Fine fears

Banks Slow German Return to Iran

iran_dpa
Iran's manufacturing industry is especially appealing to German companies.
  • Why it matters

    Why it matters

    Despite the lifting of sanctions, many obstacles remain for German businesses wanting to do business in Iran.

  • Facts

    Facts

    • A deal was agreed this week that will see economic sanctions on Iran eased in exchange for it scaling back its nuclear activities.
    • German companies hope to increase exports to Iran from €2.4 billion ($2.6 billion) last year to €10 billion by 2019.
    • Having been stung by fines, European banks are in no hurry to finance them until strict U.S. trade regulations are also lifted.
  • Audio

    Audio

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German industry has high hopes for new business in the wake of the Iran deal this week. With economic sanctions being eased in return for the removal of weapons-grade nuclear material, manufacturers of machinery, cars and chemicals are all hoping for orders from the crippled Islamic republic. The problem is that the financial sector, which is supposed to finance foreign trade, is far less euphoric.

The German banking association, known as the BdB, has welcomed the agreement, but its general manager, Michael Kemmer, notes that economic sanctions are unlikely to be relaxed until “the beginning of next year at the earliest.”

He adds that the same unconfirmed timeline will apply to restrictions on financial services, and told Handelsblatt: “Banks will then be ready to finance the economy, in line with political developments.”

The banks themselves are even more cautious. Deutsche Bank emphasized that it will continue to comply with all sanctions against Iran, although it says that it is monitoring the implementation of the nuclear deal and that it “may reconsider its position if sanctions are lifted in areas that are relevant to the bank.”

The only information that could be coaxed from the state-owned KfW IPEX-Bank was that it “is observing the situation very closely.” DZ Bank, a cooperative, is taking the same approach. Commerzbank, like the major U.K. banks Standard Chartered and HSBC, plus the French bank BNP Paribas, have refused to comment on the issue.

“Even if all sanctions against Iran are lifted, large German banks will wait for at least another year before getting involved in this type of business again.”

Michael Tockuss, German-Iranian Chamber of Commerce

The restraint is understandable. Many banks have been forced to pay huge fines in the past because the U.S. authorities believed they contravened the Iranian embargo.

BNP Paribas was hit for almost $9 billion (€8.3 billion) last July after it admitted ignoring the ban on doing business with Iran, while Germany’s Commerzbank had to fork out $1.5 billion over its dealings with an Iranian shipping firm. Standard Chartered also received a $1 billion fine.

Banks that have been penalized are unlikely to be among the first to finance business with Iranian companies, according to financial sources. “They will look very carefully at what they can do without any problems and what could lead to fresh trouble,” the sources said.

Until they have clarity on what is and isn’t allowed, banks will not want to take any risks. “We are hearing from large German banks that even if all sanctions against Iran are lifted, they will wait for at least another year before getting involved in this type of business again,” says Michael Tockuss, a member of the board of the German-Iranian Chamber of Commerce.

Some bank executives believe that a period of two to three years may be more realistic. For international banks, Mr. Tockuss says that it is not just the sanctions themselves that are a problem, but also concerns that U.S. customers could decide to award contracts only to banks that do not do business with Iran.

The hesitant approach is unlikely to impress German industry, which has seen exports to Iran drop from about €4 billion four years ago to €2.4 billion last year.

The German engineering association, the VDMA, has described difficulties with financing as the “crucial hurdle” to business with Iran. Klaus Friedrich, a VDMA foreign trade expert, estimates that the market for exports of plant and machinery to Iran could grow to €1.5 billion in the medium term.

He says that Germany used to have a 25 percent share in this market, but warns that it will be unable to achieve this figure again unless the system for payment transactions returns to normal.

At present, it is not possible for Iranian companies to make direct money transfers to Germany; payments must be made via third countries.

If they cannot obtain the foreign currency they need from the government, they have to get it from Iranian intermediaries. If they get that far, they must find a friendly bank in Germany to receive the payments. This is often a problem as many banks impose their own restrictions which prevent them from processing even legal payments.

Conservative estimates suggest bilateral trade could grow to €6 billion or €7 billion in 2016 if sanctions are phased out quickly.

According to Mr. Friedrich, further difficulties are caused by banks giving priority to existing customers, while there have also been cases in which one branch of a bank accepts payments originating in Iran while another does not.

Such restrictions will weigh heavy on German companies as they have a lot to gain from the lifting of sanctions. Even the banks think so. “The abolition of economic sanctions could have considerable benefits, particularly for the German and European economy,” said German bank BayernLB in a study.

“In particular, the modernization of the oil industry will open up major market opportunities in machinery and plant engineering.” The automotive sector, the chemical industry and the health sector could also benefit.

The Association of German Chambers of Industry and Commerce estimates that German exports to Iran could rise to more than €10 billion in the next three to four years. Conservative estimates suggest bilateral trade could grow to €6 billion or €7 billion in 2016 if sanctions are phased out quickly.

But Mark Hibbs, a senior associate at the Carnegie Nuclear Policy Program in Washington, warned that the incremental lifting of sanctions agreed as part of the Iran deal could throw cold water on such figures and cause problems for investors

“For companies making investments that should serve as a warning signal; it would be imprudent to assume that after the signing of an agreement the environment suddenly becomes predictable,” he said.

At present it is mainly small, regional German banks that are keeping the foreign trade going. “But this won’t be enough when at some point financing is needed for large projects,” Mr. Tockuss said.

Having had their fingers burnt by U.S. regulators, European banks are in no hurry, however. “U.S. banks, which are closer to the U.S. regulator, will probably be the first to re-enter the market,” one institution says. JP Morgan is already thought to have been on a fact finding mission to Iran, says Mr. Tockuss.

 

The authors are Handelsblatt correspondents and editors specializing in finance and banking. To contact the authors: osman@handelsblatt.com, braecher@handelsblatt.com, delaMotte@handelsblatt.com, slodczyk@handelsblatt.com

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