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Policy Change at China’s Bank of Kunlun Cuts Iran Sanctions Lifeline

Policy Change at China’s Bank of Kunlun Cuts Iran Sanctions Lifeline

Bank of Kunlun, the state-owned bank at the heart of China’s trade with Iran, has made a dramatic change in its policies, informing clients that it will no longer process payments that contravene US secondary sanctions on Iran.

On December 10, deputy president of the Iran-China Chamber of Commerce Majid Reza Hariri announced that Bank of Kunlun has restarted handling Iranian money after a two-month pause that created about USD 2 billion in backlog demand. But just ten days later, Pedram Soltani, deputy president of the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), announced in a tweet that Kunlun had informed its clients that it would clear Iranian money only in full compliance with US sanctions until the end of April, when China’s Significant Reduction Exemption for the import of Iranian oil runs out.

Soltani tweeted a letter from Iran’s Tose’e Ta’avon Bank, informing its clients that Kunlun will only process payment orders or letters of trade in “humanitarian and non-sanctioned goods and services.” Kunlun’s change in policy cuts a longstanding financial lifeline for Iran’s automotive, shipping, petrochemical, and steel industries. “I believe the current situation with the Bank of Kunlun will create serious challenges for our trade with China in the coming months,” Soltani told Bourse & Bazaar. The change in policy and related concerns were separately confirmed to Bourse & Bazaar by two companies which maintain accounts at Bank of Kunlun.

Soltani believes that the cautious approach may reflect the need for Chinese state energy group CNPC, the majority shareholder in Bank of Kunlun, to protect its interests in the US market. Kunlun’s increasing focus on consumer banking may also be affecting risk appetites. The turn to compliance reflects a major change for a bank that grew rapidly after its selection as the principle financial institution through which China would process oil payments to Iran.

Kunlun continued to process Iranian money even when the Islamic Republic was subject to multilateral sanctions imposed by world powers, leading to its designation by the United States Department of Treasury in 2012. Perhaps reacting to events such as the arrest of Huawei CFO Meng Wanzhou, Soltani says that “[Kunlun’s] owners have shown that they are disinterested in facing another challenge with the US by violating sanctions frameworks.”

When Kunlun first informed its customers in late October that it would temporarily stop handling Iranian money in advance of the reimposition of US sanctions, Iran-China trade was brought to a standstill. At the time, Bourse & Bazaar reported that Chinese authorities were interested in using the Special Purpose Vehicle (SPV) being devised by the European Union to continue sustain trade and investment with Iran without putting financial institutions in the crosshairs of US authorities.

This assessment is supported by recently leaked diplomatic cables published by the New York Times. During a working lunch at the EU-China Summit in July, Donald Tusk, president of the European Council, asked Chinese officials whether they “would consider financial mechanisms to mitigate secondary sanctions” placed on Iran by the United States. Chinese Premier Li Keqiang responded that China would “not act unilaterally” in this regard, according to a European summary of the meeting.

Both sides agreed that “'longarm jurisdiction' by the US would harm the interests of many companies” but China ultimately “looked to the EU for the protection of its interests.” Publicly, the Chinese government has said it opposes any unilateral sanctions and has defended its business relations with Tehran.

With Europe’s SPV set to be launched in the coming weeks, Iranian executives will be eager to see whether China engages the new mechanism. Soltani thinks that China may still be “willing to do Iran a favor” and “connect its banking channels to the SPV.” This would mean that Iran’s oil revenues at Bank of Kunlun could but used to purchase goods from European exporters via the SPV, which will most likely initially focused on the non-sanctionable and humanitarian trade for which Kunlun remains open.

In such a model, Bank of Kunlun would play a similar role to that which Japanese banks such as MUFG, Sumitomo Mitsui, and Mizuho played in supporting non-sanctionable trade during the previous sanctions period. But Iranian industrial firms, which rely on raw materials and parts imported from China, would remain without a clear banking solution.

Despite Iranian reports in late October that Beijing aims to establish “a new banking mechanism” for Iran, it remains unlikely that Chinese commercial banks will risk disconnection from the international banking system by transacting with Iran. As such, it will require the intervention of the Chinese government to identify a new state bank to facilitate lucrative industrial trade in the Iranian market, where Chinese companies have come to dominate as European industrial players rolled back their investments over the last decade.

In the meantime, Soltani believes that Iranian industrial leaders will rely on stopgap solutions, just as they did when banking ties with Europe and Japan were interrupted in a similar fashion in the previous round of sanctions. “Our imports from China will exit the Kunlun channel and our trade model will once more be forced to rely on smaller transactions cleared by a network of exchange shops,” he said, referring to the use of sarafis. “In fact, such a scenario could prove easier with China compared to other countries because many Iranian businesspeople are active in China and have offices there,” Soltani noted.

Photo Credit: Bank of Kunlun

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