The German Central Bank is ready to act as a third party between India and Iran, helping to channel oil funds to Tehran. The deal will anger the US which continues to punish Iran's business partners with sanctions.
India and Iran get round sanctions with third-party help
Efforts by the United States to isolate Iran and undermine its efforts to pursue its controversial nuclear ambitions have long been centered on the Islamic Republic's financial sector and its business dealings with the outside world.
Years of US sanctions on international banks with links to Iran, coupled with United Nations resolutions and European Union measures, have attempted to stem the flow of any revenue to Tehran which could be diverted into its contested atomic program.
However, Iran has continued to do business with partners through dubious channels which circumnavigate international sanctions and undermine these efforts.
The latest revelation of shadowy dealings with Iran was made this week by the German Handelsblatt business daily. According to the newspaper, the German Bundesbank - the country's central bank - could become the third party in the transfer of oil revenue between India and Iran.
Bundesbank as conduit for oil money
India, one of the world's largest importers of Iranian oil, intends to place around 9 billion euros ($12.6 billion) destined for Tehran as payment for its fuel in an account with the Bundesbank. The German central bank would then transfer the money to the Hamburg-based, Iranian-owned Europäisch-Iranische Handelsbank (European-Iranian Trade Bank - EIH), which would then transfer it to Tehran.
EIH shareholder Bank Mellat was hit with UN and EU sanctions
The EIH was accused of evading international sanctions and handing billions of dollars in transactions on behalf of the Iranian government and entities involved in its nuclear and missile programs by the US Treasury Department in September last year, an accusation which was followed up by US sanctions.
Treasury undersecretary Stuart Levey called the bank "a key financial lifeline for Iran" and "one of Iran's few remaining access points to the European financial system," adding that it had provided financial services to Iranian proliferators of weapons of mass destruction as well as doing business with other Iranian banks already under sanctions.
While the US sanctions isolated EIH from the US financial system, it is currently not subject to EU or UN sanctions despite its main shareholders, Bank Mellat and Bank Refah blacklisted by the EU and UN last year.
Dr. Chris Emery, an expert on Iranian sanctions at the London School of Economics and Political Science, believes that while EIH and its main shareholders could be providing funds for Tehran's nuclear program, limiting their activities won't stop Iran's atomic advances.
"Bank Mellat and Bank Refah were charged with 'conduct which supports and facilitates Iran's nuclear and ballistic missile programmes,'" Emery told Deutsche Welle. "So according to this logic it is possible that money obtained from such deals could eventually be channeled into Iran's nuclear program. However, such deals do not provide the life-blood to the program and the Iranian government is quite capable of funding them directly."
Germany's links with Iran frustrate US
The US has urged the EU to quicken its pace when it comes to financial sanctions meted out on Iran and has become increasingly frustrated and angry with Germany for its continued close business ties with Iran, with the country's exports there totaling 3.8 billion euros in 2010, according to official figures.
Should the Bundesbank agree to act as the conduit between India and Iran - Germany's foreign and economic ministries have already given their approval to the arrangement - then it is likely that relations between the US and Germany will become even more strained in light of Berlin's abstention over the UN Security Council's resolution on Libya.
Germany has also reluctantly dealt politically with Iran
Media reports revealed that US senators wrote to German Foreign Minister Guido Westerwelle earlier this month urging him to take action to close down the EIH because of its "financial support of Iran's nuclear proliferation activities."
Economy ministry spokeswoman Sarah Schneid told a government briefing this week that "the inclusion of a bank on the (sanctions) list is not something decided by the (German) government but the European Union council."
Germany claims that the Bundesbank would only allow India to funnel payments to the EIH after Delhi provided assurances the money would not be used to support Iran's atomic program. Chancellor Angela Merkel's spokesperson Steffen Seibert told reporters this week that the EIH was under "strict" supervision, with all transfers over 10,000 euros needing to be reported and all those above 40,000 euros requiring approval.
"The European-Iranian Trade Bank was not listed in the annexes of either the EU or UN sanctions against Iran and thus the Bundesbank has argued that it has not contravened them," Emery said. "By arguing that they have found no link between the EITB and Iran's nuclear program, and that the German government signed off on this decision, they can maintain that they have kept to the letter and the spirit of the sanctions."
New sanctions on EIH and other banks
Washington hopes that a new round of sanctions in response to Iran's continued intransigence on the nuclear front could lead to the EIH being shut down as the proposed measures would be designed to hit Iranian economic institutions irrespective of whether they have a role in the country's nuclear program.
However, for the new sanctions to be more effective, analysts believe they would have to target other sectors.
New sanctions would also hit Iran's business partners
"No current UN Security Council sanctions limit the capacity of the Islamic Republic to produce or export hydrocarbons, therefore the only kind of sanctions that could coerce the Iranian government into completely re-thinking its nuclear program simply do not exist," Emery said. "Economic sanctions are only going to be effective if they target Iran's oil sector and are universally enforced."
Any new sanctions which would put the EIH out of business would also cause problems for India and Iran's other business partners which are under increasingly pressure from the United States to break direct commercial links with Iran.
With domestic banks refusing to handle Iranian funds for fear of risking international sanctions, Iran's partners will have to find another way of paying the Islamic Republic for the oil it imports or take a calculated risk and continue as they are.
"The effectiveness of the sanctions really depends of the amount of pressure the US government can apply on countries who are heavily invested in Iran's energy sector; essentially this mainly means China but also India," Emery concluded. "Many companies are willing to risk being punished by the US in order to continue doing business in Iran."
Author: Nick Amies
Editor: Rob Mudge