Europe, China seek al­ter­na­tives to dol­lar in trade with Iran

The U.S.’s with­drawal from the Iran nu­clear accord has cre­ated dis­en­chant­ment among its Euro­pean al­lies and cre­ated a stim­u­lus for them to seek al­ter­na­tive fi­nanc­ing struc­tures that aim to side­step the U.S. dol­lar dom­i­nated fi­nan­cial sys­tem

Daily Sabah (Turkey) - - Front Page - ELİF BİNİCİ - IS­TAN­BUL

WITH THE with­drawal from the Iran nu­clear deal, also known as Joint Com­pre­hen­sive Plan of Ac­tion (JCPOA), the U.S. has cre­ated dis­en­chant­ment among its al­lies across the At­lantic and has com­pelled them to look for ways to keep the accord alive. Euro­pean coun­tries such as Ger­many, France and the U.K. have ex­pressed de­ter­mi­na­tion to con­tinue eco­nomic ties with Iran and their in­vest­ment projects in the coun­try. In or­der to do that, Europe is look­ing for al­ter­na­tive fi­nan­cial struc­tures for its trade with Iran and with no ex­po­sure to the U.S. dom­i­nated fi­nan­cial sys­tem, in­clud­ing euro-de­nom­i­nated loans and euro-based pay­ment sys­tems.

THE nu­clear deal was seen as a great step to­ward en­sur­ing peace and sta­bil­ity in the Mid­dle East when the P5+1 coun­tries – the U.S., the U.K., France, China, Rus­sia, and Ger­many – along with the Euro­pean Union (EU) agreed to re­lieve sanc­tions im­posed on Iran on the con­di­tion that the coun­try curb its nu­clear ca­pac­ity in July 2015. Af­ter nearly three years, U.S. Pres­i­dent Don­ald Trump an­nounced last Tues­day that his coun­try would with­draw from the agree­ment, which took ef­fect dur­ing the term of his pre­de­ces­sor Barack Obama. The U.S.’s al­lies across the At­lantic – Ger­many, France and the U.K.– im­me­di­ately crit­i­cized Trump’s de­ci­sion. Euro­pean lead­ers ex­pressed that they will en­sure the con­ti­nu­ity of the deal and pro­tect their busi­nesses in Iran be­cause they are heav­ily in­vested in Iran’s au­to­mo­tive, aerospace, trans­porta­tion and en­ergy in­dus­tries.

A meet­ing be­tween Ira­nian Foreign Min­is­ter Javad Zarif and his Ger­man, Bri­tish, and French coun­ter­parts as well as EU foreign pol­icy chief Fed­er­ica Mogherini on May 15 also high­lighted the joint de­ter­mi­na­tion to seek “prac­ti­cal solutions” for keep­ing the nu­clear accord. “I can­not talk about le­gal or eco­nomic guar­an­tees but I can talk about se­ri­ous, de­ter­mined, im­me­di­ate work from the Euro­pean side,” Mogherini said.

The ur­gent ques­tion that pops up is how will the EU main­tain com­mer­cial and eco­nomic ties, par­tic­u­larly en­ergy im­ports from Iran, which to­taled 9 bil­lion eu­ros in 2017. But the trade of petroleum prod­ucts with Iran does not seem to be go­ing on as the newly im­posed sanc­tions pro­hibits petroleum-re­lated trans­ac­tions with, among oth­ers, the Na­tional Ira­nian Oil Com­pany (NIOC), Nafti­ran In­ter­trade Com­pany (NICO), and Na­tional Ira­nian Tanker Com­pany (NITC), in­clud­ing the pur­chase of petroleum, petroleum prod­ucts, or petro­chem­i­cal prod­ucts from Iran.

The new U.S. sanc­tions pro­vide 90-day and 180-day grace pe­ri­ods for Euro­pean com­pa­nies to with­draw from their con­tracts in Iran, in­clud­ing pur­chases of Ira­nian oil.

Euro­pean coun­tries have al­ready is­sued eu­ro­de­nom­i­nated loans in or­der to fi­nance ex­ports to Iran. For in­stance, France started of­fer­ing eu­ro­de­nom­i­nated loans to Ira­nian buy­ers of its goods later this year, to help trade flour­ish out­side the reach of U.S. sanc­tions, state-owned in­vest­ment bank Bpifrance an­nounced at the be­gin­ning of this year.

Italy and Iran agreed on a frame­work credit agree­ment to fund in­vest­ments in Iran worth up to 5 bil­lion eu­ros. Iran’s gov­ern­ment-owned Bank of In­dus­try and Mine and Mid­dle East Bank signed the accord and the in­vest­ment arm of Ital­ian state-owned hold­ing In­vi­talia. More­over, Aus­tria’s Ober­bank and Den­mark’s Danske Bank inked frame­work agree­ments with a num­ber of Ira­nian banks in Septem­ber 2017, un­der which they will pro­vide fi­nanc­ing for Aus­trian and Dan­ish com­pa­nies ex­port­ing to Iran.

All Euro­pean par­ties try to struc­ture a fi­nanc­ing model through ve­hi­cles with­out any U.S. link, whether to the cur­rency or oth­er­wise, the aim is to avoid the ex­trater­ri­to­rial reach of U.S. leg­is­la­tion.

More­over, re­cent re­ports also claimed Tehran has taken pre­lim­i­nary steps to es­tab­lish a bank for trans­ac­tions be­tween Iran and the EU in eu­ros. This was done to set­tle pos­si­ble fi­nan­cial issues which might arise af­ter Wash­ing­ton’s de­ci­sion to with­draw from the deal, Ira­nian Am­bas­sador to Ger­many Ali Ma­jedi was quoted say­ing.

French Fi­nance Min­is­ter Bruno Le Maire put for­ward three main pro­pos­als start­ing with an EU-wide block­ing statute sim­i­lar to an EU reg­u­la­tion passed in 1996 de­signed to nul­lify any U.S. sanc­tions im­posed on EU firms. The statute per­mit­ted Euro­pean com­pa­nies to ig­nore the U.S. sanc­tions and said that any de­ci­sions by foreign courts based on such sanc­tions would not be up­held in Europe.

The sec­ond pro­posal is look­ing at Europe’s fi­nan­cial in­de­pen­dence – what can be done to give Europe more fi­nan­cial tools al­low­ing it to be in­de­pen­dent of the U.S.? One pro­posal is to set up a purely Euro­pean fi­nance house to over­see euro-de­nom­i­nated trans­ac­tions with Iran. The French min­is­ter also proposed a Euro­pean agency ca­pa­ble of fol­low­ing the ac­tiv­i­ties of foreign com­pa­nies. With re­gard to the use of block­ing statue, which has vague rules dif­fi­cult to en­force, Euro­pean Com­mis­sion Vice Pres­i­dent Valdis Dom­brovskis told the Euro­pean Par­lia­ment yes­ter­day that “the EU block­ing reg­u­la­tion could be of lim­ited ef­fec­tive­ness there, given the in­ter­na­tional na­ture of bank­ing sys­tem and es­pe­cially the ex­po­sure of large sys­temic banks to U.S. fi­nan­cial sys­tem and U.S. dol­lar trans­ac­tions.”

Ex­perts and busi­ness­peo­ple also stress that the re­cent out­break of events will cer­tainly un­leash the fi­nan­cial cre­ativ­ity of Euro­pean busi­ness peo­ple and lead­ers but the solutions might be lim­ited and cre­ate no im­pact on the dom­i­nance of the U.S. dol­lar.

High­light­ing that solutions will be lim­ited and dif­fi­cult to achieve, Es­fand­yar Bat­manghe­lidj, founder of a busi­ness and me­dia com­pany fo­cused on Iran, Bourse and Bazaar, stated that the sit­u­a­tions re­quires a new po­lit­i­cal imag­i­na­tion and a new ca­pac­ity for cre­ative think­ing.

“In the com­ing weeks, po­lit­i­cal sig­nal­ing will help the most com­mit­ted multi­na­tional com­pa­nies to pre­serve their op­er­a­tions in Iran, in the com­ing months Europe will need to cre­ate new Euro-de­nom­i­nated bank­ing channels to fa­cil­i­tate ba­sic trans­ac­tions and sales, and over the next year, Europe needs to find ways to pro­vide eq­uity or debt fi­nanc­ing for Iran, by find­ing a way to sell bonds on the in­ter­na­tional mar­ket and by ex­pand­ing the man­date of or­ga­ni­za­tions such as the Euro­pean In­vest­ment Bank to fi­nance projects in Iran,” he said. Yet, Bat­manghe­lidj em­phat­i­cally stated that none of these steps will sig­nif­i­cantly un­der­mine the pri­mary of the U.S. in the global fi­nan­cial sys­tem. But they can in­tro­duce a greater de­gree of Euro­pean in­de­pen­dence in eco­nomic state­craft and there­fore the project is im­por­tant for Europe in the long-term.

Pa­trice de Wergi­fosse, the head of a con­sult­ing prac­tice in Iran, talked to Daily Sabah about the steps the EU could take to main­tain busi­ness ties with the EU and how it would im­pact the place of the U.S. dol­lar.

“If a cred­i­ble al­ter­na­tive to the trad­ing in U.S. dol­lar was cre­ated, it may se­duce com­pa­nies for more than just busi­ness with Iran, as many in­sti­tu­tions and com­pa­nies around the world are grow­ing frus­trated of the in­creas­ing scru­tiny and in­ter­fer­ence in their busi­ness from the U.S.,” Wergi­fosse said.

“So there is a chance for euro to take a big­ger role at in­ter­na­tional level, but cer­tainly not to the point of re­plac­ing the green­back any time soon,” he added. He re­called that the lift of the sanc­tions was sup­posed to trig­ger a re­con­nec­tion of Iran to the in­ter­na­tional bank­ing sys­tem.

How­ever it didn’t hap­pen, as all the ma­jor Euro­pean banks were still afraid of po­ten­tial neg­a­tive re­ac­tions from the U.S. Be­cause of the am­biva­lent at­ti­tude of the U.S., he said, the Euro- peans did not feel com­pelled so far to de­velop an in­de­pen­dent fi­nan­cial sys­tem com­pletely iso­lated from the dol­lar and the U.S. bank­ing sys­tem.

The with­drawal of the U.S. from the JCPOA and the re-in­tro­duc­tion of sanc­tions, he con­cluded, might be the straws that break the camel’s back and fi­nally trig­ger the Euro­peans to start such a project.

The efforts to by­pass U.S. dol­lar by us­ing euro or lo­cal cur­ren­cies in trade with Iran aims to pro­tect the on­go­ing con­tracts of Euro­pean com­pa­nies and Europe’s grow­ing en­ergy trade with the coun­try as the con­ti­nent looks for al­ter­na­tive mar­kets to curb the dom­i­nance of Rus­sia in its en­ergy im­ports. Af­ter JCPOA starts im­ple­men­ta­tion on Jan­uary 2016, Euro­pean giants in­creased busi­ness vol­umes with Iran and launched in­vest­ments projects worth bil­lions of dol­lars in the coun­try. French en­ergy gi­ant To­tal and China’s state-run China Na­tional Petroleum Corporation (CNPC) signed a $4.2 bil­lion deal with the state-run Na­tional Ira­nian Oil Com­pany in July 2017 to de­velop the South Pars off­shore field, one of the world’s largest nat­u­ral gas fields. But the French en­ergy com­pany an­nounced Wed­nes­day that it will pull out of the in­vest­ment plan if no sanc­tions waiver is re­ceived from the U.S.

In 2016, French car­maker PSA Group signed a frame­work deal with Ira­nian coun­ter­part SAIPA to pro­duce and sell Citroen ve­hi­cles in the coun­try. The deal obliges the Paris-based car­maker to in­vest 300 mil­lion eu­ros over the next five years for the de­vel­op­ment and pro­duc­tion of three Citroen mod­els, which will be sold through­out the coun­try. PSA pulled out of Iran in 2011 un­der U.S. pres­sure.

Re­nault Group fi­nal­ized a con­tract for a joint ven­ture with Ira­nian car­mak­ers. Ac­cord­ing to the terms of the con­tract, 60 per­cent of the shares of the com­pany cre­ated will be held by Re­nault, the state com­pany In­dus­trial De­vel­op­ment and Ren­o­va­tion Or­ga­ni­za­tion of Iran (IDRO) will hold 20 per­cent and 20 per­cent will go to Ne­gin Kho­dro, the of­fi­cial dealer of im­ported Re­nault cars in Iran. The trade be­tween EU and Iran has also fol­lowed a rising trend since 2013 when the bi­lat­eral trade vol­ume was low­est since 2007 and cal­cu­lated at 6.2 bil­lion eu­ros. With grad­ual in­creases over the years, the trade be­tween EU and Iran reached 13.7 bil­lion eu­ros in 2016 and 20.9 bil­lion eu­ros in 2017 when Iran rep­re­sented 0.6 per­cent of EU trade, with 10 bil­lion eu­ros worth of ex­ports, mainly in ma­chin­ery, trans­port equip­ment, chem­istry and man­u­fac­tured goods.

EU im­ports from Iran in­creased by 83.9 per­cent last year. The EU rep­re­sented over 16 per­cent of Iran’s trade, with petroleum prod­ucts com­pos­ing some 88 per­cent of Iran im­ports to the EU and to­tal­ing to 9 bil­lion eu­ros.

Iran’s ex­ports of petroleum prod­ucts to EU have seen surge af­ter the nu­clear deal. In 2013, EU im­ported 74 mil­lion eu­ros worth of petroleum prod­ucts from Iran which later fell to 52 mil­lion eu­ros in 2015. How­ever, in 2016 EU’s petroleum prod­ucts im­ports from Iran to­taled to 4.2 bil­lion eu­ros and 9 bil­lion eu­ros in 2017, demon­strat­ing a strik­ing rise in en­ergy trade. EU im­ports of Ira­nian crude more than dou­bled last year, from 291,000 bar­rels a day in 2016 to around 620,000 bar­rels a day in 2017.

Against the back­drop of these eco­nomic en­gage­ments, Europe an Iran are work­ing to main­tain ties and safe­guard in­vest­ment plans. Although fully es­cap­ing U.S. sanc­tions may not be pos­si­ble for EU and Iran be­cause of U.S. dom­i­nance in fi­nan­cial mar­kets and its po­lit­i­cal and mil­i­tary al­liance with Europe, sig­nif­i­cant al­ter­na­tives are be­ing de­vel­oped.

An in­ter­na­tional sanc­tions ex­pert of Com­pli­ance and Ca­pac­ity Skills In­ter­na­tional (CCSI) En­rico Carisch told Daily Sabah that trade fi­nanc­ing with Iran may be in­te­grated into Trans-Euro­pean Au­to­mated Real-time Gross Set­tle­ment Ex­press Trans­fer (TAR­GET-2) a sin­gle, de­cen­tral­ized euro-based pay­ment set­tle­ment sys­tem for its in­ter­nal mar­ket as Euro­pean part­ners ad­vance rapidly for its im­ple­men­ta­tion, draw­ing at­ten­tion to the is­suance of euro-de­nom­i­nated loans for ex­ports to Iran. “Iran’s econ­omy will also ben­e­fit from very much in­creased bi­lat­eral trade agree­ments with China, Rus­sia, In­dia as well as the vir­tual cer­tainty that Ja­pan, one of its largest oil-buyer will con­tinue to ben­e­fit from a waiver from the U.S., in or­der to se­cure its en­ergy sup­ply,” Carisch said. China signed in Feb­ru­ary 2016 with Iran 17 agree­ments, boost­ing trade with Iran over the com­ing 10 years to $800 bil­lion. “Fur­ther trade ex­pan­sions are ex­pected as Iran will fea­ture as an im­por­tant node in China’s Belt and Road Ini­tia­tive. These eco­nomic en­gage­ments will not be con­ducted in U.S. dol­lars, but most likely in the Chinese cur­rency the ren­minbi,” he added.

In fact, the ren­minbi’s share in al­lo­cated re­serves has al­ready seen a rise with more cen­tral banks in­clud­ing yuan re­serves. The yuan took a ma­jor step to­wards broader in­ter­na­tional adop­tion in 2016 when the In­ter­na­tional Mone­tary Fund (IMF) de­cided to in­clude it in the bas­ket of cur­ren­cies that make up the Spe­cial Draw­ing Right, an al­ter­na­tive re­serve as­set to the dol­lar. In June 2017, the Euro­pean Cen­tral Bank (ECB) has con­verted 500 mil­lion eu­ros of its re­serves into ren­minbi for the first time.

Ac­cord­ing to the IMF data, the share of ren­minbi re­serves rose to 1.23 per­cent in the fourth quar­ter of 2017 from 1.1 per­cent in the third quar­ter of 2017. The ren­minbi’s role is be­com­ing more im­por­tant par­tic­u­larly in en­ergy trade af­ter yuan-de­nom­i­nated oil fu­tures were launched on Shang­hai In­ter­na­tional En­ergy Stock Ex­change which is pri­mar­ily for de­liv­ery of medium-sul­fur Mid­dle East­ern crude, ver­sus the Brent and WTI con­tracts, which are for de­liv­ery of low-sul­fur, so-called light crude from the U.S. or North Sea. There­fore, yuan-de­nom­i­nated oil fu­tures on Shang­hai ex­change are seen as an al­ter­na­tive fi­nan­cial method EU-Iran en­ergy trade.

Bar­bara Slavin, the act­ing di­rec­tor of the Fu­ture of Iran Ini­tia­tive at the At­lantic Coun­cil, also em­pha­sized that the U.S. ac­tion is spurring new cre­ativ­ity in Europe to find ways to cir­cum­vent the U.S. dom­i­nance of the in­ter­na­tional fi­nan­cial sys­tem. “Europe is ex­plor­ing mech­a­nisms to up­date a 20 year old ‘block­ing’ statute that could strengthen its hand in ne­go­ti­a­tions with the U.S. about safe­guard­ing ex­ist­ing busi­ness with Iran,” she said and high­lighted some lim­ited credit lines in eu­ros are be­ing ex­tended to Iran.

“China, Iran’s largest trad­ing part­ner and big­gest mar­ket for oil, is al­ready do­ing busi­ness with Iran in yuan and is ex­pand­ing its own oil fu­tures mar­ket. Taken to­gether, this will un­der­cut the dol­lar and di­min­ish the ef­fi­cacy of sanc­tions go­ing for­ward,” Slavin con­cluded.

Pres­i­dent Trump signs a pres­i­den­tial mem­o­ran­dum on the Iran nu­clear deal in the diplo­matic re­cep­tion room of the White House, Tues­day, May 8.

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