Iran’s long road ahead
The contingent lifting of western sanctions on the world's biggest untapped market has been met with cautious optimism by the financial industry.
Almost a year ago, Euromoney devoted its IMF/World Bank edition cover story to the potential for banking when Iran’s sanctions were finally lifted.
In July, the world took the closest step yet to that happening, and the first one that has made the lifting of sanctions seem inevitable.
But the news has not been met with a flood of commitments to re-engage, either from international banks or their Iranian counterparts, save for the promise of some oddly domiciled mutual funds. Instead, the reaction has been one of cautious optimism.
On the international side, this is understandable. Banks such as Standard Chartered, BNP Paribas, Commerzbank and HSBC have been heavily fined for what the US has perceived as sanction-breaching activity involving Iran; neither they nor any other western multinational will be sprinting back into Iran at the first opportunity.
It is also important to remember that, although EU sanctions are going to be removed, US ones will only be suspended, with removal following eight years later; in the meantime, those sanctions can snap back into place at any time if the six nations who negotiated this agreement believe that Iran is failing to honour its commitments on the nuclear issue.
How much reputational damage has been done to Iran in the intervening period and how long will it take to resolve?
Who is going to invest substantial amounts of capital and reputation in a country where that’s a real possibility? Where, at a stroke, an environment within which it is legal to operate is replaced by one where it is not?
Instead, first movers are considered more likely to be banks from places such as Turkey and the United Arab Emirates, or perhaps the odd Landesbank that has no operations involving the United States. That’s fine, and a great opportunity for them, but these are not the institutions with the scale for custody and transactional capability that would truly reintegrate Iran into the world economy.
From the Iranian side, while people are pleased to see the deal, there is a sense that there has been so much disappointment in the past that they will believe it when it happens.
Here’s the timeline: the UN endorsed the deal in late July, and adoption day will follow 90 days later, by which time legislation must be in place for the EU to terminate its sanctions and the US will issue sanction waivers through presidential authority.
Then comes implementation day once the IAEA has verified implementation of measures by Iran; it’s on that day that EU sanctions are terminated and US sanctions waived. However, we don’t know the timing of that. It might be six months from now, but if the IAEA runs into anything it doesn’t like, or even anything that warrants further study, then it could take longer.
There’s also still the threat that US Congress could scupper the deal; president Obama has said he will veto any attempt to do so, but opponents could then try to get together sufficient votes to override the veto. While political analysis in the US says that’s unlikely to get through, one can understand why Iranians aren’t yet assuming the deal is closed.
In fact, until financial messaging service Swift is switched on again in Iran, we’re not going to know exactly how this is going to play out – and this is what troubles Iranian banks. When they are finally permitted to handle international trade in dollars again, that’s a big day, for sure.
But who’s going to be on the other end of the trade? Who’s going to be ready to deal with them on day one? How much reputational damage has been done to Iran in the intervening period and how long will it take to resolve?
Euromoney discussed a year ago the irksome problem Iranians were having: that even transactions that are perfectly legal were being shunned because western banks were so scared of running foul of US investigation.
We heard of one UK arm of an Iranian bank that couldn’t even bank its tax refund from the British tax office because no British bank was prepared to handle the cheque. Even when sanctions lift, that stigma is likely to remain for a while before western institutions – banks, lawyers and fund managers – start testing the water for re-engagement.
This is a landmark for Iran, no doubt, and for world markets too. With Saudi Arabia having opened up earlier this year, we now have the prospect of one of the last big isolated economies stepping in from the cold. But there is a long road ahead towards true reintegration into the global banking system.