By Mona Moussavi, Assistant Editor, Adelphi Books

Officials from India and Iran met last week to discuss how to process oil payments, which have until now been blocked by Western sanctions against Tehran.

Following the agreement of the Geneva interim nuclear deal, which will marginally ease sanctions in exchange for curbs to Iran’s nuclear programme, Tehran has sought to restore limited economic ties with the rest of the world. This is part of what seems to be a wider effort by President Hassan Rouhani to revive Iran’s crippling economy; inflation is higher than 40% and unemployment is spiralling. Undoubtedly, the sanctions relief is more symbolic than substantial: Iran will be able to access oil assets worth US$4.2 billion, from a reported US$100bn total frozen assets abroad.

Banking sanctions, enacted by the United States and the EU, have cut off Iran from major global payment and credit networks. Foreign commercial banks are prohibited from clearing transactions with Iranian banks; legislation requires the US president to ‘severely curtail’ those banks’ US operations if they do. There are exemptions for banks in countries that are ‘significantly reducing’ their oil purchases from Iran, but waivers are re-issued every six months. In March 2012, SWIFT (the Society for Worldwide Interbank Financial Telecommunication), which processes almost all global banking transactions, took the unprecedented move of expelling 30 Iranian banks. 

These measures have considerably impeded Iran’s ability to conduct international trade, as it is increasingly difficult to pay for Iranian exports. Workarounds have been implemented. Iran began accepting payments for its oil in foreign currencies: Chinese renminbi, Indian rupee, Japanese yen and Korean won. Chinese importers began routing renminbi payments through Russian banks that do not operate in the US. A gas-for-gold trade had developed between Iran and Turkey, though additional sanctions mean this is no longer a viable option.  

In the case of India, a little over half of its payments for Iranian oil had been in euros, through Halkbank, a Turkish state-run bank. (The remainder was paid for in rupees through India’s UCO Bank.) In February, however, new sanctions thwarted this channel, because Iran could no longer repatriate revenue from the oil it had been able to sell. 

Consequently, Indian refiners have not yet paid for roughly half of their Iranian oil imports. At the end of November, they ‘owed about US$2.2 billion for partial payments to Iran, on top of about $4 billion lying in Tehran's account with UCO Bank’. As with China, Iran has used some of its rupee funds to buy goods from New Delhi, such as agricultural products, pharmaceuticals and textiles. Such workarounds are far from ideal, however. In October, Iran requested again to use the Halkbank route. India and some of Iran’s other trading partners are awaiting further instruction once the terms of the Geneva deal take effect.

Facing tough banking sanctions, Iran’s limited alternatives reflect the increasing importance of currencies in geopolitics. A new IISS Adelphi book, The Power of Currencies and Currencies of Power, elaborates on these issues, and examines how the US has deployed the power of the dollar to advance its geopolitical objectives. The volume also analyses the geopolitical implications of other currencies – such as the renminbi – becoming more powerful.

The widespread international use of the dollar, for example, has allowed the US to both better enforce banking sanctions against Iran and to strengthen the effect of those sanctions. As John Williamson explains, ‘any payment in dollars ultimately involves a transfer on the books of the Federal Reserve (unless both the recipient and payer of funds have accounts at the same bank, which is unlikely for international payments). The Federal Reserve can require that any institution for which it does business has to certify that it either has no prohibited ties to Iran or is in receipt of a waiver. The US can also require that an institution that contracts with the Fed impose similar requirements on the clients on behalf of which it is acting.’

Those financial institutions that conduct prohibited transactions face hefty fines: just last week, the Royal Bank of Scotland was fined US$100 million by US regulators for violating sanctions. On Thursday, the Obama administration expanded its list of blacklisted companies and individuals that have evaded sanctions against Tehran.

Limiting access to the US financial system for foreign banks that continue to deal with Iran has much greater sway because the dollar is so widely used in global transactions. On the other hand, if the rupee or renminbi were used more widely internationally, it would be more beneficial for Iran to hold reserves in these currencies; they could be used in Iran’s trade with other countries, weakening the impact of US banking sanctions.  

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