Oct 26, 2017

A recent string of “financing agreements” that various governments and international banks have signed with Iran indicates that Tehran is finding solutions to leave behind the bottlenecks in financing its international projects. The question at this stage is whether or not such deals will facilitate the planned expansion of trade and investment with international — and especially European — companies.

The series of agreements started in August with a number of credit lines issued to Iran, including 8 billion euros extended by South Korea’s Export-Import Bank (Kexim), followed by a $10 billion line by China. The process continued when two mid-sized European banks, Austria’s Oberbank and Danish Danske Bank, signed framework agreements with Iranian entities to finance the exports of Austrian and Danish companies to Iran. Similar agreements are in the works with Japan and Italy. Furthermore, the Central Bank of Iran and the Export Insurance Agency of Russia (EXIAR) have also signed a memorandum of understanding to finance joint projects between the two countries.

The above developments mean that most of Iran’s major trading partners are engaged in facilitating the financing of projects — a main area where Tehran was facing limitations since the lifting of the nuclear-related sanctions in January 2016. Indeed, international companies exporting to Iran have faced major challenges in financial transactions, mainly due to the hesitation of global first-tier banks to engage the Iranian market. This hesitation was partly due to the changing legal framework in international banking and partly due to concerns over existing or future US sanctions against Iran. Part of the problem is that a number of major European banks that have been fined by the US authorities for past transactions with Iran have also committed to not engaging in business with Iran for a certain period. In the meantime, the more antagonistic tones from Washington will create further disincentives for global banks to consider Iran-related transactions.

In addressing the shortcomings in the country’s banking sector, the administration of President Hassan Rouhani has introduced a number of reforms to pave the way for an efficient reconnection of Iranian banks to the international financial system. This has meant that Iranian banks have had to observe the so-called Basel banking norms and become transparent and comply with international norms, especially with regard to regulations designed to combat money laundering and terrorism. So far, the needed regulatory reforms have been introduced, but a number of the financial institutions in Iran are still lagging behind in implementing the needed practices.

The good news is that the signing of the abovementioned deals means that a growing number of Iranian banks — both governmental and private — have achieved an acceptable degree of compliance with the mentioned laws. Consequently, the number of international banks that are gradually entering into direct financial transactions with Iran is growing, which will allow a greater level of integration of Iranian banks in the global financial system. However, the absence of first-tier international banks will continue to create hurdles in the financing of large projects. The fact is, the financing agreements with mid-sized international banks will only present solutions for small- and medium-sized projects. At the same time, most of Iran’s major trading partners also offer credit coverage to exports to Iran, which allows the mentioned banks to manage the risk of engaging in such projects.