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The U.S. House of Representatives on July 31 passed legislation amending the Iran Sanctions Act (ISA) of 1996, expanding the scope of businesses subject to sanctions for investing in Iran's energy infrastructure. Further threatening Iran's commercial standing, the two largest banks in Europe that are still conducting financial operations in Iran -- Deutsche Bank and Commerzbank -- recently announced plans to halt transactions with private clients in Iran.
Cutting off Iran's access to international finance and business investment is a central part of the U.S. strategy to force Iran to change its behavior regarding Iraq and the nuclear issue. Increased U.S. pressure on Western banks to boycott Iran will force the Islamic republic to do business elsewhere, primarily in Asia. Though the United States has made progress in its efforts to change international banking practices -- mainly in Europe -- regarding Iran, further U.S. moves to restrict European business ties to Iran could complicate the United States' grander strategy of winning political support from Europe against Iran. Furthermore, it will be harder for the United States to get Chinese banks to stop doing business with Iran than it has been for the United States to get European banks to halt such transactions.
Europe and other major economies are not likely to institute formal trade sanctions, given their existing lucrative dealings with Iran, so Washington has asked European banks and other international institutions to comply with the U.S. ban on financial transactions. This aims to make the Iranian elite suffer by being cut off from the world financial system. The U.S. Treasury Department claims that more than 40 financial entities -- including UBS, HSBC, Standard Chartered and Commerzbank -- have either scaled back or terminated business transactions with the Iranian government and/or private Iranian businesses since the United States began its appeal in September 2006.
The July 31 amendment to the ISA bolsters Washington's strategy. The act already barred all U.S. companies from investing in Iran's energy sector; the amendment adds financial institutions, insurers, underwriters, export credit agencies, guarantors and other business organizations to the list of entities that could be subject to sanctions. The amendment also broadens the ISA by redefining "petroleum resources" to include petroleum byproducts. Furthermore, the new legislation holds parent companies liable for foreign subsidiaries' violations of the act. It also requires the Treasury Department to disclose the names of companies with more than $20 million invested in Iran's energy sector and prevents legal action against pension funds that divest such companies.
The United States has used finance to pressure countries in the past. Investment effectively dried up in North Korea in 2006 after the United States revealed Macau's Banco Delta Asia's involvement in North Korean drug and counterfeiting activities. The bank did not want to risk its reputation and froze North Korea's funds. North Korea -- much like Iran -- relied on the international banking network, and this network is significantly reliant on U.S. support and approval. Now, Washington is using this tactic again, claiming that European governments might have facilitated illicit business with Iran and must do more to stop such transactions.
Deutsche Bank informed Iranian clients July 20 of its intention to halt business transactions by Sept. 14. Commerzbank made similar commitments in July. The banks did not indicate that U.S. pressure was the primary cause of their announcements, but they did claim that doing business in Iran had become prohibitively difficult. This indicates that the United States has been somewhat effective in increasing the general risk of doing business and investing in Iran. Deutsche Bank claims that its Iranian business only accounts for 0.1 percent of its total revenues, or roughly $37 million. Though that is no small change, Deutsche Bank likely did a cost-benefit analysis and believes that staying in Iran is not worth the risk of losing out on potentially more lucrative business in the United States.
Because of this growing divestment, Iran is looking elsewhere for support. In 2006, in anticipation of a tightening of finances and threats of sanctions from the European Union, Iran claims it began shifting its assets, withdrawing money from European banks and transferring it to other unnamed banks abroad. Since 2005, Iran's role as an invited observer in the Shanghai Cooperation Organization has allowed it to strengthen its relationships with Russia and China.
Iran will increasingly turn to countries such as China, Russia and Venezuela for commercial transactions, which poses a problem for the United States since Washington has relatively little leverage over these countries.
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