The German government is pleading with the country’s banks to return to Iran and do business.
The request came in a recent letter, seen by Handelsblatt, sent jointly to large German financial institutions by the federal economy and finance departments.
Most economic sanctions on the Islamic Republic were lifted last year in exchange for international monitoring of Iran’s nuclear industry. In theory, the deal agreed by Iran and major world powers should have been good news for German businesse, offering exporters a fresh new market with a foreign government ready to invest in infrastructure.
But even months after the lifting of most sanctions, there has been little movement on bilateral trade between Germany and Iran. One big problem, says the German government, is the attitude of German banks: Very few are yet willing to provide financing for export deals with Iran.
“European-Iranian economic relations can only succeed if the finance industry makes finance available for new projects.”
German exporters are increasingly frustrated with this stumbling block on the resumption of economic relations. But the banks have reasons to be careful: They are wary of possible conflict with the U.S. authorities. The United States still has many sanctions in place, and the overall legal situation remains unclear.
The official letter, signed by Matthias Machnig and Thomas Steffan, state secretaries in the departments of economy and finance, emphasizes that the nuclear deal has cleared the way for “restarting of European-Iranian economic relations.” But it also warns that “this can only succeed if the finance industry makes available the necessary instruments for realizing new projects.”
The government also points out the importance of economic ties for the fate of the nuclear deal itself, since the agreement will only succeed if expectations are met on all sides. From the Iranian point of view, it says, this includes the restoration of economic ties with the European Union. Banks should “support the financing of business with Iran, including by establishing payment methods for German business.”
This is not the first time the German government has urged domestic banks to strengthen their ties with Iran. The economics ministry has repeatedly invited finance industry representatives to talks on the issue, say figures involved in the discussions.
Industry figures agree that financing is the crux of the issue. “The financing problem has to be solved now, it is the number one block on business investment,” said René Harun, managing director of the German-Iranian Chamber of Industry and Trade.
German banks are “being prevented from financing deals with Iran,” complained Reinhold Festge, president of the German Engineering Federation, or VDMA, an industry association representing manufacturers of machinery.
But many banks remain hesitant. “So far, we are seeing considerable reluctance among large banks in particular,” said Thomas Junge, head of corporate clients with the Europe-Iran Commercial Bank, or EIH. Smaller banks, including some of Germany’s savings banks and cooperative banks, seem more prepared to accept deposits from clients’ dealings in Iran, he said.
There are good reasons for the banks’ reticence. Unlike international sanctions, most American sanctions have remained in place. Dollar payments with Iran, for example, are still outlawed. In the past, European banks in the United States have been heavily penalized for deals that U.S. authorities initially said were above board. So uncertainty reigns.
Another factor is the Financial Action Task Force, or FATF, an inter-governmental body which combats terrorist financing and money laundering. The FATF still ranks Iran as “high risk”: another reason for banks to be cautious.
EIH is one of the few financial institutions to have fully re-engaged with Iran. “We have been accepting new clients since mid-January,” said Mr. Junge. Since then, EIH has been financing trade deals with Iran for companies across Europe.
“The financing problem has to be solved now, it is the number one block on business investment with Iran.”
It is a different story with DZ Bank, Germany’s fourth-largest bank and a central institution for the country’s 900 cooperative banks. The bank has re-established payment channels in euros to Iran, but will only process payments via German subsidiaries of Iranian banks. “Every single payment is checked for sanctions conformity,” a bank spokesperson said.
BHF Bank, a private German bank owned by Deutsche Bank, is still weighing its options. “BHF Bank is examining the question of Iran, but has not yet made any final decision,” a spokesperson said.
Representatives of BHF Bank, along with some from AKA Bank, were scheduled to participate in a recently-postponed visit to Iran by Sigmar Gabriel, the economics minister and vice chancellor. AKA Bank is an export-financing bank, jointly owned by a number of major German financial institutions.
The Iranian government would prefer far more decisive engagement on the part of German banks. Officials in Tehran are even said to have considered acquiring a German bank to speed up the re-establishment of economic links. Sources in the finance industry said Valiollah Seif, the head of Iran’s central bank, has visited Frankfurt on several occasions for talks on the subject. But no one has hit the jackpot just yet.
Meanwhile, Iran’s government is highly indebted, according to a recent report, which put its debts at 5.4 trillion rials, the equivalent of €156 billion, or $178 billion, according to official exchange rates. The debt is partly owed to banks and companies for construction.
Within this current Iranian business year, which started on March 21, the government wants to issue bonds worth the equivalent of €8 billion, two and a half times as much as last year. The money may be used to achieve one of Iran’s president Hassan Rohani’s plans, to pay back debts to banks and companies by March 2018.
“As long as the government doesn’t pay back its debts to banks and companies, we can’t expect the economy to develop much in the coming year,” said Hossein Abdoh Tabrizi, an adviser to the ministry of construction. “Issuing bonds is the government’s best solution.”
Last September, the government started to issue different kinds of bonds which conform with Sharia law. Its bonds run between four and 52 weeks and the interest rates are high – effectively 30.1 percent for the first series, which is significantly higher than the inflation rate, at 16.5 percent – so private investors from Iran are likely to be interested.
It may be possible to trade future Iranian government bonds via a secondary market. This would mean buyers could resell their bonds on the Iran Fara Bourse, a market for securities in Tehran. In the next three years, the Fara Bourse aims to increase its trade volume in bonds to an annual $16.5 billion.
This is likely to attract traders from abroad though they are subject to the exchange rate risk on bonds issued in rials. Norway’s oil funds are already investing in Iranian government bonds again. But for bonds in euros or dollars, Iran would first need a creditworthiness rating from a recognized ratings agency.
Mathias Brüggmann heads Handelsblatt’s foreign affairs desk. Yasmin Osman is a financial editor with Handelsblatt’s banking team in Frankfurt. Dana Heide is a correspondent in Berlin, focusing on energy policies, small and medium-sized companies and innovation. Mahya Karbalaii contributed to this article. To contact the authors: firstname.lastname@example.org, email@example.com, and firstname.lastname@example.org.