In an interview with Euromoney, Reza Raei, vice-governor for international affairs of Iran's central bank, supports the view that financial sanctions are not a big impediment. But just how far can high oil and gas prices insulate the country from the wrath of the world's biggest economy? Dominic O'Neill reports.
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Central bank vice-governor for international affairs, Reza Raei, belittles the consequences of sanctions, as well as vehemently condemning them |
"WHAT YOU CAN'T get through the door, you get through the window." This is how one executive of an Iranian quasi-governmental investment vehicle characterizes his country's approach to international financial sanctions imposed by the EU, US and the UN.
The Islamic Republic's financial system has certainly become adept over the years at skirting international restrictions. And nothing helps and hinders it more, especially in 2008, than the vast amount of oil and gas that girds its southwestern edges.
Iranian central bank vice-governor for international affairs, Reza Raei, belittles the consequences of the sanctions, at the same time as vehemently condemning them.
Other Iranian officials support Raei's views that the sanctions are only having a small effect. Behouz Alishiri, the man in charge of international relations at the ministry of finance, for example, tells Euromoney that in 2007 foreign direct investment to Iran, even outside the oil and gas sector, was more than double inflows in 2004 (shortly before the reformists were voted out of government).
It is those least connected to the finance ministry and the central bank that express the deepest concern about the effect of financial sanctions. One experienced banker now working in Iran's private sector says: "There is no doubt that the sanctions are taking their toll on the Iranian economy."
Granted, says the banker, when bigger banks turn away from the country, Iran's banks, especially the private institutions, can find alternative partners for trade finance and foreign exchange deposits. However, returns are lower, and the costs and risks are higher. Iran's alternative banking partners are often second-tier and third-tier banks, some of whose strength and reputations leave quite a lot to be desired, says the banker.
In opposition to these vulnerabilities, Iran's central bank has more than $80 billion of foreign exchange reserves, according to figures from the IMF. But inflation is running at about 20%.
Economists in Tehran say central bank governor Tahmasb Mazaheri has won a battle of wills with the president, who wanted to force standard, instalment-style interest rates even further below the level of inflation. These rates now stand at 12% for public banks and 13% for private-sector institutions.
Private-sector bankers and other sources say some banks, especially in the private sector, have begun to use participatory-style Islamic lending more frequently. This enables them to charge rates above the rate of inflation. Economists in Tehran also say the central bank has tried to rein in credit lines it was throwing to public-sector banks, which had been obliged by the government to lend to risky projects.
Iranian private-sector banks are doing their best to take up some of the trade finance shortfall left by state-owned sanctions victims such as Bank Melli. EN Bank is growing its international operations. It has opened a branch in Dubai, and is hoping to open branches in another Gulf state, as well as in Kyrgyzstan. EN Bank is growing in Iraq, whose trade with Iran is increasing, totalling about $4 billion last year (almost twice that of the year before).
Parsian, the largest private-sector bank, is also preparing to open an international branch. Among public-sector banks, Tejarat Bank, for example, will soon open a branch in Belarus.
Indeed, official sources cited in the local press say that Iran's non-oil exports have risen over the past year. Non-oil exports were helped, according to financiers, by record petrochemicals prices and new export relationships with such countries as Côte d'Ivoire, Congo, Armenia, Azerbaijan, Turkmenistan, Syria, and Venezuela – particularly in car manufacturing, construction, and engineering consultancy.
In the face of pressure from the west, therefore, Raei is unrepentant. He claims the Iranian banking system has done nothing wrong: US sanctions, he says, hit Iranian citizens and not the groups intended.
The UN imposed further sanctions against Iranian banks this March. What effect is this having on the banking system and economy?
As result of a UN resolution in 2006, Bank Sepah no longer has any international operations. However, the new UN resolution says only that vigilance should be used when dealing with Iranian banks. This is not a limitation, because the Central Bank of Iran, as a vigilant regulator, always wants vigilance to be used with the Iranian banking system, as well as any other banking system. Our banking system is clean and transparent. So increased vigilance does not pose any problems for the international operations of our banks or for the Iranian economy.
What is the economic growth rate?
Iran posted a good rate of GDP growth of about 6.7% in March 2008 and for 2008/09 we expect an even better rate of around 7%. Inflation, however, is relatively high: around 19.4% in April 2008, part of which can be traced to price hikes of goods that we import from other countries, which in turn has its roots in the increase of oil prices.
Is that rate of GDP growth sustainable?
The president of Iran has proposed a development plan for the banking, taxation, subsidies, and customs systems of the country. We think these will have a big influence on the country's economic growth next year.
What about the new unilateral restrictions imposed by the US last October against banks Melli, Mellat, Saderat, and Sepah. Are these restrictions dampening activity in Iranian banks at all?
US restrictions are not a new phenomenon in Iran. The Clinton administration, for example, restricted US companies, including banks, from doing business with Iran.
Iranian banks do not deal in dollars any more. Whether in the oil industry or in other sectors, Iranian banks have steered clear of the US dollar. This has been the case for about a year and a half. Also, over the past year and a half, the central bank has gradually decreased its US dollar assets.