Willing banks find profits in legal trade with Iran

As Western sanctions on Iran have grown tighter, some small banks have found a lucrative niche financing what remains of the legal trade with the Islamic Republic.
Top-tier financial institutions including Société Générale SA and Rabobank Group have stepped back from business with Iran in recent months, citing increased political risk and logistical hassles that attend even legal trade with the country.

As a result, the remaining players are commanding higher fees and offering increasingly complicated services. Like Russia’s First Czech-Russian Bank LLC and China’s Bank of Kunlun Co. Ltd, they are typically small, obscure financial institutions often based in countries historically friendly to Iran.

The firms and other intermediaries still brokering these trades are charging more than 6% per transaction for legitimate trade deals with Iran, on top of traditional banking fees, according to traders and bankers knowledgeable with the process.

That is as much as triple the fees typically charged by Arab Gulf banks two years ago, before the United States and European Union significantly stiffened sanctions, according to Iranian businessmen.
“Companies still willing to facilitate Iran’s global business are charging hefty fees to do so,” says Trevor Houser, a partner at New York-based economic research firm Rhodium Group. “And those fees hit Iranians much more than their foreign customers or suppliers.”

EU exports to Iran totaled around €10.4 billion ($13.6 billion) in 2011. In 2010, Iranian trade with China was estimated at €16.9 billion.

While relatively small, the markets are large enough to attract smaller institutions. In February, some traders started flocking to First Czech-Russian Bank after word spread that it had started servicing Iran trade facilities, according to Iran trade professionals. In March, Roman Popov, the chairman and majority owner of the bank, was elected to lead the Russian-Iranian Business Council, promising to increase bilateral trade.

In Geneva, Hinduja Bank (Switzerland) Ltd., handles Iranian food transactions for Swiss companies. Achille Deodato, a manager for group and business control, said the bank remains involved “with the authorization of Swiss authorities” in trade involving letters of credit and “bulk agricultural commodities.”
Even in countries with historic ties to Iran, the subject is touchy. A spokeswoman for First Czech-Russian Bank declined to discuss the group’s Iran business. Bank of Kunlun didn’t respond to requests for comment, and a representative at state-owned China National Petroleum Corp., which controls Bank of Kunlun, said he was unaware of the matter.
Other institutions involved in financing legitimate trade with Iran declined to speak on the record, saying they feared publicity could lead the U.S. Treasury to increase its scrutiny of their U.S.-dollar operations.

“Legal or illegal, it doesn’t matter. It’s now political. Nobody wants a headache, and Iranian business is now a headache,” said a Gulf official working on Iran policy.

Until recently, trade with Iran was still straightforward. Businesses signed deals with Iranian counterparts, used Iranian banks to clear payments, and could readily convert rials into euros, dollars or pounds.

But between late December and January, the U.S. and EU enacted a barrage of sanctions designed to increase pressure on Iran to change its nuclear policies. The new restrictions include a ban on the Iranian central bank, which had been the clearing house for all oil deals, and bars two dozen Iranian banks from the international bank-transfer system.

In Iran, a trio of small, private banks—Saman Bank, Karafarin Bank and Pasargad Bank—have stepped in to replace the larger, sanctioned institutions. The banks didn’t return requests for comment.

On both sides of the border, there is demand for financial services. Medicine, food and other goods considered essential for Iranians‘ daily welfare are exempt from U.S. sanctions. The EU will join the U.S. this summer in prohibiting oil imports from Iran, but energy sales aren’t sanctioned by U.N. rules, which China and Russia follow.

The changing rules have raised new questions about what deals are profitable—or even possible—without normal banking channels. Businesses that violate U.S. sanctions against Iran could be cut off from American markets and face legal action against their U.S. subsidiaries.

In response, Rabobank and Société Générale say they have stopped servicing Iran deals or curbed their trade finance. According to Iranian trade professionals, Korea’s Woori Bank and Industrial Bank of Korea have done the same. The Korean banks could not be reached for comment.

Many Arab Gulf banks have also frozen their long-standing relationship with Iran, according to Arabian officials and bankers. In the last several weeks, the central banks of the United Arab Emirates and Qatar have told the institutions they regulate to stop financing Iranian trade deals, regardless of the nature of the contract.

The effects have been chilling. The rising costs of doing business with Iran have forced long-standing regional suppliers out of business, according to DF Deutsche Forfait AG, which provides financial services for EU companies trading with Iran. An official at the company said that some German exporters of medical equipment have recently had to cancel trades with Iran after being unable to find banks to service them.

With the new restrictions, trading partners have turned to esoteric finance mechanisms that sidestep normal banking channels.

One method, a “money exchange,” requires Iranian buyers to pay for foreign goods at a bank in Tehran, while the seller gets paid an equivalent amount at a bank abroad. A middleman balances the transaction between the banks.

Another avenue to service Iran deals is “forfaiting,” in which a third party buys a letter of credit from an exporter and takes responsibility for recovering payment from the importer.

DF Deutsche Forfait started such services for Iranian trade in 2000 and says it is still active in this market. The company said in an email that it would work with clients as long as none of the parties are under sanctions and they are dealing in legitimate goods.

The firm declined to comment on the cost of such a service, but a person familiar with the matter said it typically charges 6% to 8% for Iranian transactions.


Source: / WSJ /

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