Iran’s Banks Face Trouble from Within and Without

Banking is perhaps the most profound example of Iran’s economic isolation from the world. Iran remains one of the few countries where international electronic payments are impossible. Foreign tourists (flocking to Iran in ever greater numbers) have to carry cash. Iranian businesses struggle to set up shop abroad, while foreign businesses are wary that they won’t be able to get their money out.  That’s in large part a remnant of nuclear and other sanctions against Iran, but also has a lot do with the dysfunction of Iran’s own banks. As the Financial Times reports:

“With the adoption of [International Financial Reporting Standards], many major banks have suddenly realised they can easily have losses in their accounts and do not know how to deal with that,” said one senior banker. “Iranian bankers do not understand the concept of compliance and transparency.”

On top of that, interest rates as high as 30 per cent have contributed to a high rate of non-performing loans — for some banks, this can run to as high as 40 per cent of their loans. Without government support, bankers say, many banks would go under. [….]

Also contributing to the uncertainty in the sector is the growth of small credit institutions that account for about a quarter of all banking activity, bankers say. Most of them are not regulated by the central bank or any other body. These are often officially or unofficially affiliated to political, religious and military power centres including the Revolutionary Guards. There is no exact figure on their numbers but they proliferated under former president Mahmoud Ahmadi-Nejad, a populist who was in power from 2005-13, and authorities estimate they account for about a quarter of the country’s banking activities.

Opponents of the Iranian regime ought to be able to take pleasure in the struggles of their banking sector. Unfortunately, our schadenfreude is spoiled by one of the most insidious elements of the Iran nuclear deal.

The unspoken critical element of the Iran nuclear deal is that 15 years after its implementation—when most of the restrictions on Iran’s nuclear development are set to expire—the regime will be sufficiently integrated into the global system that they will be willing to negotiate an extension to the limitations. The most optimistic version of this is that Iran by 2030 will have chosen President Obama’s “different path” that would see Iran become a normal international actor. Phillip Gordon, former special assistant to the President and White House coordinator for the Middle East, North Africa, and the Gulf region under President Obama, argued as much here in The American Interest in 2016:

We do not know what Iran will look like in October 2030, 15 years from the day the nuclear deal was officially implemented. But we can be fairly certain that the current Supreme Leader (now 75 years old) will no longer be in power and a new generation of Iranians—perhaps less marked by the conflicts of the past—will be in charge. There seems to be at least the possibility that such a new leadership will have chosen the “different path” President Obama referred to.

It’s why all of Obama’s key advisors on Iran—Antony J. Blinken, Jon Finer, Avril Haines, Philip Gordon, Colin Kahl, Robert Malley, Jeff Prescott, Ben Rhodes, and Wendy Sherman— wrote and signed an op-ed in Politico highlighting the election of Iran’s President Rouhani against “hardliners,” by implication making Rouhani a moderate or reformer as he is so often falsely described.

Which brings us back to Rouhani’s banking reforms.

Even if we take the most plausible version of the Obama administration’s defense of the 15 year sunset provisions, the only reason why Iran would be willing to extend the limitations is if the benefits of sanctions relief are so great, and Iran is so closely drawn into the global economy, that its leaders wouldn’t possibly want to risk returning to the status quo ante. For that to happen, Iran’s economy, including its banks, needs to boom.

That’s how you end up with the perverse and embarrassing scene of the United States Secretary of State John Kerry acting as an Iranian trade envoy encouraging European bankers to do business in Iran. It’s also why the Iranians kind of have a point when they say that non-nuclear sanctions violate the nuclear deal.

Though there is some dispute about whether or not Iran is in full compliance with the deal, the IAEA and other nuclear non-proliferation experts and monitors continue to state that Iran remains in compliance. The deal, while poorly negotiated, ought to remain in place so long as they continue to do so. That’s especially true given that President Trump—despite saying in an interview with the Wall Street Journal last month that he thinks he’s going to declare them non-compliant during the next certification review in September—hasn’t laid any of the groundwork in Congress, with our partners in Europe, or with China and Russia for an alternative to the deal.

In imposing new sanctions for Iran’s other bad behavior, Congress will have to find a very narrow path between the necessity of punishing Iran, leaving America unsupported if the nuclear deal collapses, and leaving enough economic incentives that Iran will want to extend the deal after 2030. It won’t be easy.

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