The Ultimate Sanction?

This month the US announced the tightening of sanctions previously imposed on Iran.  Since withdrawing from the Joint Comprehensive Plan of Action (designed to arrest the development of an Iranian nuclear capability) the US had already imposed sanctions on a variety Iranian exports – notably in November 2008.  An important element is the withdrawal of waivers, which allowed some countries to continue purchasing Iranian oil, shielded from US action.

A number of nations have not fully supported the US stance, for example the EU, China, India, Turkey and Russia.  So how big an issue does this become for Iran and those who might wish to trade with her?

Units of Trade & Export Online 33 & 34 explain customs procedures.  The content is expressed in terms of the impact of customs regulation on businesses.  But does so primarily in relation to companies and citizens that are subject to the regulation of the jurisdiction that has passed them.  So, for example, the regulation passed by the EU in relation to EU exports and imports.

A key implication of the US measures in relation to Iran is that they are extra-terrestrial.  So they can impact activities undertaken by non-US organisations. This can be a major concern for those that have US activities.  Even if the prohibited trade is undertaken by a non-US arm of the business.

A further consideration is that the USD (US dollar) is the dominant world currency.  Indeed much of the trade in commodities, including oil, is in USD.

Units 40 and 47 also describe the process of payment and foreign exchange settlement in normal trade circumstances.  Underpinning these processes is an accounting and settlement framework between financial institutions that entails them holding reciprocal accounts in the country of the currency used.  So a USD transaction in this sense is ultimately reflected and settled in an account held with a US bank.  This, in turn, provides an opportunity for regulators and compliance officers to scrutinise non-compliant activity.

Given all these threads major corporates are reluctant to do anything that may fall foul of US extra-terrestrial legislation.  As there is extensive inter-connectedness of much EU and US trade, for many EU businesses non-compliance would be a risk too far.  This would be the case whatever the local regulatory stance, even where a means for circumventing is available.  This impact extends to SWIFT (the organisation described in the course that is responsible for much of the world’s inter-bank settlement), which is headquartered in Belgium.   SWIFT is unlikely to risk falling foul of the US administration because of the potential penalties, and disruption to its business, that could occur.

Despite this ability of the US to extend its reach it does not mean countries with significant clout of their own, and point to make, are not be able to facilitate the sanctioned trade.  For example they can do this using: non-USD currency, a specifically created organsition set up for the purpose, segregated from any US activity and settling outside the SWIFT system.  There is speculation China might provide a prime example, given its current uneasy relationship with the US on trade matters.  However, such an approach does require strong political support and would not in itself prevent significant damage being done to Iranian trade by the US legislation.  Indeed that is already happening as a result of previous sanctions.



About the author

David Millett is a coach and trainer who works regularly for RWA. He has a long experience in trade issues with a background in banking, where he was Head Of Trade Product Management for the Royal Bank of Scotland, before becoming Head of Business Development for UK Export Finance’s short-term business. David is a Fellow of the Institute of Export and former Council Member for the International Chamber of Commerce UK and the British Exporters Association.

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