By Kandaswami Subramanian
In an earlier paper we analysed the circumstances leading to the termination of payment arrangements under the ACU to pay for crude oil supplies from Iran.
It took nearly six weeks for the Indian and Iranian authorities to negotiate and work out a new system to pay for crude supplies. Abrupt termination of the ACU complicated India’s purchase of crude oil from Iran and it was proving to be difficult to find an alternative arrangement in the current global context riddled with U.S. sanctions.
At one level, as a recent CRS Report for Congress [i] said, “…..the Indian move and reported continuing difficulty in agreeing to a replacement payments mechanism appears to signal that India was, at least in part, joining U.S./European-led efforts to shut Iran out of the international financial system.” At another, the search for an alternative met with roadblocks as, “Several banks considered as replacement mechanisms are either under U.N. sanctions or fear fallout (restrictions in the U.S. banking system) from transacting banking business for Iran.” It was like trying to square a circle.
On February 4, there were news flashes in major papers in India and abroad. A breakthrough was reported in India-Iran negotiations over a new payment arrangement [ii]. The reports said that a decision had been taken at a high-level meeting attended by National Security Adviser Shiv Shankar Menon, Foreign Secretary Nirupama Rao, Economic Affairs Secretary R. Gopalan and Petroleum Secretary Sundereshan to make euro payment through the Hamburg-based Europaisch-Iranische Handels bank AG (EIH). The State Bank of India (SBI) was directed to clear the backlog immediately. The system will coverall supplies to state-owned oil companies like the IOC, HPC, etc. and also private companies.
The system appears to be neat and simple. National Iranian Oil Company (NIOC) has an account with the EIH. EIH, in turn, has a tranche with the Central Bank of Germany – Deutsche Bundes bank or DBB. SBI will make payments in euro to DBB on behalf of NIOC and these would be passed on to the NIOC. To ensure compliance with extant sanctions, each payment will be supported by a certificate that the money would not be used for trade in any commodity that is under U.N. or European sanctions. It was added, for good measure, that oil from Iran is not been banned by either the U.N. or the European Union and also that the DBB has underwritten and guaranteed the procedure.
The announcement was greeted with relief. The fear of disruption or uncertainties attached to future oil supplies evaporated. This is the arrangement which was greeted by Badrakumar as a diplomatic feat [iii]. It is intriguing that, so far, there has been no official announcement about the revised procedure. Nor have the press reports been denied. There seems to a shroud over the arrangement.
Even as the new system shifts the onus from the ACU to the EIH, it does not seem it would resolve forever the difficulties faced earlier by the ACU. The EIH itself carries a legacy and is beset with a string of travails. It has been at the centre of an acute and embarrassing diplomatic controversy between Germany and the U.S. It is indeed the fallout of the German response to ever-widening U.S. sanctions in the background of German’s economic links with Iran.
For a long time, the EU, especially Germany, has resented unilateral U.S. sanctions of an extra-territorial nature. The European states had shown reluctance to go along with the U.S. The U.S., in its turn, has been trying to arm twist them through intense diplomatic pressure. More importantly, over time, U.S. has amended and fortified its Iran Sanctions Act which culminated in the passing of Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (CISADA, P.L.111-195). Simultaneously, U.S. has also been seeking to use its hegemonic status in the global economy and, especially, the dominant position of its banks in the global financial system. It has been using every route to stop payments to Iran and to cripple its capability to engage in nuclear programs. Though the stated aim is to reduce Iran’s nuclear capability, it is inevitable that the Iranian economy gets strangulated when it is disengaged from global banks.
Countries like Germany that have closer economic relations with Iran have to wage recurrent diplomatic battles with the U.S. to safeguard their national interests. It is unfortunate that these sanctions assume primacy and deny access to the Iranian market at a time when there is a global economic recession, in particular in the U.S. The reverse side of the coin is that Iran is driven to seek trade access in Asia to fill the vacuum created by sanctions. China does not hesitate to exploit the opportunities. This atmosphere breeds suspicion in the minds of U.S. Statement Department and U.S. strategists that European nations are not playing ball in enforcing sanctions. Their public pronouncements are seen to be at variance with their private actions back home. Even as U.S. steps up its surveillance over sanctions, there are doubts (and fears) over European attempts to circumvent them.
Indeed, this atmosphere has created an uneasy balance in the U.S.-EU relations and is marked by recurrent tension and verbal exchanges in public. Though there is a broad agreement on sanctions, there are differing legal bases and authorities for them in the respective jurisdictions. As the CRS paper quoted earlier [iv] explained, “A U.S. President cannot mandate a foreign company to take any particular action. However, the U.S. government can penalize or reward firms which take action that supports U.S. objectives.”
For instance, UNSC sanctions are considered binding on member countries. However, the EU has clarified, as recently as in late October 2010that the sanctions against Iran do not ban import of Iranian oil and gas or ban export of gasoline to Iran. Unfortunately, EU companies that sell gasoline to Iran might open themselves to U.S. penalties under ISA read with CISADA. With the banning of banking relations the sanctions could reach any corner of the earth. It was this noose that was tied around the ACU and led to its closure. Will the EIH survive U.S. scrutiny?
It calls for a closer study of German-Iranian relations and where the EIH stands [v]. Iran is one of the most important economic partners of Germany in the Middle East and has been a good export market. By 2009, Iran was ranked third as Germany’s trading partner in the region preceded by Saudi Arabia and United Arab Emirates (UAE). Despite the sanctions, Germany remained the most important Western partner for Iran. For instance, in 2009, 35 percent of Iranian imports from the EU were from Germany. Germany has remained an important supplier of machinery, equipment and technologies to Iran. German firms showed keen interest to invest in the energy sector to access new sources of oil and gas, especially after the gas crisis broke out in Europe. As with other major powers, there is the Central Asian and Caspian lure for which Iran is pivotal. This led to their interest in the construction of Nabucco gas pipeline which will supply gas from Central Asia to Europe. German corporations held a high level meeting with the Iranian energy minister when he visited Berlin in May 2009. However, the details were not disclosed.
Germany has other geopolitical and strategic interests. As a latecomer in Europe after the Second World War, Germany has no friends in the Middle East. France and the U.K. have deeper involvement with many countries in the region dating back to colonial or pre-world war years. Germany wants a foothold in the region and Iran proved to be the gateway, along with Israel. Germany is eager to be recognized as an influential power and is happy over its status as a member of P “5+1” group both in the U.N. and in the global arena. Germany is keen to resolve the Iranian nuclear issue through peaceful measures, i.e. diplomacy and negotiations and not force. These objectives create conflicts and contradictions in its foreign policy postures. As the study referred to earlier [vi] observed, “Differences in the approaches were especially strong during the presidency of George W. Bush when the policy towards Iran was one of the factors which adversely affected German-U.S. relations.” These continue unabated under the Obama administration.
Even around the time when the last round of U.N. sanctions were discussed, the U.S. was unsure about German intentions over sanctions. Major papers like the Wall Street Journal and the New York Times carried reports about Germany’s growing economic relations with Iran. As the WSJ reported [vii] , on the same day when the Obama administration scored a significant diplomatic success when it persuaded the UNSC to approve new economic sanctions, “companies in Germany – a nation that nominally supports the sanctions effort – increased their exports by 48% in March and 15% in the first quarter. Their imports from Iran rose by even greater margins.” It referred to several research studies such as those done by the Foundation for Defense of Democracies. This think-tank has done extensive research on Iran’s economy. It noted, “German-Iranian trade has consistently hovered” around $5 billion annually, making Germany Iran’s largest EU trading partner almost every year. The trade has been important in helping Iran maintain and upgrade its economically crucial energy sector.” There are other civil society activists agitating against Germany’s failure to comply with sanctions. The Israeli press has been very vocal.
Another twist to the story is that, as a result of U.N. and U.S. sanctions, big German corporations like Siemens, etc. having global reach began to close down their investments and operations in Iran fearing that they would be subject to the new, stringent sanctions and their assets would be frozen by U.S. authorities. They feared that they would lose their global business if they were subject to U.S.’ sanctions. While passing the bill in June 2010, Sen. John McCain, R-Ariz., said that foreign companies would be given a choice: “Do you want to do business with Iran, or do you want to do business with the United States?”
Smaller and medium-sized companies in Germany are a different kettle of fish. They do not have global operations and are confined to Iran or neighbouring European countries. They can ill afford to close down their Iran operations. For them, even ordinarily, closure of Iranian operations was not an easy option. It was unthinkable in the context of global recession and the fall in export markets after the recession.
On the political front, Angela Merkel represents a coalition which includes the Free Democratic Party (FDP). “The Free Democrats, the coalition partner of Merkel’s Christian Democrats, are a pro-business party, many of whose members own midsized companies. A sizable number of FDP members are involved in commerce with Iran, and oppose restrictions on the trade.” [viii] Germany’s Foreign Minister Guido Westerwelle is from the FDP. The Economic Ministry is headed by the FDP’s Rainer Bruderie.
Unlike in India or some other Asian countries, the power which small and medium business wield over governments in Europe, in particular in Germany, is hard to imagine. In the post-war years and in recent decades, Germany has tried to protect and advance their interests. Merkel’s coalition has to bow to their interests while evolving its policies over Iran sanctions. No wonder it decided to walk the tight rope. Either by design or accident, the EIH got linked with exports to Iran, especially to the exports of the small and medium-sized business. Sadly, it did not escape the gaze of the U.S. Treasury.
The Wall Street Journal [ix] fluttered the dovecotes when it published a story on the EIH. It alleged that the EIH had done over one billion dollars of business for Iranian companies associated with Iran’s conventional military and ballistic missile programs, included companies blacklisted by the U.S., the United Nations and the European Union.” The EIH was also reported to be involved in a broad sanctions evasion scheme, conducting euro-denominated transactions on behalf of entities facilitating Iran’s weapons trade and proliferation activities. The EIH itself was said to be in the blacklist of the Treasury.
Lack of harmony or even fissures in policies over sanctions came out in the open. The EU Foreign Ministers met in the last week of July 2010 to discuss new sanctions against Iran. The pressure from the U.S. for inclusion of more institutions in the blacklist was intense and the status of EIH was discussed. It was clear that there was lack of harmony among the U.N., EU and U.S. sanctions. Critics alleged that Iran was able to exploit these differences. The most contentious issue indeed was the status of the EIH.
There were four Iranian banks operating in Germany. Except the EIH, the three others were owned by the Iranian government. Those banks were banned under U.N. sanctions and were closed down. EIH was not under the UN or the EU sanctions. EIH is a bank incorporated in Hamburg, Germany, and owned by resident Iranians and serviced German-Iran trade. In recent years, its business has grown mostly as a result of US/UN sanctions. The three state-owned banks were blacklisted by the U.N. With their closure, the EIH took over their business. Deutsche Bank was also engaged in Iran trade. But, fearing loss of its U.S. and global business under U.S. sanctions, it decided to play safe and shed the Iranian business in Hamburg. The net result was that EIH was the beneficiary and remained the sole surviving bank to service German-Iran trade.
Even though pressure mounted on Germany to ban the EIH, Germany and the E.U. took the stand that they will take the cue from the U.N. and not the U.S. In fact, a representative of Germany’s banking supervisory agency “BaFin- said that the UNSC and not the U.S. sets the standard by which Germany imposes sanctions on Iranian banks operating in Germany. A spokesman of the German Finance Ministry added, “The banking oversight currently has no findings about infringements reported (by the WSJ), but BaFin and the Bundes bank are investigating these accusations against this bank.”
There was growing frustration over Germany’s lack of response to the blacklisting of the EIH. There were reports that President Barack Obama made a telephone call to Angela Merkel in July last year to discuss the EIH affair and it was of no avail. Some papers described it as a “snub” to Obama.
The U.S. Treasury would pursue regardless. On 7th September 2010, it issued a notice [x] “designating” EIH as one of the remaining banks facilitating business with Iranians and handling billions of dollars worth of transactions on their behalf. This decision was taken “pursuant to Executive Order (E.O.) 13382, which blocks the property of designated weapons of mass destruction (WMD) proliferators and their supporters, thereby isolating them from the U.S. banking system.” The order went on to list several occasions and transactions with which the EIH was associated. As Mr. Stuart Levey, US Undersecretary for Terrorism and Financial Intelligence elaborated, “EIH has acted as a key financial lifeline for Iran. As one of Iran’s few remaining access points to the European financial system, EIH has facilitated a tremendous volume of transactions for Iranian Banks previously designated for proliferation.” By issuing this notification, perhaps the Treasury expected that there would be corresponding German action. There has been none till date.
For its own reasons, the press in Israel has taken more interest in the issue. It covers regularly the developments over the EIH dispute. As recently as in the first week of February this year, The Jerusalem Post took up the issue with Angela Merkel. [xi] When asked whether the German government planned to shut down EIH’s operation, a spokeswoman for the Chancellor wrote, “EIH is under particularly strict regulatory control, which cannot be compared to any other German financial institution.” It also added, that “the EU sanctions against Iran do not at this time list EIH.” The German Finance Ministry also wrote to the same paper, “There is no German sanctions list: rather the European Council must decide within the framework of the EU sanctions mechanisms. We are not aware of any such decision of the European Council.”
It would be evident from the above narration that EIH and its future hang by a thread. It is unclear how strong the thread is and how long Germany or the EU would hold on to it. Much would depend on the changing nature of U.S.-EU and U.S.-German relations. For the present, Germany is determined to defend the EIH in the context of its own coalition politics and the need to protect the interests of small and medium business. If and when the economic and political balances change, Germany may well shift gear and drop the EIH if it proves to be an irritant in maintaining friendly relations with the U.S. This may be earlier if the U.S. economy revives.
There is another dimension. As one report in the WSJ [xii] put it, “.. arrangement would appear to place State Bank of India in a vulnerable position.” The SBI has branches in the U.S.A. and has also correspondent relations with major U.S. banks in its international transactions. Should the Treasury “designate” it under the new fangled CISADA or does not give a waiver to India it would cause serious damage to the operations of the SBI. It may well be argued that the SBI is not dealing with the EIH but with DBB which is a central bank. But the U.S. authorities have not been rational in dealing with sanctions (terrorist!) issues and don’t bother about legal niceties.
It is no surprise that around the same date (February 4) when India was working out an arrangement with Iran, eleven U.S. Senators wrote [xiii] the German Foreign Minister “expressing grave concern with the continued financial support” of EIH to Iran urging, “the German government to take immediate action to these practices.” “Yet, the continued operation of EIH allows the Iranian regime to skirt the sanctions and undercut the effectiveness.” It is evident that the EIH is hostage to the U.S.-EU/German relations and cannot remain a platform to finance our energy requirements from Iran in the longer term.
Viewed from another angle, this arrangement to finance our Iranian imports makes us lean heavily on German shoulders. Will Germany undertake the role for us, much against the ire of the U.S., without expecting something in return? If so, what is the price we pay? There is no charity in diplomacy.
Further, at a time when other countries like China are reducing dependence on earlier sources through diversification, we are creating a new dependency, a payment related dependency, for the same (existing) sources! It will push up the price of crude oil as the payment is in euros. Clearly there are long imponderables and uncertainties attached to the arrangement.
Our assessment is that, at best, this arrangement can work in the shorter term. Its longer term survival is very much in doubt.
(The writer is a Former Joint Secretary, Ministry of Finance, Government of India)
i Iran Sanctions, Kenneth Katzman, CRS Report for Congress No. RS20871, February 3, 2011at www.crs.gov India, Iran resolve crisis, The Hindu, 04/02/11 URL:
iii Indian diplomacy scores hat trick, Indian Punchline at http://www.blogss.rediff.com/mkbhadrakumar/2011/02/04
iv Ibid. Note at i above.
v For an interesting analysis see �Dilemmas in the German policy towards Iran�, Justyn Gotkowska, Centre for Eastern Studies, 2009-08-12
vi Ibid. Note above.
vii Next for the Iran Sanctions: Making Them Actually Bite, The Wall Street Journal, June 11, 2010.
viii Diplomat Slam German-Iranian trade and ahead of Merkel trip, The Jerusalem Post, February 4, 2011.
ix Small Bank in Germany Tied to Iran Nuclear Effort, The Wall Street Journal, July 18, 2010.
x Treasury Department Targets Bank in Germany Over Iran Activities, 07 September 2010, at http://www.america.gov./st/texttrans-english/2010/September/2010090754315suO.4062268..
xi Germany: EU Iran sanctions don�t prohibit Hamburg Bank, The Jerusalem Post, February 6, 2011.
xii India, Iran Try New Oil-Sale Conduit, The Wall Street Journal, January 5, 2011.
xiii http://in.finance.yahoo.com/news/US-senators-urge-Germany-stop-pti-2815281508 html?x+0