The Anatomy of Humanitarian Trade With Iran — Amir Handjani
The United States has long promised to ensure trade in humanitarian goods for countries under its economic sanctions. For this reason, each U.S. country-based sanctions program has carved out exceptions that secured food and medicine so as to limit potential catastrophic effects on civilian populations. Yet these legal exceptions for humanitarian trade have become unworkable in practice, as insufficient resources are dedicated to understanding the ways in which this trade takes place and how U.S. economic sanctions affect the ecosystem of such commerce.
Nowhere is this more true than in Iran. The Trump administration is in the process of employing a “maximum pressure” strategy dedicated to undermining Iran’s economy and disrupting the country’s ability to import even basic goods. If the Trump administration is serious about its professed concern for the Iranian people — a topic of no insignificant debate within Washington policy circles — then it should more clearly delineate the process by which humanitarian trade with Iran can take place, even if that means taking steps to relieve certain sanctions to secure the Iranian people’s unobstructed access to food and medicine.
In May 2018, President Trump announced his decision to withdraw the United States from the Joint Comprehensive Plan of Action (JCPOA) — the nuclear deal among the U.S., other major world powers and Iran. The U.S.’s withdrawal from the JCPOA and the subsequent reimposition of U.S. sanctions lifted under the nuclear accord have pushed the JCPOA to the brink of collapse. By leveraging its dominant position in the global financial system, the United States has nullified the quid pro quo that lay at the heart of the JCPOA (i.e., that Iran would impose limits on its nuclear program in return for its economic reintegration in the world) and has caused Tehran to reassess its own willingness to stick to the nuclear accord. Rather than draw Iran back to the negotiating table, the Trump administration’s policy of “maximum pressure” has started to unwind the negotiated constraints on Iran’s nuclear program and set the stage for a renewed crisis.
The reimposition of U.S. sanctions targeting Iran not only has nullified the economic benefits to Iran’s nuclear bargain but also has undermined Iran’s very economic livelihood. The administration’s policy of “squeez[ing] [Iran] until the pips squeak” — as National Security Adviser John Bolton declared in November 2018 — has had a devastating effect on Iran’s ability to import basic humanitarian items, including food, medicine and medical devices. These difficulties have been particularly pronounced since the Trump administration targeted most Iranian financial institutions, some of which had been intimately involved in facilitating humanitarian trade prior to the JCPOA, for secondary sanctions. Shortfalls in basic medicine and the raw ingredients necessary to produce drugs domestically have stirred anxieties among Iranians — most of whom recall the years before the nuclear accord, when U.S. sanctions severely stymied the supply of medicines and medical devices.
The potential effects of U.S. sanctions on Iran’s civilian population have not gone unnoticed by the international community. In August 2018, Idriss Jazairy, the United Nations (U.N.) Special Rapporteur on the negative impact of unilateral coercive measures, lamented the “unjust and harmful [U.S.] sanctions,” which, he said, “are destroying the economy and currency of Iran, driving millions of people into poverty, and making imported goods unaffordable.” In October 2018, the International Court of Justice (ICJ) issued a provisional order requiring the United States to “remove, by means of its choosing, any impediments arising from the [U.S.’s withdrawal from the JCPOA and its reimposition of sanctions] to the free exportation to [Iran] of [humanitarian goods].” The Trump administration responded by announcing the U.S.’s immediate withdrawal from the 1955 Treaty of Amity, Economic Relations, and Consular Rights — which had served as the jurisdictional predicate for Iran’s lawsuit.
The Trump administration appears unmoved by international and domestic Iranian fears of shortfalls in basic goods. Some administration officials have even indicated that undermining humanitarian trade with Iran might be intentional — a means of provoking food riots and, ultimately, the overthrow of the Islamic Republic itself. As Secretary of State Mike Pompeo noted in an interview with BBC Persia in November 2018, “[T]he [Iranian] leadership has to make a decision that they want their people to eat.” Most recently, the Wall Street Journal reported that U.S. officials were contemplating additional sanctions to curb what remains of Iran’s export revenue and deny the regime the ability to import basic goods, and some outside groups have begun measuring the effectiveness of sanctions by the scope of price increases for basic goods, including foodstuffs, in Iran.
Despite these sanctions, however, the official policy of the U.S. government remains that humanitarian trade with Iran should be facilitated. According to guidance from the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the agency in charge of administering most U.S. sanctions targeting Iran, “[T]he [U.S.] maintains broad authorizations and exceptions under U.S. sanctions that allow for the sale of agricultural commodities, food, medicine, and medical devices to Iran.” This includes, for example, a general license authorization for the sale of agricultural commodities, food, medicine and medical devices to Iran, as well as guidance on how non-U.S. persons can trade in humanitarian goods with Iran without being subject to U.S. secondary sanctions.
But the reach of U.S. sanctions targeting Iran weakens the effectiveness of those licenses and humanitarian exceptions. Large swaths of Iran’s financial sector, including its largest state-owned banks, are designated under U.S. counterterrorism or WMD proliferation authorities. This has made it increasingly challenging for humanitarian trade with Iran to lawfully take place, as existing licenses and exceptions specifically exclude transactions or dealings with such designated Iranian parties. As OFAC’s public guidance states:
Even those few Iranian banks that remain free from designation find it increasingly difficult to maintain correspondent banking relationships with foreign financial institutions, which fear even processing permissible payments from Iranian banks lest those banks have unknown affiliations with individuals or groups and might later be targeted by U.S. authorities for sanctions.
The Iranian economy is heavily state run. Many aspects of it are controlled by the Iranian Revolutionary Guard Corps (IRGC), which has recently been designated a Foreign Terrorist Organization (FTO) by the State Department. Some estimates conclude that up to 40 percent of the Iranian economy is run by the IRGC and IRGC front companies — and, ostensibly, any individual or foreign company that has any dealings with those entities would be subject to U.S. secondary sanctions and possible criminal prosecution. What’s more, the Iranian banking sector has effectively been cut off from the international financial system for the better part of a decade since the international community started leveling sanctions on Iran to restrain its nuclear program. Both these factors handicap Iran’s economy to a degree that makes basic international transactions, of the type that would be routine, virtually impossible.
In addition to sanctions, Iran also faces self-inflicted regulatory challenges that create barriers to humanitarian transactions. The Rouhani administration has been pushing the unelected branches of the Iranian government to implement the Financial Action Task Force (FATF) guidelines on money laundering and terrorist financing, which form the bedrock of the international banking sector. The fact that Iran is still trying to adopt these guidelines is evidence of a financial services industry that is out of step with the rest of the world.
Opponents of sanctions have argued that reimposition of secondary sanctions by the Trump administration on huge swaths of the Iranian economy has a chilling effect on humanitarian trade with Iran. Even though OFAC guidelines allow for trade in medicine and food with Iran, the uncertainty and rhetoric surrounding U.S. policy on sanctions — along with the technical sophistication required to understand what is and isn’t permitted — forces most firms to give up entirely on all business with Iran. The risk of being excluded from the American market, or facing crippling fines from U.S. regulators, leads multinational corporations to conclude that the risk of doing business with Iran isn’t worth the reward. And the few firms that decide to engage in humanitarian trade with Iran face myriad challenges not easily discernible to policy makers.
Iranians have traditionally preferred Western products and technology over others, and when it comes to humanitarian trade, the counterparty providing goods to Iran tends to be European. In fact, these companies may very well be wholly owned subsidiaries of American companies such as General Electric, Cargill or Bunge — to name a few companies that have traded with Iran over the years. These entities are selling an Iranian consumer some type of product, be it food or medicine. Typically, they operate out of Switzerland, Germany, Italy or France.
For the purposes of this analysis, we will call the international seller “Company A.” On the Iranian side, the consumer or buyer that Company A would deal with — call it “Company B” — would have to be screened against OFAC, European Union (EU) and U.N. sanctions lists. Company A’s compliance department and legal counsel will screen Company B’s ultimate owner, shareholder and directors against these lists to make sure that it is a suitable counterparty for Company A to sell goods and services to.
Company B, provided it is deemed suitable, would then enter into a contract with Company A specifying what goods or services Company A would provide Company B. The contracting parties would include standard nomenclature in their contract customary to the goods being traded. Typically, the currency used in contracts with Iranian counterparties will be euros, Swiss francs or any other currency that is not U.S. dollar denominated. Avoiding U.S dollars helps these firms avoid exposing themselves to the U.S. banking and regulatory system, which forbids the use of U.S. dollars for transactions involving Iran.
At this time, Company B would be responsible for opening a Letter of Credit (LC) with an Iranian bank that complies with terms of Company B’s contract with Company A. To do so, Company B would have to have a banking relationship with one of a handful of smaller Iranian private banks that, while subject to OFAC sanctions, are capable of financing humanitarian transactions with Iran. These banks are lesser known outside of Iran but are very well known to those European multinationals that specialize in food and medicine. Bank Pasargad, Saman Bank, Middle East Bank and EN Bank have been the bankers of choice for Iranian importers and international exporters.
These banks have corresponding relationships with Turkish and European banks that can facilitate the payment portion of the trade. Functionally, this means the Iranian banks can transfer funds to the beneficiary bank of the humanitarian exporter. Typically, these banks charges fees over and above a transaction with a non-Iranian counterparty. The private Iranian importer must absorb these fees and pass them to customers. However, before all that takes place, Company B must fight an uphill battle with an ossified bureaucracy. First, the importer must convince the smaller private bank to lobby the Central Bank of Iran (CBI) to use its allocation of foreign reserves (euros, Swiss francs, Chinese RMB, Indian rupees) for the specific transaction.
Iran’s foreign reserves come from sales of the country’s oil, gas, petrochemical products as well as its metal exports. This money is deposited in accounts belonging to the CBI in the countries that import these goods from Iran. Iran then uses these funds to pay for its international purchases. Now that the U.S. government is no longer granting waivers for countries to purchase Iranian crude — indeed, on May 8 the Trump administration announced sanctions on non-U.S. entities doing business with the Iranian iron-ore, steel, copper and aluminum sectors — Iran will have less hard currency with which to purchase food and medicine from the international market. Nevertheless, we assume for the purpose of this post that some sort of hard currency will be available to Iranian importers for humanitarian trade.
Once the LC is operational, the importer must deposit the Iranian rial equivalent of the foreign currency stipulated in the contract into an account at its bank in Iran. Since Iran’s currency is extremely volatile and humanitarian trade is essential to the overall health of the Iranian people, the CBI has offered a subsidized exchange rate for things such as wheat, soybeans, corn and medicine. This exchange rate is often 60 or 70 percent lower than the free market rate of the Iranian rial against the euro, Swiss franc or U.S. dollar.
At this point, the Iranian entity, Company B, has sought and gotten the necessary approvals from the various ministries with oversight over the goods being imported into the country. Only when and if those approvals are received will Company B be able to take this documentation to the Iranian bank that is opening the LC. And then both the bank and the importer must wait.
The economic principle known as “Monetary Velocity” — the speed with which funds are moved through the financial system and change hands — now becomes the greatest enemy of the Iranian importer. Because the hard currency Company B needs to conduct the trade isn’t ever in the importer’s hands but is instead allocated from CBI to the bank that is opening the LC, any delay in meeting Company B’s financial obligation to Company A must be borne by Company B. This cost is in turn passed on to the consumer once again.
Due to the sanctions regime and the resulting difficulty CBI has in moving funds across the border, Company B is at the mercy of factors that are no longer commercial but strictly geopolitical. This puts the importer in the unenviable position of having huge delays on payment for goods or, much worse, defaulting on the contract with Company A.
If Company B is fortunate enough to execute this transaction, any delays or penalties incurred throughout the process are absorbed by the Iranian people once the goods are discharged and distributed. The net result is that Iran’s population of 80 million is now paying huge premiums (sometimes two or three times the price they would have paid in the absence of sanctions) for basic necessities such as insulin, milk, meat and bread. Meanwhile, Company B will be paying interest to an Iranian bank to finance the transaction at a rate anywhere between 18 to 25 percent per annum. This cost of borrowing is so high that even if Company B navigates the minefield of issues described above, an enormous number of things will have to go right for it to remain in business year in and year out.
In this hypothetical, we’ve considered the plight of a private importer not affiliated with any government entity. While the Iranian economy is dominated by quasi-governmental entities, sanctions ironically tend to wipe out private traders unable to withstand the tsunami of uncertainty and cost. Governmental entities have better access to foreign exchange and financial resources and are moved to the “front of the line” by the bureaucracy. Paradoxically, the sanctions regime strengthens those very same forces that the United States has long sought to undermine — such as the IRGC — because it allows only a few dominant players with funds and access to conduct such transactions.
Sanctioned practitioners have long argued that the goal of sanctions is to change regime behavior and not to punish the civilian population of a targeted country. In the case of Iran it appears that the Trump administration, whether by design or indifference, is pursuing a policy that will effectively wreak havoc on civil society in the hopes that by making it so difficult for the Iranian government to access basic goods, the people will rise up and overthrow it. Putting aside the dubious nature of that policy, holding humanitarian trade hostage to the geopolitical tug of war between Washington and Tehran is not in America’s national interest. The Iranian people, despite the history of enmity between the two governments, have held favorable views of the United States. However, if they start to feel that the U.S., despite the rhetoric of the Trump administration, is pursuing a policy of collective punishment to impoverish their country, they may, so to speak, rally around the flag. The administration should take great care that, whatever aggressive sanctions it pursues against the Iranian regime, it will provide a clear legal and financial mechanism by which the Iranian people will be able to access food and medicine. This is the moral thing to do, and it is in keeping with the best tradition of American foreign policy.