Banking: How long can Iran hold?


Olivier Holmey
Published on:

The Trump administration has begun the process of ostracizing Iranian finance. Bankers there are hanging on to some rare good news, but how long will it be till they are back to square one?


In early November, Swift, the financial messaging service used to link thousands of banks around the world, announced that it would disconnect certain Iranian banks from its network. Calling this step “regrettable”, Swift said it had taken it “in the interest of the stability and integrity of the wider global financial system.”

Most observers interpreted the decision as Swift falling in line with the US’s increasingly tough stance on Iran. As recently as February 2016, Swift reconnected a number of Iranian banks to its system after a four-year hiatus, prompted by a tightening of US international sanctions against Iran. History repeats itself, sometimes in short order.

In late November, news emerged that Iran was exploring alternatives to Swift, including a state-backed cryptocurrency. That too may bring back some memories. In recent years Iran’s financial sector has found increasingly imaginative ways to circumvent, and sometimes break, the many crippling sanctions imposed upon it.

This back and forth – the imposition of restrictions on Iran and the ways it finds to get around them – is certainly a well-trodden path for the country’s bankers and one that they hoped they would leave behind with the signing of the Iran nuclear deal in 2015.

Iran’s bankers are having to cope, once again, with an endless series of crises. This summer, after President Donald Trump had announced the US withdrawal from the nuclear deal, Ali Rayhani, head of research at Ayandeh Bank, the country’s largest commercial bank, told Euromoney that Ayandeh executives regularly met for over five hours to address the mounting risks facing the institution. At most banks, such meetings typically happen only once a quarter; at Ayandeh, they happen once a week.

US president Donald Trump

Even before the US withdrawal the situation was far from ideal. Many international banks remained wary of doing business with Iran, aware that the Trump administration could at any point reintroduce sanctions, jeopardizing whatever contracts they had signed and, worse still, threatening them with heavy fines. 

Nor are US-induced problems the only ones Iran’s financial sector has had to deal with. Its central bank has been slow to introduce regulations that meet international standards and most banks still use technology that elsewhere would be deemed obsolete. 

Moreover, public distrust of the country’s banks runs high after the failure of several financial institutions that had offered their customers too-good-to-be-true rates for years. Allegations of corruption and mismanagement underlying these failures fuelled widespread protests late last year, after customers were prevented from withdrawing their savings from the country’s most troubled institutions.

So Iran’s banking sector has much to prove if it is to regain the population’s trust, as well as the trust of potential partners abroad. With the return of sanctions, that task has become all the more daunting. 

Deeply troubled

Indeed, since Trump’s decision to leave the nuclear deal, it has been hard to keep up with the constant stream of worrying news coming out of Iran. In May the US imposed sanctions on Iran’s central bank governor, Valiollah Seif. Two months later, Seif was dismissed. And in August Iran arrested the central bank’s top foreign exchange official, and dozens more, as part of an investigation into financial corruption. Far from reassuring investors, the country’s government and judiciary have reinforced the impression that Iran’s banking sector is deeply troubled. 

So much for the resurgence of trust in the Iranian financial system.

Still, bankers can hold on to some threads of hope. First, Trump has so far opted not to use the full might of the US against Iran’s economy and banking sector. Crucially, while his administration has imposed new sanctions on the purchase of Iranian oil – the country’s main export – it has granted exemptions to eight countries, including six of Iran’s biggest clients. 

Second, the other signatories of the nuclear deal – China, Russia, France, Germany and the UK – remain committed to its implementation and are working together with businesses to make sure that they do not give up on Iran. The European Union has set up a team dedicated to this task and a number of companies – mainly small and medium-sized enterprises – have responded positively to those efforts.

With two years to go until the end of Trump’s presidential mandate, anything could yet happen to relations between the US and Iran. But during that time, and however drastic sanctions get, Iran’s financial sector would be well advised to press on with reform, adopting more secure and transparent systems of governance, and partnering with peers in Europe and Asia whenever it can. Only then can it hope to develop into a banking sector deemed worthy of trust and one that can thrive if and when US sanctions are eventually lifted.