Nuclear Deal No More: Implications on the Global Financial Sphere

 In AML Surveillance

               Earlier this year, Global RADAR reported on the possibility of the United States withdrawing from the “Joint Comprehensive Plan of Action” (JCPOA), otherwise known as the Iran Nuclear Deal. Widely considered the signature foreign policy directive of former U.S. President Barack Obama, the agreement was made between the Islamic Republic of Iran and several world powers – a list that includes the United States, United Kingdom, Russia, France, China and Germany (or P5+1). The accord was reached with the primary goal of reducing the ability of Iran to produce plutonium and uranium, two key components in the creation of nuclear weapons, in exchange for the easing of stringent economic sanctions that had stifled Iran’s overall growth and development in years past. In addition to the nuclear restrictions, Iran was also subjected to scrutiny and United Nations inspections over the next 10 to 15 years to ensure their compliance with the requirements of the agreement, measures that include continuing efforts to terminate their nuclear programs, shut down uranium centrifuges, and convert existing nuclear facilities into research centers. The move was also supposed to grant Iran increased access to the global financial system, although U.S. banks remained prohibited from conducting both direct and indirect business with the middle-eastern country due to its alleged ties to terrorism. This in turn deterred many European institutions from re-establishing banking links with Iran due to fear of repercussions from U.S. regulatory bodies, a point that frustrated Iranian nationals who accused the U.S. of not fulfilling their portion of the agreement by all but discouraging banking cooperation. While still controversial to date, the move ultimately was facilitated to increase the amount of time it would take Iran to foster enough nuclear material to create weapons that could be used against the United States and their allies, although skeptics believed that Tehran received too much in the deal. As of last week however, it appears this once landmark deal is no mas.

              Last Tuesday, U.S. President Donald Trump announced his executive decision to recede from the JCPOA, several days ahead of the May 12th deadline for a decision to be made on renewing the waivers of nuclear sanctions on Iran. The proclamation began a 90-day countdown towards the restoration of previously held sanctions against the embattled country, although questions remain surrounding exactly which sanctions lifted in the deal would be immediately re-imposed. Fox News writes that a smaller-scale move could be the best option in this case, as “a more limited move could leave Trump more room to potentially stay in the deal if other members agree to toughen it” (Pappas, 2018). Despite valiant efforts made by his counterparts in Europe, most notably French President Emmanuel Macron, Trump could not be persuaded to keep the deal, and may choose to impose additional high-level economic constraints on Iran in the coming months. The New York Times writes, “the talks collapsed over Mr. Trump’s insistence that sharp limits be kept on Iran’s nuclear fuel production after 2030. The deal currently lifts those limits” (Landler, 2018). Many have also speculated that the move may also increase tensions between the U.S. and Russia & China, other key members of the agreement, in addition to warranting potential retaliation from Iran in the near future. Although it is too early to tell at this juncture, if the deal was to ultimately completely collapse, potential implications could include Iran’s resumption of its nuclear activity “while businesses and banks doing business with Iran would have to scramble to extricate themselves or run afoul of the U.S.” (Roberts, 2018). President Trump has warned of very severe consequences however should Iran restart its nuclear activities.

While still in its early stages no doubt, the long-pending decision has already had a significant impact on the Iranian banking system, one that is once again being drawn into a downward spiral. Although Iran succeeded in salvaging over 200 business relationships with their international peers since 2015, money has not flowed as freely as the government had dreamed it would. Sources indicate that while transactions were occurring prior to the recent announcement, very rarely did they exceed $250 million (USD) because of the difficulties involved with clearing payments. Due in part to this period of profound political uncertainty, Iranian citizens have been quick to pull their funds from local banks, all but drying out the savings found in some of the country’s largest institutions. Given that Iran had faced a variety of issues in the finance space prior to the Trump decision, several unnamed senior banking officials in the country fear that the deterioration seen across the country’s banking system over the last year may pale in comparison to what it yet to come. Reuters writes that the loss of confidence from the general public “both reflects and contributes to wider problems threatening pragmatist President Hassan Rouhani in Iran’s faction-ridden clerical establishment: investment has dried up as banks limit lending, growth is slowing and unemployment is at a record high, exposing Rouhani to growing criticism from hardliners” (Saul & Hafezi, 2018).

The anticipation of the U.S. decision has also caused the national currency, the Iranian rial, to lose roughly half of its value in the last six months alone driving prices upward and drawing inflation ever-closer. This has subsequently brought about the ban of domestic foreign-exchange transactions in Tehran, as well as a limit being placed on foreign currency holdings to approximately $12,000 (USD). Imports into Iran have also taken a significant hit of late, as British marketers “exporting consumer goods to Iran had reported a 50 percent drop in purchases over the past two months” due to the “risk of further (bank) liquidity concerns” (Saul & Hafezi, 2018).

The move is also expected to have major ramifications on the European financial sector, as the efforts that have been made by smaller European entities to re-include Iran into the global financial system appear to have been for naught. The small European lenders that remain in Iran have already begun limiting transactions to their large-scale customers, as the majority of their larger equivalents have long-since cut their ties with the country altogether in order to avoid crippling fines by U.S. authorities. In their May 9th article titled “Iran Nuclear Deal Upheaval Shakes Up European Banks’ Outreach”, esteemed Wall Street Journal writers Max Colchester and Laurence Fletcher cite a partner from renowned U.S. law firm Pillsbury Winthrop Shaw Pittman LLP. who asserts that “European banks are going to be less and less inclined to process any non-U.S. dollar transactions going in and out of Iran”, with the threat of being cut off from the U.S. banking system sending a chilling effect across the industry (Colchester & Fletcher, 2018). With government officials and financial authorities from the world powers involved in the deal now at odds over the way the situation in Iran should be handled moving forward, it seems that financial institutions both domestically and abroad are entering into unchartered territory.

 

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