As Europe and the U.S. Diverge on Iran, the SWIFT Financial Network is Stuck in the Middle

Published September 11th, 2018 - 01:02 GMT
Over 10,000 banks around the globe rely on SWIFT's services. (Swift HQ Belgium, AFP)
Over 10,000 banks around the globe rely on SWIFT's services. (Swift HQ Belgium, AFP)

By Eleanor Beevor

The Iranian economy has been pushed to a knife-edge ever since President Trump reneged on the internationally agreed nuclear deal, which had relieved Iran from sanctions in exchange for tough restrictions on its nuclear activities. But though the new wave of American sanctions has made life for Iranians much harder, the regime is still not collapsing because of them. And the chances of that collapse are limited by the fact that the US is alone in wanting to see the end of the deal.

In the years prior to the nuclear deal, Iran had been buckling under the pressure of international sanctions, agreed by all members of the United Nations Security Council. These multilateral sanctions took many forms, but their power lay in the fact that no major world power was offering Iran a way out. Now, by contrast, the US is working alone. The question is whether its unilateral sanctions will have enough bite to bring the Islamic Republic to its knees.

That rather depends on what happens to Iran’s oil industry. For so long as Iran can keep exporting oil, sanctions will hurt its economy, but are unlikely to completely cripple it.

Europe, Russia and China all remain invested in the deal, and are keen to safeguard not only the deal’s security benefits, but also their own energy interests. Their oil hungry economies don’t want any obstructions to their buying Iranian crude, and have made clear that they will do their best to keep Iran’s oil flowing.

Now, Trump is due to slap wide-ranging sanctions on companies dealing in Iranian oil in November. And it has spurred declarations across the board to find ways to evade American sanctions. China has already experimented with international trade in its own currency, the renminbi, and will almost certainly find ways to keep buying Iranian oil.

Not only does China need the energy, but given the vast investments it has made in Iran as part of the One Belt One Road infrastructure project, it has no interest in seeing the fall of the Iranian regime either.

Meanwhile, the European Union has gone so far as to pass a “blocking statute”, which essentially makes it illegal for European companies to cease trading with Iran because of American sanctions. But this hasn’t quite resolved the matter. European companies have already pulled out of Iran, and those who are still there find themselves in an uncertain legal limbo. Dr. Clara Portela, an expert in the politics of sanctions at the University of Valencia told Al Bawaba:

European banks and companies are not obliged to implement US sanctions, given that there is no equivalent EU legislation imposing similar restrictions. However, Washington claims to have extraterritorial jurisdiction over European companies dealing with Iran. This places European banks and companies in an awkward situation: they are not technically obliged to implement US sanctions, but if they do not, they risk being fined by America’s Office of Foreign Assets Control (OFAC) and losing access to the US markets - which is a phenomenal loss to most of them.”

 

Trade with Iran under these circumstances would be undesirable for most international companies. However, there is a further trick that Washington might be able to pull that would turn dealing with Iran from awkward to near-impossible, at least for a while. And it hangs on whether or not the Trump administration can coerce a small, Brussels-based financial transaction company called SWIFT to expel Iranian banks from their system.

For a company that doesn’t actually handle money and makes far less in annual turnover than a well-established bank, SWIFT’s influence on the global financial system is staggering. Over 10,000 banks around the globe rely on its services. SWIFT handles 30 million transaction messages every day.

 

What SWIFT does, essentially, is make secure records of international transactions, confirming the relocation of money from one account to another. It’s a universal financial language that most international banks rely on for dealing with each other. Neil Bhatiya, a Research Associate in Energy, Economics and Security at the Center for a New American Security told Al Bawaba:

SWIFT is essentially a secure messaging system for banks to move money, especially when using foreign currency. Each financial institution that participates in SWIFT is giving a unique code that validates the transfers of funds from one account holder to another. If you've ever send a wire transfer, you've probably needed to know your bank's SWIFT code to process it.”

The organisation’s board of directors is made up of representatives from major international banks – including American ones – all of whom are renowned experts in the technicalities of international banking. But unless SWIFT is granted an exception from American sanctions, then come November, those individuals could find themselves facing travel bans and asset freezes – the kind of treatment normally reserved for suspected international criminals.

SWIFT has always proclaimed itself to be a neutral body with no involvement in politics. But the scale of SWIFT’s means that politics inevitably comes after it. SWIFT cannot be the gold-standard of international transfers if it falls out of favour with major world powers, and that means it is sometimes forced to compromise.

SWIFT was pushed by the US in the past to block transfers to Cuba, and to provide Washington with data on terrorist financing after 9/11. And in 2012, the EU imposed sanctions on Iranian banks, including the central bank. Given that SWIFT is based in Belgium, it had no choice but to comply.

 

An Iranian oil tanker floats on the Caspian Sea in April 2004. (AFP)

In this period, the importance of SWIFT to Iran’s economy became clear. The year before the sanctions, Iran’s oil exports brought the country $92.5 billion in revenue. But in 2012, after SWIFT transactions were blocked, its oil export revenue fell to $52 billion. The expulsion of Iranian banks from SWIFT wiped off almost half the sector’s value. Neil Bhatiya explained:

Because SWIFT facilitated payment between Iranian and any international bank, losing SWIFT access essentially cut them off completely from their biggest trading partners. It shut the door completely on oil purchases, since the transactions underlying those trades would have required going through Iranian banks paying European banks on behalf of the companies selling and buying the oil.” 

Tehran was able to broker some deals with hawala transfers, and by brokering individual arrangements with particular foreign banks. However, the complication and expense associated with buying Iranian crude shot up, turning off a huge majority of buyers.  

 

 

If Iran is again kicked off the SWIFT network, the government could be in real trouble. Popular discontent over the floundering economy is extremely high as it is. If Iran is faced with even a window of time in which it is virtually impossible for it to trade, it could loosen the regime’s grip on power. Dr. Clara Portela said:

In general, disconnecting an entire country from SWIFT is an extremely disruptive measure, as witnessed in the period preceeding the JCPOA; it is almost a "nuclear" option.”

But Iran might not be the only loser if the US invokes the “nuclear’ SWIFT option. It seems that sanctions are for President Trump what threatening to sue was for the businessman Donald Trump – a first rather than last resort measure to intimidate the competition into compliance. The problem is that this galvanizes the hunt for alternatives. Clara Portela added:

“If disconnecting countries from SWIFT becomes frequent, it invites countries to devise alternatives to it that escape the control of the West.”

This is becoming increasingly evident. Turkey, Russia, China and Iran were all loudly proclaiming their intentions to establish non-dollar trading systems in order to evade America’s punitive measures. And now, Europe is adding its voice to the list.

The German Foreign Minister Heiko Maas said in August that “We must increase Europe's autonomy and sovereignty in trade, economic and financial policies”. And this was not an idle threat. The EU has reportedly already begun constructing a parallel system to SWIFT to facilitate Iranian trade with European banks.

SWIFT has not confirmed what it will do yet – its spokesperson has said that the company is seeking “clarification” on both European and American legislation. Whether Europe’s blocking statutes will prove a defence or a punishment for SWIFT is unclear for now.

There is a faint possibility that America will grant SWIFT an exception, given American banks’ reliance on it. But given that Europe is scrambling to build an alternative, it seems that there are few who ultimately believe that SWIFT can avoid complying with Trump.

The question now is whether those who want to save Iran from this economic nightmare can work fast enough to establish an alternative to SWIFT, and whether that alternative can really protect businesses from Washington’s reaches. But the desire among nations – even old American allies such as Europe – to protect themselves from being financially strong-armed by Trump, is growing. That could come back to haunt America.


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