of Chabahar from sanctions in order to protect India’s strategic interests. Despite this accommodation, recent government data suggests that no new Indian investments have been made in the port project in the last two years.

Foreign aid expenditure figures released in July by the re-elected Modi government show that India has not spent any of its allocated funds for Chabahar since 2017. There is a conspicuous absence of spending even though roughly USD 20 million (150 crore rupees) was set aside each year. The government has now allocated a significantly lower, and perhaps more realistic, USD 6 million for the current year.

These figures confirm reports that India’s ambitions for Chabahar had hit a stumbling block even before Trump withdrew from the JCPOA nuclear deal. Evidently, the sanctions waiver has not been of much use either.

India’s Chabahar Ambitions

Indian prime minister Narendra Modi, now in his second term, has declared regional connectivity as a primary foreign policy goal and injected momentum into major initiatives to India’s east and west. A part of this was certainly driven by the state’s concerns about China’s own mammoth connectivity drive—the Belt and Road Initiative (BRI)—that runs through its immediate neighborhood and traditional sphere of influence. The project ideas themselves, however, pre-date the BRI.

The main regional connectivity project to India’s west is the Iran-India-Afghanistan transit initiative that hinges on the development of the Chabahar port along with road and rail links connecting it to Afghanistan. With Pakistan denying land access to India, New Delhi intends to use Chabahar to engage with the Afghan market and support Afghanistan’s trade and economic development.

Four years after Modi injected fresh momentum into the project, development at Chabahar has been slow—largely owing to US sanctions against Iran.

As per Iran’s original four-phase development plan, India was to invest USD 85 million to upgrade, equip, and operate two terminals on a ten-year lease. Indian prime minister Narendra Modi and Iranian President Hassan Rouhani oversaw the signing of this contract in May 2016 during the former’s visit to Iran.

Subsequently, Iran upgraded existing port infrastructure as per their agreed first phase of development. This upgraded port was inaugurated in December 2017 with great fanfare. The following year, India took over operations of the port but not much else went according to plan.

Ambitions vs. Reality

When it comes to sanctions, talk is never cheap.

Statements are more than enough to spook companies, heighten risk-aversion, and add further costs to proposed ventures. This was the case for Chabahar as early as Trump’s election campaign, long before the US president violated the nuclear deal.

The Indians first faced an investment chill at home. The Chabahar project calls for a private Indian firm to come on board as a strategic partner to manage, operate and maintain the port for ten years. The government entity created to oversee India’s foreign port projects—India Global Ports Limited (IGPL)—held two bidding rounds since 2016 with no result. It is now rewriting the terms a third time. Given the delay, the Indians signed on an Iranian firm (Kaveh Port and Marine Services) in the interim to take over operations.

A second task was to equip the port. European firms were Iran’s first preference but predictably after Trump’s win, they showed little-to-no interest in equipment bids. This left India with no choice but to work with Chinese firms. Interestingly, a Chinese company that won a bid to supply cranes in 2017 is blacklisted within India. Recent reports in the Indian media now suggest that some of these companies are reluctant to deliver equipment. Again, an environment of fear and uncertainty remains despite the US exemption.

A third aspect is the larger regional project on connectivity between India, Iran, and Afghanistan. As things stand, all parties are working with existing port infrastructure, roadways and operational capacity on this transit project. The route was tested successfully in October 2017 when Indian shipments of wheat arrived at Chabahar from Kandla (Gujarat) and made their way into Afghanistan. There is much left to be done, including the building of a new railway route, but Trump’s sector-specific sanctions pose new complications.

Making Do and Muddling Through

Three years on, Chabahar’s progress does not match India’s original expectations and Trump’s exemption has proven to be inadequate.

This project was touted to be India’s first foreign port development endeavour. For many assessing New Delhi’s record on infrastructure development abroad, the Chabahar project is no longer a useful indicator. It continues to rely heavily on stopgap measures with neither Indian nor foreign companies coming on board. It was a venture that New Delhi could have fought harder to preserve. But the reality is that it chose not to—a decision that merits an entirely separate discussion on the nuances of the India-US partnership and Iran’s reduced place in it.

All signs today point to the stakeholders behind the Chabahar project muddling through with what exists on the ground in Iran. As one Indian official involved with the project since its origins lamented, “This was not what we hoped to achieve. Chabahar is only about photo-ops now, not substance.”

Photo; Logiscm.ir

INSTEX Develops New Service in Bid to Fast-Track Iran Transactions

The state-owned company at the center of European efforts to save the Iran nuclear deal is entering its next phase of development. In a push to process transactions more quickly, INSTEX is rolling out a new factoring service for European exporters. The company is also making new hires that will enable it to expand operations in the coming year. 

Having reached the end of his six-month contract, Per Fischer is stepping down as the president of INSTEX, the state-owned company established by France, Germany, and the United Kingdom to support trade with Iran. Fischer’s replacement is former German ambassador to Iran Bernd Erbel. A career diplomat, Erbel has been posted in Lebanon, Saudi Arabia, and Egypt, and served as ambassador to Iraq prior to his stint as ambassador to Iran. 

The change in leadership comes as INSTEX finalizes several other management hires. By filling these roles, INSTEX will enter a new phase of operation as a standalone company based in Paris. Until now, both INSTEX’s outreach to European companies and its coordination with its Iranian counterpart, STFI, has been led by civil servants at the foreign and economy ministries of the company’s three founding shareholders. 

Fischer, a former Commerzbank executive, had been selected as the company’s first president due to his banking background. But Erbel, who lacks commercial experience, will have a different mission as he assumes his leadership role. Erbel will leave key commercial responsibilities to the new managers, focusing instead on ensuring a constructive working relationship between INSTEX and STFI. In recent weeks, cooperation between the two entities has slowed. Iranian authorities have called for INSTEX to be funded by Iran’s oil revenues—a move that would leave INSTEX vulnerable to sanctions from the United States. 

Erbel’s deep knowledge of Iran may help him navigate the tensions surrounding the INSTEX project in Tehran and reassure Iranian stakeholders of the seriousness of European efforts to develop the mechanism further. 

The goal for INSTEX remains to ease Europe-Iran trade by developing a netting mechanism that eliminates the need for a cross-border financial transactions. In this model, INSTEX will coordinate payment instructions between companies engaged in bilateral trade between Europe and Iran, enabling European exporters to receive payment for sales to Iran from funds that are already within Europe. The counterpart entity, STFI, will then mirror those transactions, allowing Iranian exporters to get paid with funds already in Iran. 

Delayed by political disagreements, INSTEX and STFI remain in the process of establishing the netting mechanism. But in a bid to fast-track transactions, INSTEX has opted to roll out a new service that does not require the direct participation of its Iranian counterpart. INSTEX is now in advanced negotiations to a provide factoring service to an initial cohort of European companies.

In factoring transactions, INSTEX will purchase the expired invoices of European exporters who have failed to receive payment for sanctions-exempt goods sold to Iran. The focus on expired invoices allows INSTEX to avoid lengthy French regulatory approvals for a full factoring service. Importantly, INSTEX will not require the goods in question to have been delivered to the Iranian buyer in order for the European exporter to factor its receivables. In this sense, the service approximates a kind of trade finance. 

According to a draft contract between INSTEX and a European company seen by Bourse & Bazaar, the purchase price paid to the European exporter by INSTEX would amount to 95 percent of the “assigned receivable.” In other words, INSTEX will charge a 5 percent fee as part of its factoring service. This fee will vary based on the transaction.

Such costs are not negligible for European exporters, especially when considering that INSTEX will require each transaction to undergo third-party due diligence at the exporter’s expense. Yet they are commensurate with the transaction fees typically charged by banks in those cases in which the bank is willing to accept funds originating in Iran. Moreover, for European companies burdened with unpaid invoices, the certainty of payment from INSTEX, a state-owned European company, is inherently attractive.

In some respects, the factoring service is a more appealing solution for companies than the netting mechanism service which INSTEX still intends to operationalize. However, factoring is inherently less scalable as it requires significant capital to be made available to INSTEX in order purchase invoices. INSTEX will also assume the burden of seeking payment from the Iranian debtor.

However, should the factoring solution prove popular, it may be the case that INSTEX could subsequently transfer its newly assigned receivables to STFI, making it possible for Iranian importers to pay STFI for goods purchased from European exporters. Alternatively, INSTEX could open an account either in Iran or at the Iranian bank branch based in Europe in order to receive payment for the outstanding invoices. While conceived as a stopgap solution, the experience with factoring could help INSTEX develop a more robust netting mechanism.

As it welcomes new leadership and pivots to a new service, INSTEX resembles any ordinary startup at a key stage of its development. Like all startups, INSTEX continues to face many hurdles—its success is far from assured, particularly in the darkening political climate. But the individuals responsible for its development are responding to pressure from demanding shareholders and skeptical customers with creative solutions—an encouraging sign.

Photo: Anna McMaster

Why China Isn’t Standing By Iran

Last week, Iran’s economic minister was in Beijing for talks on bilateral trade and investment. An official readout of the discussions from China’s commerce ministry describes China and Iran as “comprehensive strategic partners.” This echoes the language used by President Xi Jinping a few weeks earlier, when he welcomed a delegation that included Iran’s foreign minister, oil minister and parliament speaker. Xi declared that “No matter how the international and regional situation changes, China’s resolve to develop a comprehensive strategic partnership with Iran will remain unchanged.”

Unfortunately for Iran, the data tells a different story from the official rhetoric.

The reimposition of U.S. secondary sanctions on Iran in November has significantly slowed Chinese-Iranian bilateral trade. Chinese exports to Iran—mainly crucial machinery and parts for Iran’s manufacturing sector—fell from USD 1.2 billion in October to just USD 428 million in February. Exports had averaged $1.6 billion a month in the period from 2014 until the beginning of 2018.

Imports from Iran, mainly crude oil, which had fallen to $1 billion in October, rose after November, when the Trump administration granted China a waiver to permit continued oil purchases. Imports hit USD 1.3 billion in February, of which USD 866 million is attributed to oil imports. These figures are consistent with the monthly averages in the period from 2014 until the beginning of 2018.

In short, while China is continuing to benefit from Iran’s energy resources, Iran is struggling to use its earnings to purchase Chinese exports. 

This challenges the long-standing assumption in Tehran that China would stand by Iran despite sanctions pressures. In the previous sanctions period from 2008 to 2016, Chinese businesses significantly expanded their commercial presence in Iran, stepping in as Western companies exited the market. Iranians welcomed commercial partnerships with a country they believed to be economically minded, and unconcerned by Iran’s regional activities or its domestic governance.  

These hopes received an early jolt in October, when the Iranian business community was left scrambling after Bank of Kunlun, the state-owned bank at the heart of China-Iran trade, suspended most financial transactions with Iran. Although the bank resumed trade in January, it announced a new policy: It would only service trade exempt from U.S. secondary sanctions. This means trade in food, medicine and consumer goods, for which China is not Iran’s leading source of imports. Bank of Kunlun’s move is consistent with the terms of the oil waiver, which requires Iran’s earnings be paid into an escrow account and used exclusively for non-sanctioned bilateral trade.

Seen through the prism of short-term considerations, China’s policy adjustments at the expense of its trade with Iran are easy to understand. As Pedram Soltani, vice president of the Iran Chamber of Commerce, has observed, the roiling trade war with the U.S. remains a much higher priority for China. Additionally, the arrest of Huawei executive Meng Wanzhou has made Chinese enterprises, particularly those with the most global reach, reticent to engage opportunities in Iran for fear of being similarly targeted by American authorities.

But China’s acquiescence to secondary sanctions is inconsistent with Beijing’s stated opposition to extraterritorial sanctions. In October, foreign ministry spokesperson Hua Chunying told reporters: “China always opposes the unilateral sanctions and long-arm jurisdiction. China’s normal cooperation with Iran under the framework of the international law is reasonable, legitimate and legal, and it should be respected and upheld.”

While Europe has made extraordinary efforts to both assert its economic sovereignty and preserve the nuclear deal, even going so far as to establish a new state-owned trade financial intermediary, China has taken no commensurate effort to shield its own trade from the long arm of American law.

Also, by downgrading the trading relationship with Iran, Beijing is in effect signaling to Washington that secondary sanctions can be used to stymie China’s economic ambitions abroad. As the U.S. struggles to respond to China’s Belt-and-Road strategy and its new role as a Eurasian superpower, there will be a temptation to use sanctions to raise barriers to China’s expansion. By failing to resist secondary sanctions on Iran now, China is inviting more pressure on key trade and investment relationships in the future, while also shirking its obligation to help preserve the nuclear deal.

It is possible that Chinese-Iranian trade could recover to a new steady state later this year, and that Beijing could designate a new bank to facilitate non-oil exports. But when the waivers come up for renewal in early May, the Trump administration could make such a waiver contingent on China continuing to downsize its non-oil trade with Iran. Since Iran is more important for China as an energy supplier than as an export market, China will likely sacrifice its exports to sustain oil imports—especially since it is unclear that Iran has sufficient leverage to insist that China avoid making such a trade-off.

Photo Credit: IRNA

Trading With Iran Via the Special Purpose Vehicle: How It Can Work

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

Following weeks of speculation, France, the United Kingdom, and Germany (the E3) have formally registered a special purpose vehicle (SPV) to help facilitate trade with Iran – trade that the return of US sanctions has significantly hampered. This comes after months of technical coordination between member states led by the European External Action Service. While reactions in Tehran have been mixed, this is a significant demonstration of Europe’s commitment to preserving the Iran nuclear deal after President Donald Trump withdrew the United States from it.

The E3’s foreign ministers issued a joint statement with a brief overview of this new mechanism, called the Instrument in Support of Trade Exchanges (INSTEX), but have provided little clarity on the details of how it works. This is understandable given that they must finalise several technical aspects of INSTEX before it becomes operational. INSTEX will initially focus “on the sectors most essential to the Iranian population – such as pharmaceutical, medical devices and agri-food goods”. This means that, for now, INSTEX will avoid a direct clash with the White House, since US sanctions permit these categories of trade due to their humanitarian nature.

But the exact method INSTEX uses will be the first instance in which Europe tries to mitigate the effects of US secondary sanctions on what it sees as legitimate trade. Companies in Europe and Iran are eager to know if the system can be of practical use. The assessment below lays out INSTEX’s likely structure.

Sovereign Shield

An important element of the mechanism is its sovereign backing from the E3. The supervisory board of INSTEX will include senior European diplomats such as UK Permanent Under-Secretary of State for Foreign Affairs Simon McDonald; Miguel Berger, head of the economic department at the German Foreign Office; and Maurice Gourdault-Montagne, secretary-general of the French Ministry of Europe and Foreign Affairs. The E3 governments are also shareholders of INSTEX.

The E3 have gone to great lengths to create a diplomatic shield around INSTEX and to share risk among the biggest economies in Europe. With the E3 having stuck their necks out, several other European countries are also considering joining the SPV as shareholders. While this does not eliminate the risk of US pressure on the mechanism, it does substantially raise the stakes for Washington should it seek to directly sanction or otherwise coerce a sovereign European entity or its senior management board – as it has with the European private sector.

It is important that the Iranian government now establishes another SPV to mirror INSTEX inside Iran. To persuade European companies to use the SPV, the Iranian entity will need to meet high standards of transparency in anti-money laundering and counter-terrorism financing regulations. Thus, the E3 would prefer that the Iranian SPV was either a new company or operated under an Iranian bank that has not been subject to US secondary sanctions. This is likely to reduce the risk that the US administration will apply pressure to INSTEX’s operations.

In theory, Iran should establish its SPV more quickly than the E3 did their mechanism, given that Tehran will not need to balance the interests of several countries. However, it is inevitable that this issue will be caught up in extensive political debate in Iran. To speed up this process, Tehran should carefully consider offers from the European Union and the E3 on technical assistance in launching an Iranian SPV.

The Mechanism Behind INSTEX

INSTEX is best understood as an international trade intermediary that provides services to ease trade between Europe and Iran. Although the new company is not a bank, it will have a role in coordinating payments relating to trade with Iran. This coordination is necessary. Iranian importers have struggled to purchase and receive euros from the Central Bank of Iran on time – as is necessary to make payments to European suppliers. Even when they do acquire euros, Iranian importers struggle to make payments to suppliers, as European banks remain hesitant to accept funds originating in Iran. This holds true even for humanitarian trade that is formally exempt from sanctions: several exporters of food and medicine to Iran have reportedly experienced disruptions in recent months, contributing to troubling shortages and sharp price increases.

INSTEX will seek to facilitate Europe-Iran trade while reducing the need for transactions between the European and Iranian financial systems. It will do this by allowing European exporters to receive payments for sales to Iran from funds that are already within Europe, and vice versa. For example:

• A European exporter with an order for medicine from an Iranian importer provides INSTEX with the relevant documentation on the transaction. This will include evidence that the importer has practised reasonable due diligence in relation to the Iranian buyer and the end user. Crucially for European companies, INSTEX will not provide the requisite due diligence service.

• Once it has approved the sale, INSTEX will register it on a ledger of trade.

• INSTEX will examine its ledger to identify an instance in which a European importer has registered a purchase of pistachios from an Iranian exporter.

• INSTEX will then approve a payment from the European importer of pistachios to the European exporter of medicine, meaning that the payment can be made from one European bank to another without using funds that originated in Iran.

• To complete the process of trade intermediation, the Iranian counterpart to INSTEX will coordinate a similar payment from the Iranian importer of medicine to the Iranian exporter of pistachios. These funds will remain within Iran.

While it is novel for European governments to establish a state-owned company that performs this function, the basic mechanism at work here will not be new to international companies active in Iran. The innovative aspects of the new mechanism are its scale and the backing it receives from European countries rather than companies.

These transactions will not always match up perfectly, individually or in aggregate. This is particularly so given the European companies have stopped purchasing Iranian oil. Even companies in Greece and Italy that received US waivers to continue importing Iranian oil have reportedly not used them. Overall, European trade in food with Iran is roughly balanced: according to data from Eurostat, in the first eleven months of 2017, the EU’s food exports to Iran totalled €298m and its imports of similar goods from the country totalled €292m. The bloc’s trade in medicine and medical devices is far more imbalanced, with exports totalling €851m and imports just €27m in the period. As such, there will likely be greater demand for the new mechanism in facilitating sales to Iran than purchases from the country.

INSTEX will need to find a way to balance payments within both overall trade flow and at an operational level, so that payments can be settled in timely fashion – ideally, within 60 days. In balancing overall trade, European policymakers should attempt to maximise Iranian food exports to Europe through the mechanism.

Additionally, as has been suggested by European and Iranian officials, it may be possible to invite non-European countries to join the new mechanism. The SPV is more likely to succeed if it links with revenues related to Iran’s oil exports to countries such as China, India, and Japan.

INSTEX will expand gradually, accepting clients in a way that maintains a general balance in the ledger. At times, INSTEX may need to step in to top up the funds available to pay European exporters. To do so, the mechanism will need working capital. It could raise this capital either through contributions from European countries that are, or are becoming, shareholders in it. INSTEX could also charge a commission fee for the use of its services, thereby creating reserves that it can use to balance trade within a given payment period. Currently, banks that facilitate payments to and from Iran typically charge 2-3 percent of the transaction’s value, a high fee. INSTEX could reasonably charge a similar fee, thereby generating cash flow.

Speedy Implementation Required

It is hard to tell how much trade will flow through the mechanism. Ideally, normal correspondent banking channels should continue to facilitate a large portion of Europe-Iran humanitarian trade. INSTEX will step in to facilitate trade that might otherwise not occur given the currency and banking restrictions outlined above. On this basis, the initial version of the mechanism will have been a success if it eventually facilitates trade in the order of tens of millions of euros each year, perhaps intermediating around 5 percent of the total value of European exports to Iran. In this scenario, Europe could then consider expanding the mechanism to a wider range of trade.

Both Iran and the E3 should expect a teething period while the mechanism adjusts to best serve commercial actors. For European treasury managers and compliance officers tasked with finding workable financial channels with Iran, complexity has long been the norm. If the INSTEX channel proves reliable, companies are likely to use its services.

The E3 should undertake the necessary technical arrangements to operationalise INSTEX as quickly as possible. The new managing director of INSTEX will need to tour Europe to meet business executives and policymakers. They will need to engage in extensive outreach with European operators to persuade them to use the SPV – and, more importantly, with European banks that are instrumental to it – by settling accounts between European companies. The European External Action Service should be closely involved in this coordination effort across Europe.

By acting swiftly, Europe will boost its credibility with Iran, where the government is scrambling to manage the economic fallout of the US withdrawal from the nuclear deal and is increasingly under pressure to reduce compliance with the agreement. This will also increase the E3’s leverage with the US administration by demonstrating that they have substantive resilience against US sanctions.

Photo Credit: AFP

How Europe’s Forthcoming SPV Can Help Iran Fight Inflation

Europe has yet to launch its special purpose vehicle (SPV) to support trade with Iran and while Iranian stakeholders grow increasingly impatient, some have begun to question the likely impact of the new mechanism. The chief complaint is that the initial SPV, if limited to humanitarian trade, will not have a meaningful economic impact for Iran, which had sought to maintain oil exports to Europe in the face of US sanctions.

As recently argued in a joint report from Bourse & Bazaar and the European Leadership Network, the creation of a humanitarian SPV (H-SPV) has important advantages from the standpoint of protecting the new trade mechanism from interference by the United States. A focus on non-sanctionable trade will enable Europe and Iran to develop a more robust mechanism that delivers practical value for businesses. When a truly useful mechanism has been devised, subsequent SPVs can be established to facilitate what the United States considers sanctionable trade. 

Nonetheless, in order to be welcomed by a broad spectrum of Iran’s political and business establishment, the initial SPV, especially if limited to non-sanctionable trade, must demonstrate a positive impact on Iran’s economy in the near term. An examination of the nature of Europe-Iran trade and the impact of this trade on Iran’s currency markets, suggests that the SPV could have a significant and stabilizing impact on Iran’s economy by helping to fight runaway inflation, the foremost economic challenge facing Iran’s leadership.

Trade Deficits and Inflation

Since early 2018, Iran has been struggling to contain rising inflation exacerbated by rapid currency devaluation. Rising costs of imports have impacted the costs of goods in the consumer basket. The year-on-year increase in the consumer price index in Aban (October 23 - November 22), the most recent period for which data is available, was 39.9 percent. This increase was driven by year-on-year rises in categories including food and beverages (59.9 percent), tobacco (150.8 percent), clothing and footwear (48.5 percent), and furnishings and household goods (83.1 percent). The increase in the health category, which includes medicine, was a significant 19.6 percent.

These categories represent the daily needs of Iran’s households. They are also, broadly speaking, goods which do not fall under the restrictions of US secondary sanctions. Not only are the goods themselves not sanctioned, but the larger role of the private sector within the food, pharmaceutical, and FMCG sectors in Iran means that the Iranian corporate entities active in these sectors are typically not subject to secondary sanctions. On this basis, a humanitarian SPV which would focus on non-sanctionable trade, would be well-suited to support Europe-Iran trade related to these elements of the consumer basket.

While Iran does manufacture many of these goods domestically, overall consumption still relies on a significant volume of imports of food and medicine, with the European Union (EU) the most important trading partner. Even the domestically produced products rely on imports of raw materials which mainly originate in the EU. In 2017, the most recent full year of trade without sanctions, Iran faced a trade deficit with Europe of just under EUR 1 billion in the food and beverage, medicine, clothing and footwear, and furniture categories, based on imports of EUR 1.3 billion and exports of approximately EUR 300 million. Importantly, this figure does not include Iranian imports from Switzerland, a major source of pharmaceutical products with about as much export volume as Germany. But given that the SPV is an EU undertaking, and given that the Swiss are working on a separate banking channel to support their humanitarian trade with Iran, it can be kept separate for the purposes of this analysis.

Beyond humanitarian goods, Iran has typically run a trade deficit of about EUR 1 billion with Europe, even in those years that Iran has been able to export significant volumes of oil to European buyers. The trade imbalance with the EU has a direct impact on inflationary pressures in three areas. First, the euro is a strong currency and the rapid devaluation of the rial has made imports considerably more expensive over the last year. Second, purchasing European goods generally involves higher transaction costs for Iranian importers related to the restrictions on banking channels between Europe and Iran. Finally, Europe is the only source for a number of imports, particularly medicines, meaning that a fall in exports will have a direct and often unmitigable impact on available supply in Iran, pushing prices higher and creating black markets for some specialized medicine. All three phenomena can be seen in the Iranian market today.

There are other indirect drivers as well. As is common for countries at the same level of development, Iran’s process of industrialization is import-intensive. New technologies are acquired to produce a wider range of foods, medicines, and consumer goods domestically, often in accordance with licenses for European formulations or technology. Iran imported EUR 5.5 billion in industrial machinery and equipment in 2017 in order to support domestic industrial capacity. When this equipment or the relevant services, spare parts and training are unavailable, it has a knock-on effect on manufacturing output, available supply, and the market price for consumers.

On one hand, the fall of Iranian imports of European machinery from their 20-year high of over EUR 8 billion in 2004, suggests that Iran is increasingly sourcing such machinery from other markets, especially China. But, Europe retains a technological advantage over China for the manufacturing of food and medicine and the most popular brands in Iran in these categories are often European brands or formulations. This means that substitutions cannot be easily made for the equipment necessary in the domestic production of these goods. Moreover, Iran also relies on European technology for the storage and distribution of food and medicine across the supply chain.

The SPV Intervention

Given these challenges, the appeal of Europe’s SPV, if properly operationalized, is clear. The SPV can help alleviate inflationary pressures by empowering European and Iranian policymakers to better manage foreign exchange risks, reduce transaction costs, and address the trade deficit, particularly around key items within the consumer basket.

First, in the area of foreign exchange, the SPV could reduce pressure on the Central Bank of Iran to source and allocate euros for importers of so-called “essential goods.” Presently, delays in the allocation of foreign exchange are leading to payment issues on the part of Iranian importers of both food commodities and pharmaceuticals. In one manifestation of these delays, cargo ships are remaining anchored off of Iran’s coast for as many as sixty days, incurring demurrage costs.

If the SPV oversees a ledger of trade between Europe and Iran, a role which some have compared with that of a “clearing house,” it would be able to coordinate a version of book transfers, which would enable Iranian importers to pay European exporters indirectly with the SPV coordinating a euro-denominated payment by a European importer on behalf of the Iranian importer. In turn, the Iranian importer would make a rial-denominated payment on behalf of the European importer to its counterparty in Iran (an exporter). Through such a mechanism, there would be no need for the Central Bank of Iran to source and allocate Euros for the purchase by the Iranian importer, as monies already in Europe would be used to make the payment. In this way, reducing demand for euro allocations among Iranian importers should help the CBI more effectively operate the NIMA system, its central marketplace for foreign exchange, thereby reducing the significant inflationary pressures arising from foreign exchange markets.

In a related fashion, the facilitation of book transfers by the SPV would also help eliminate the additional transaction costs currently incurred when arranging cross-border financial transactions between Europe and Iran. Due to the higher compliance risks associated with accepting Iranian-origin funds, the few European banks that do continue to transact with Iran impose fees on clients of up to three percent of the total transaction amount. Some routine and low-risk trade currently facilitated by the few correspondent banking channels that remain between Europe and Iran could be shifted to the SPV, reducing the compliance costs associated with cross-border transactions that can depress export volumes.

Finally, the SPV will only truly succeed if it is operationalized alongside an effort to shrink Iran’s approximate EUR 1 billion trade deficit with Europe in non-sanctionable goods by increasing Iran’s non-oil exports. To be clear, it is highly unlikely that the full volume of Europe-Iran trade will run through the SPV. Where possible, companies will certainly favor using normal channels, facilitating payments through the small number of European banks that will remain willing to process payments for humanitarian trade. Nonetheless, the fundamental problem faced by Iranian importers is access to the euros necessary to sustain purchases from Europe. In this case, in the absence of oil sales, foreign finance, or foreign direct investment, Iran’s exports to Europe will remain the only reliable source of euros for the Central Bank of Iran which is responsible for making foreign exchange available to Iranian importers. 

A New Vision for Europe-Iran Trade

As such, it should be a primary goal of the SPV to increase the volume of European imports from Iran, helping to minimize the trade balance and increase the supply—and thereby reduce the cost—of Euros for Iranian importers. This may seem a difficult task. Iran’s manufacturing output is generally inferior in quality and higher in cost than that available from EU member states and from other countries with active trading relationships with the bloc.

But there are a few product categories where Iranian producers could regain or establish market share in Europe. In 2000, Iran exported EUR 316 million worth of “floor coverings” to Europe, a figure which primarily reflects the sale of traditional Persian wool rugs. By 2017, the sales amounted to just EUR 28 million. The collapse in Persian rug exports may reflect changing tastes among European consumers, as similar decreases can be seen for the same product category as exported by India, Pakistan, and China. An industry-led campaign to boost the popularity of Persian rugs among younger consumers could help reverse the trend.

Iran’s loss of market share in the export of key foodstuffs is harder to explain. European consumption of pistachios has exploded in the past 20 years, but the increase demand has been met by supply from the United States, the only other major producer of pistachios in the world. Iran lost its mantle as top exporter of pistachios to the EU in 2004. Had it captured just half of the growth in European imports since that date, pistachio exports would be around EUR 150 million higher.

Similarly, Iran’s exports of caviar to Europe have fallen from EUR 26 million in 2000 to just EUR 700,000 in 2017. In the same period, exports from the United States have risen from EUR 11 million to EUR 26 million. Exports from China have risen from less than EUR 500,000 to EUR 7 million. It is also notable that Iran’s export of shrimp to Europe has collapsed from EUR 40 million to EUR 2.7 million since 2000, despite the fact that Iran’s seafood industry remains healthy.

Altogether, by dramatically ceding market share, Iran has likely failed to realize around EUR 250 million of export potential in these categories. However, Iran’s growing exports of saffron, which have risen from EUR 24 million in 2000 to EUR 67 million in 2017, help illustrate that Iranian suppliers can achieve significant growth in the European market. This analysis does not account for the many categories of foodstuffs such as nuts and fruits where Iran’s exports to Europe remain very low, but where Iran ranks among the top global producers.  Generally, Iran could become a reliable supplier of food ingredients and herbal medicine to Europe, but it will require an effort from both sides to facilitate the growth. Iran also exported just over EUR 30 million in pharmaceutical products to the EU in 2017—another potential area for growth. Organizing relevant delegations in both directions to expand commercial ties in these sectors would be an important step.

The non-oil trade deficit has been the subject of some attention among Iranian authorities. The National Development Fund of Iran, the country’s sovereign wealth fund, has a program to provide capital to Iranian commercial banks in order to fund loans for private sector export-oriented enterprises. Many of these projects are focused on agricultural production, where loans are used to implement new (often European) technology in order to increase the quality or quality of production while also creating jobs.

Nonetheless, the primary instinct for Iranian officials has been to try and reduce import demand. Recently, the government announced a measure to ban the advertisement of foreign products for which there exists a domestically manufactured equivalent. But given that demand for many imports will prove inelastic, a focus on boosting exports would be a far more prudent strategy for dealing with the trade deficit.

When looking to non-sanctionable goods and the current trade deficit of EUR 1 billion within this category, the possibility of boosting Iranian exports by EUR 250 million is significant from the standpoint of reducing pressure on foreign exchange markets. Add to this other intended improvements to the cost efficiency of trade, and it becomes clear how the forthcoming H-SPV could help Iran address some of the external drivers of inflation. Most importantly, this analysis shows that the launch of the SPV is not the end of an implementation process. It is just the first step in a much-needed reimagining of Europe-Iran trade relations and a process in which the EU can showcase its commitment to a working partnership with Iran.

Photo Credit: IRNA

Under Trump, US Sale of Medical Goods to Iran Down Nearly 40%

With just two weeks until Trump reimposes secondary sanctions on Iran, administration officials are under increasing pressure to prove that the returning sanctions will not adversely impact humanitarian trade.

Secretary of State Mike Pompeo has declared that “sanctions and economic pressure are directed at the regime and its malign proxies, not at the Iranian people.” But a review of US trade data shows that humanitarian exports from the US to Iran have withered under the Trump administration, lending credence to claims that while sanctions exemptions for humanitarian trade persist in principle, companies are struggling to avail themselves of these exemptions in practice.

In August, US exports to Iran surprisingly surged to nearly USD 150 million dollars, levels not seen since late 2008, when the Bush administration oversaw the sale of a significant volume of wheat to Iran, pushing monthly exports above USD 100 million for several months. The sudden increase in US exports to Iran was even reported upon by Iranian media outlets.

Looking into the content of those exports, just over USD 140 million dollars of the August trade is attributable to the sale of American soybeans to Iran, the number one destination for the crop that month. Due to Trump’s trade war, the export of soybeans to China has collapsed 95 percent, making commodities traders eager to offload supply to Iran.

But August’s sharp increase in exports to Iran remains exceptional for the Trump administration. Looking to data for the twenty months of the Trump presidency, a clear pattern emerges—along with overall trade, the export of humanitarian goods like food and medicine remains significantly lower than average monthly values registered during the Obama years.

Isolating humanitarian trade within United States Census Bureau export data can be done by analyzing twenty-one of ninety-nine standard “Schedule B” commodity codes, used to categorize trade in live animals, cereals, food oils, pharmaceuticals, and medical devices, among other goods that may fall under sanctions exempt or readily licensed trade.

Looking to the average monthly export value for goods in these categories, the Trump administration’s average of USD 15.4 million is actually about 6 percent higher than the monthly average of 14.5 million dollars registered during the Obama years. However, the Trump average is significantly distorted by the bumper trade in soybeans during July and August. When excluding these two months from the calculation of the Trump average, the monthly export value falls to just USD 7.1 million dollars, about half the level seen during the Obama years.

The significant decline in humanitarian trade is also evidenced by looking to the median monthly export value, which may better account for the natural volatility in US exports to Iran. In the 96 months of the Obama presidency, the median value of humanitarian exports to Iran was USD 9.4 million dollars per month. In the 20 months of the Trump presidency so far, the same figure has fallen to USD 5.8 million dollars per month, a 40 percent reduction.

The most regular kind of humanitarian trade between the US and Iran is the export of pharmaceutical goods. There was just a single month during the whole Obama presidency in which no exports of pharmaceutical products to Iran were registered. Likewise, pharmaceutical exports to Iran have so far been registered in every month of the Trump presidency. However, even in this routine trade, the Trump administration is falling short.

Under Obama, the United States exported an average of USD 2.1 million in pharmaceutical products to Iran each month. Under Trump, that monthly average export value has collapsed to just USD 720,000, a paltry one-third of the former level.

Importantly, in the last few years, the trade in medical devices to Iran has outpaced trade in pharmaceuticals, which may point to Iran succeeding in finding other suppliers of key medications while also boosting domestic production. The shift begins around March 2014, shortly after the January 2014 implementation of the Joint Plan of Action (JPOA)—the precursor of the nuclear deal—in accordance with which the Obama administration began to expand secondary sanctions relief for humanitarian trade, including pharmaceutical exports to Iran. It is likely that European exports continue to offset the fall in American exports, including the reexport of American-made products from European divisions of American companies.

However, when adding medical devices and equipment into an overall calculation of exports of medical goods, the picture remains dire. During the Obama years, the US exported an average of USD 6.3 million in medical goods each month. In the first 20 months of the Trump administration, that figure has fallen to USD 4.6 million, a significant 37 percent drop.  

The decline of medical exports to Iran is unlikely to reflect falling Iranian demand. There were no exports of medical devices or equipment to Iran during the first nine months of the Trump presidency. But in October 2017, the same month when Trump “decertified” the JCPOA nuclear deal, exports of medical devices and equipment began again, and have recently reached the highest monthly level since 2015, despite the fact that the sharp devaluation of the real has made such imports much more expensive. Add to this the clear evidence from Iran that sanctions are beginning to result in shortages in key medicines and foodstuffs, and it is obvious that there remains significant scope for the Trump administration to expand its humanitarian trade with Iran.

It would seem that the Trump administration has reached a kind of crossroads when it comes to its strategy for humanitarian trade with Iran. It has publicly insisted that it will allow trade to flow and export volumes in the last few months are more consistent with the decade-long pattern of exports in food and medicine sustained by the US concurrently with the imposition of secondary sanctions.

At the same time, moves such as the recent sanctions targeting Parsian Bank, suggest that the administration is unwilling to send reliable signals to those companies and financial institutions engaged in vital humanitarian trade with Iran. Whether the administration will make good on its own reassurances and meet its moral obligation to facilitate humanitarian trade with Iran remains to be seen.

Photo Credit: IRNA

New Sanctions on Iran’s Parsian Bank Threaten Humanitarian Trade

On Tuesday, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) applied new sanctions on “at least 20 corporations and financial institutions” associated with the Bonyad Taavon Basij, encompassing activities in “Iran’s automotive, mining, metals, and banking industries.”

While the designation of bonyads, which are best understood as holding companies, has been a common feature of US sanctions policy for over a decade, yesterday’s action actually reflects a significant break with sanctions policy under the Obama administration. Included among the targeted entities is Parsian Bank, one of Iran’s leading private sector banks and a vital conduit for trade with Europe, especially humanitarian trade.

In the previous sanctions period, Parsian had been among the Iranian banks that were not subject to secondary sanctions despite being designated along with the rest of the Iranian financial system. This was due to the fact that the Treasury Department had no derogatory information at the time to suggest the bank was engaged or linked to terrorist financing. Indeed, Parsian, established in 2001, has a reputation as among the most trustworthy and well-managed Iranian banks.

Now, US authorities consider Parsian a Specially Designated Global Terrorist (SDGT), a kind of designation shared with the Qods Force of the Islamic Revolutionary Guard Corps (IRGC) among other state and quasi-state groups. The bank is now subject to secondary sanctions, meaning that non-US persons which conduct business with the bank are open to the risk of being sanctioned themselves.

In this way, the new sanctions designation has substantiated fears that had been rising among senior bankers in Iran. There was growing concern that the Trump administration would go beyond the designations of the previous US administration when placing Iran’s banks under secondary sanctions once again. Concerns first rose when OFAC issued its first guidance document following President Trump’s withdraw from the Iran nuclear deal on May 8. The guidance left it ambiguous as to how banks such as Parsian, previously exempt from secondary sanctions, would be treated.

Iranian bankers will also be dismayed that the new designation has come after Iran has made notable progress in passing legislation in accordance to the FATF action plan, which seeks to improve the integrity of Iran’s financial system. A crucial FATF plenary meeting takes place this week in Paris during which Iran’s progress will be evaluated. Further efforts on FATF reform will be hard to justify for domestic stakeholders if banks like Parsian are to be blacklisted by the US Treasury.

Alongside Pasargad Bank, Middle East Bank, and Saman Bank, Parsian was among the few Iranian financial institutions with standards reflective of FATF requirements for anti-money laundering and combatting terrorist financing procedures. These banks were therefore those entrusted by multinational companies to handle local banking needs. Even compliant trade would be impossible for these companies if all Iranian financial institutions are off-limit. A local bank is necessary for basic commercial operations.

According to Tyler Cullis, a sanctions lawyer with the Washington firm Ferrari & Associates, “Today’s designation action had everything to do with sending a signal to the world that all business with Iran is potentially sanctionable.”

In Cullis’ assessment, the links between Parsian and the entity at the heart of the new designations are unusually distant, suggesting a political motive “to inform the private sector that no amount of due diligence” is adequate—a departure from the more practical stance taken by OFAC in the past.

“Treasury designated Bank Parsian for providing material support to an Iranian entity that was seven layers removed from the Basij. It is unlikely that any reasonable amount of due diligence would have apprised Bank Parsian of the fact that it may have been engaged in sanctionable conduct under U.S. law,” Cullis notes.  

The day before the new designation was issued, Special Envoy for Iran Brian Hook was in Luxembourg, meeting with European foreign ministers. On his agenda was a structured dialogue about humanitarian trade. Cognizant of the risks posed by returning US sanctions to their effort to keep Iran in the nuclear deal, European leaders have been seeking clarity on humanitarian trade since June. No concrete assurances have been issued to date. The issue has also caught the attention of the International Court of Justice, which recently ruled that unless the United States lifts restrictions on humanitarian trade with Iran, it will find itself in violation of international law.

While the State Department has given lip service to the issue of humanitarian trade, with Secretary of State Pompeo offering assurances that “sanctions and economic pressure are directed at the regime and its malign proxies, not at the Iranian people,” the designation of Parsian suggests that the Treasury Department is not on the same page. Not only is the Parsian designation peripheral to the action against Bonyad Taavon Basij, but eliminating the ability of the bank to engage in humanitarian trade surely outweighs the value of its designation from the standpoint of minimizing terrorist finance threats. Iranians are already suffering in the face of shortages of medicine, an area of trade in which Parsian was highly active.

Treasury Secretary Steven Mnuchin’s statement, issued alongside the new designations, does make reference to “real world humanitarian consequences” but only insofar as “business entanglements with the Bonyad Taavon Basij network… fuel the Iranian regime’s violent ambitions across the Middle East.”

All too aware of their own government’s malign activities, the Iranian people await the Trump administration’s reckoning with the true humanitarian consequences of its own policies.

Photo Credit: Parsian Bank

Fears Grow That Trump Sanctions Will Throttle Iran's Humanitarian Trade

The second and final sanctions deadline of November 4 is drawing near. After this date, unilateral US sanctions on Iran’s financial sector will once again come into force. According to Iranian bankers and government officials, this could mean that Iran struggles to import humanitarian goods, including basic foodstuffs.

The sale of essential foodstuffs and medicine to Iran is exempt from sanctions, giving latitude to US officials to reiterate their claims that sanctions are targeted and not intended to hurt the Iranian people. However, while no direct legal barriers might exist for trade in humanitarian goods, potential restrictions slapped on banks that facilitate the necessary transactions might yet cause problems.

Prior to the nuclear deal, Iran’s private sector banks were exempt from secondary sanctions and thereby to be able to handle humanitarian trade payments. As sanctions are set to be reimposed, ambiguities about the scope of the returning restrictions forthcoming from the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury have left bank leaders and government officials in Iran with more questions than answers.

To understand the growing fears around the maintenance of humanitarian trade, Bourse & Bazaar spoke to several senior bankers and government officials in Iran and executives from global trading companies who are key stakeholders in this trade. All requested to remain unnamed given the sensitive subject matter.  

A veteran banker and a board member of a major Iranian private bank described two possible scenarios. "U.S. officials have said they aim to reinstate sanctions that were lifted as a result of the nuclear deal. If we use this as the basis, the interpretation is that private banks that were previously exempt from secondary sanctions and any foreign banks working with them on humanitarian trade will once again be exempt," he said.

But he warned that this time may very well be different given that the US has hardened its rhetoric and promised “maximum pressure” from the sanctions. "Your guess is as good as mine,” he quipped.

He said his bank is currently conducting business as usual but has seen some foreign counterparts take preemptive measures to reduce their transaction volume ahead of the November deadline.

“Some banks are implementing a number of limitations over concerns about what happens next. They are already doing some of the things that will be expected of them once sanctions return on November 5,” he said.

An official at the international department of another major Iranian bank expressed the same feeling of uncertainty, and highlighted concerns  that private sector banks like his will not be spared from secondary sanctions this time around.

“We are already facing issues with imports of some essential goods even before [the November] sanctions snap back,” he said. In his assessment, if the bank becomes subject to secondary sanctions, there is little to nothing Iran’s central bank can do to support them.

While Iranian bankers may feel powerless to prevent the return of secondary sanctions, they are also concerned about risks stemming from an area in which Iranian stakeholders do have control—compliance with the Financial Action Task Force (FATF) action plan, which outlines steps for Iran to improve anti-money laundering and combating financing of terrorism standards.

Iran has until mid-October to demonstrate sufficient progress to the FATF or its already embattled banking system will become more isolated than ever. Time is running out for Iran to pass the required legislation in the face of domestic pushback from local interest groups and persistent lobbying by FATF member states including the US and Israel.

“If we don’t pass the bills related to the FATF, we are effectively sanctioning ourselves,” stated the deputy chairman of one of Iran’s largest private sector banks.

These external and internal threats to routine banking between Europe and Iran could have significant knock-on effects for humanitarian trade.

Speaking on background, an executive at a major multinational commodity company described how even if food sales to Iran remain permitted under US sanctions, the imposition of secondary sanctions on Iran’s private sector banks could make the trade effectively impossible.

The Government Trading Corporation of Iran (GTC), the trading arm of country’s agriculture ministry, confirmed these concerns but insisted that contingency planning is underway.

A senior official involved in foreign trade for GTC said, “We are at the moment implementing measures to ensure that we won’t have problems concerning humanitarian trade.”

The official could not share further details, beyond explaining that any such measures will fall outside the boundaries of the banking system—a likely allusion to the use of barter trade, a method which helped sustain imports in the previous sanctions period.

“We will continue to conduct our business even after November sanctions are in place because we have had the experience of working under sanctions before and the sanctions didn’t stop us,” the official said. “You can be sure that sanctions will only serve to increase costs, not close the way entirely.”

The recent announcement that the European Union would be establishing a special purpose vehicle to facilitate humanitarian trade will offer some encouragement that a significant disruption to food imports can be avoided. But with the sanctions deadline just weeks away, the risks of dangerous supply shocks are rising by the day.

Photo Credit: IRISL