The Pandemic Depression
The Global Economy Will Never Be the Same
When it was announced a year ago, the Iran nuclear deal stoked intense debate among pundits and policymakers about whether it would accomplish its core purpose: keep Iran from developing nuclear weapons. But in recent months, the criticism has shifted. As the sanctions unwind, observers have grown more concerned about whether Iran is getting the economic relief it had expected and how the unwinding might affect the remaining bans on Iran.
Under the deal, the United States removed all nuclear-related sanctions on Asian and European business activities involving Iran, but kept them for American entities. The expectation was that Iran would experience a first wave of economic relief by renewing ties with Asian and European companies, without affecting the other non-nuclear sanctions maintained by Washington.
But much of this relief has not been forthcoming. Most multinational businesses have continued to avoid the Iranian market, largely due to the unwillingness of international banks to finance or otherwise facilitate Iran-related transactions.
Fearing the collapse of the agreement, deal supporters argue that the United States should lift sanctions that discourage foreign banks from transacting with Iran, such as the ban on dollar-clearing, which involves processing transactions in U.S. dollars. As Tyler Cullis of the National Iranian American Council notes, global banks “are having trouble dealing with the fact that their Iran-related transactions cannot dollar-clear a U.S. bank, thereby forcing them to screen off all Iran-related dealings.” Others—like Roger Cohen of The New York Times—have suggested that U.S. policymakers reach out directly to global banks to encourage them to transact with Iranian entities.
In recent months, the White House has moved forward with both suggestions. In early April, various media outlets reported that U.S. Treasury officials were developing a mechanism that would allow foreign banks to dollar-clear Iranian transactions. And in May, Secretary of State John Kerry met with the heads of Europe’s biggest banks in London to “make it clear that legitimate business [with Iran] … is available to banks.”
This approach is problematic, however. For one, the United States retained additional sanctions against Iran for good reason—they do not exclusively relate to Iran’s nuclear program, but instead target other threats posed by the Iranian regime, such as its support of terrorism and its destabilizing conduct in the Middle East. The Iran deal is not intended to address these issues; thus, the United States has no reason to lift these bans. After all, the Iranian regime remains a leading state sponsor of terror and continues to undermine U.S. interests on a variety of critical international security issues.
Further, to protect the integrity of the international financial system, Washington led a systematic campaign in the mid-2000s to warn American financial institutions about the dangers of transacting with Iranian banks. It privately reached out to over 200 banks in more than 60 countries to detail the prohibitively high risks of engaging in Iranian business. For instance, Iran’s lack of an effective anti-money-laundering regime, along with the rampant use of Iranian banks by rogue actors, like the Revolutionary Guard, made it impossible to distinguish between licit and illicit transactions. Largely as a result of this campaign, global banks decided to withdraw altogether from the Iranian market rather than invest in costly compliance measures to manage these underlying risks.
The Iran deal cannot shake the impact of this campaign and how global banks now calculate the risk of doing business with Iran. Washington’s arguments against transacting with Iranian banks—the possible support of terrorism and money laundering—remain as true today as they did before the signing of the deal. Consequently, European banks also remain reluctant to finance Iranian businesses despite the formal lifting of banking sanctions. “Governments can lift sanctions,” Stuart Levey, the chief legal officer of HSBC Holdings, notes, “but the private sector is still responsible for managing its own risk.”
The United States has ignored this risk calculus even as it encourages European banks to transact with Iran. This goes against U.S. interests, as it essentially asks European banks to discount the U.S. Treasury’s past warnings. Such a move would undermine U.S. credibility when it comes to applying financial suasion in the future.
If Iranian banks can prove that they are clean, foreign banks will have less reason to avoid transacting with them. If they cannot, then Washington can make a more compelling case that it is the Iranians—not the United States—who are scaring away investors.
At the same time, the United States made an explicit commitment to lift sanctions that would translate into meaningful economic relief for Iran. Under paragraph 29 of the agreement, the “normalization of trade and economic relations”—not simply the dismantling of specific legal authorities—is the baseline for assessing the sufficiency of the United States’ sanctions relief package. The Iranians would not have signed the deal if they knew that relief would not be forthcoming. If the agreement were to collapse because Iran feels more sanctions need to be lifted, the United States might appear as if it was never sincere about its commitments in the first place. But neither should Washington make any unreciprocated concessions to Iran.
So what are U.S. policymakers to do?
First, policymakers must reframe the discussion around economic relief. Washington should emphasize how the inherently suspect nature of Iranian finance—as opposed to U.S. inaction on lifting sanctions—drives foreign banks away. The United States should then offer a limited number of private financial institutions in Iran the opportunity to prove the integrity of their businesses by undergoing inspections by international financial-standard-setting bodies and technical experts. Just as the United States and its allies have developed a set of procedures for inspecting Iran’s nuclear program, so they should create a way to assess the integrity of Iran’s financial sector, such as with on-the-ground examinations of bank operations.
The effort could be supplemented by the more aggressive monitoring of Iranian cross-border transactions, piggybacking off of an existing financial services platform like SWIFT, the Brussels-based financial-messaging network. As former National Security Adviser Juan Zarate has described in recent testimony before the House Committee on Foreign Affairs, such a monitoring system could mimic the Terrorist Financing Tracking Program—which also functions through SWIFT—to follow and analyze suspect banking activities. As Zarate explained, this would “provide a halfway house for reintegration of Iranian banks.”
Financial inspections would offer Iran the opportunity to prove the soundness of its banking system, while allowing the United States to establish a platform for evaluating Iranian banks. This platform will lend credibility to Washington’s future dealings with U.S. banks on sanctions or other matters.
To be sure, the international community offered Iran technical assistance on financial reform matters both before and after the signing the nuclear deal, which it largely rejected. But the United States has yet to propose that Iran undergo financial inspections. Offering such a program would allow the United States to pivot the conversation away from lifting sanctions to one about Iranian financial integrity. If Iranian banks can prove that they are clean, foreign banks will have less reason to avoid transacting with them. If they cannot, then Washington can make a more compelling case that it is the Iranians—not the United States—who are scaring away investors.