Iran: Are sanctions doing more harm than good?
The West has piled economic sanctions on Iran in a full-throttle bid to curb what leaders in Europe and the US perceive to be the country’s burgeoning nuclear weapons development programme.
But a huge question-mark remains over the effectiveness of sanctions – are they achieving what they set out to achieve? Conventional wisdom is split over the answer – but what is incontrovertible is that sanctions are impacting negatively on trade between Europe and Iran. And that includes law firm business.
The transfer of funds of more than €40,000 to or from Iran requires official permission – for example, from bodies such as the UK Treasury – meaning the vast majority of private and corporate deals are caught by the sanction regime. That includes private property mortgages, trade finance, letters of credit, corporate finance and large swathes of other financial activities.
Many businesses are left with existing contracts that are effectively frozen. There are sanctions on the central bank of Iran, although the British Treasury has discretion to issue approval for transfer of funds to and from Iranian banks in relation to existing contracts. This is causing difficulty for businesses, including law firms. By the time all initial procedures – such as completion of anti-money laundering forms – and Treasury-approval applications are submitted, several hours are spent on a file before any legal advice is actually provided.
Although the sanctions appear to make it impossible to work and trade with Iran, amazingly there is still huge demand to do business with such a large market that is one of the biggest importers in the Middle East. Food and humanitarian aid are exempt from the sanctions, so by getting official approval for the transfer of funds it is still possible to trade in those products.
Trade in other types of goods is not impossible, but requires further official approval to ensure those products are not dual-purpose and cannot be used in nuclear activities. Some businesses are, in fact, busy obtaining those approvals to sell goods to Iran despite all the banking and trade finance issues. Nonetheless, ‘affordable’ Chinese goods are taking over Iranian markets.
Therefore, while the EU is suffering from a hard economic and financial environment, competitors from other parts of the world are taking advantage of the absence of European countries in the market and are exporting to Iran – and charging high prices as well, or doing deals in return for oil.
Appetite for business
There is still great appetite for business with Iran. The country is one of the main oil and gas providers in the region and the imposition of sanctions has triggered significant price inflation – price rises the EU is not in the best financial position to absorb. An EU sanction that came into effect at the beginning of this month bans imports of Iranian oil into member states and prohibits the insuring of vessels carrying Iranian petrochemicals.
The impact of this move is likely to affect governments and insurers in various ways. There are many EU countries – not least Greece and Spain – that rely on Iranian oil and now need to find replacement sources. And the EU sanction also affects non-European countries – such as South Korea – as they rely on European insurance companies to cover the shipments and vessels transporting Iranian oil.
The global financial crisis has prompted the British authorities to look at ways to delay implementation of the EU sanctions because of their feared detrimental effect on UK insurance industry players that underwrite shipments of oil cargo from the Persian Gulf.
Ultimately, private individuals and businesses are the real victims of sanctions as it is costing them more time and money. Examples include those who need to transfer family inheritances from Iran, those who want to apply for investor or entrepreneur visas and need to transfer money from Iran, traders who have sold goods to the EU and need to take payment or clear a letter of credit in Iran, and parents who need to send their student-children money for university fees and living expenses.
Food for oil
Sanctions have made it more complicated, slow and costly but not impossible. In most of those examples, people are using different legal structures and parallel routes to move money between the EU and Iran.
Iran is exporting oil to India and China, taking goods and food in return instead of money. This limits Iran somewhat in terms of the range of products it can import, but the Iranians are still buying more or less what they would have bought with the oil money – perhaps compromising slightly in relation to brand names and quality. In the meantime, India and China are purchasing the oil they need and also exporting a wide range of products.
An interesting specific area is the sanction covering passenger air traffic. State-owned Iran Air is prohibited from buying fuel at UK and other EU airports. In retaliation, Iran is not selling fuel to some European airlines, such as bmi, which means that carrier flies to the Iranian capital via Yerevan in Armenia. While that may boost the Armenian economy, it is not affecting Iran’s nuclear programme. But it is definitely affecting the lives of private individuals.
Iran, with its population of more than 70 million people, is a huge market for goods and services. Even today, in shopping malls across the country, the latest technology products and luxury brands are for sale. Despite the sanctions, consumers can buy such things in Iran, but at a premium.
And we still don’t know whether the nuclear programme is affected.
Shahrzad Atai is an associate at London-based law firm GSC Solicitors