Fortune Telling: JCPOA and a New Year for Iranian Bankers

On April 2, Iranians headed for nature on the 13th day of Farvardin in the Iranian new year, a day called sizdah be-dar. While spending time with family and conducting little ceremonies to bring good fortune, many Iranians contemplated the ongoing nuclear negotiations in Lausanne, Switzerland. The course of the new year seemed to hang in the balance as the negotiations stretched past their original deadlines.

Finally, late at night, Iranians received the best news in a decade, akin to some to the collapse of the Berlin Wall. Iran had reached a framework agreement with the six world powers of the P5+1. The agreement provided assurances for the exclusively peaceful nature of Iran’s nuclear activities, and heralded the lifting of all nuclear-related economic sanctions. The deal seemed to mark a new era of economic opportunity for all 80 million Iranians.

Perhaps no one was more relieved than the Governor of the Central Bank of Iran (CBI), Valiollah Seif, whose organization stands to gain so much through the implementation of the Joint Comprehensive Plan of Action (JCPOA) announced in the joint statement made by Iranian Foreign Minister Javad Zarif and EU foreign policy High Representative Federica Mogherini.

CBI has suffered tremendously since the intensification of financial sanctions in 2012 and the expulsion of Iranian banks from the SWIFT global interbank messaging network. CBI reportedly has between $80-100 billion dollars frozen in accounts overseas, inaccessible due to the sanctions.

Iran's commercial lenders have also been victims of the financial sanctions leveled against them by the European Union and the United States. They are cut off from their overseas businesses and transactions with their foreign counterparts, leading to crises of liquidity and leveraging.

European banks can also find cause for relief, having been hammered for failure to comply with the myriad sanctions regulations. Firms such as BNP Paribas and Commerzbank have had a rough time with US authorities, forced to pay billion dollar settlements to the US Treasury’s Office of Foreign Asset Control (OFAC). A rollback of financial sanctions will reduce the legal risk of Iran trade, and eventually these banks can carefully revive their business with Iranian banks and even enter Iran's financial markets directly.

Overall, the prospect of sanctions relief offered by the JCPOA led usually reserved bankers and investors to shout for joy.

High Hopes and a Long Road

The talks between Iran and the P5+1 - Britain, France, Germany, China, Russia and the United States - blew past a self-imposed March 31 deadline with no certainty that they would not end in failure. Yet, after eight days of marathon talks, the JCPOA was announced to much fanfare. The negotiators have until June 30 to work out the details for implantation of the final deal.

But there is a long road ahead. Diplomats close to the talks say the deal is fragile. The understandings reached on April 2 could collapse before June 30 and experts believe it will be much harder to reach a final deal than it was to agree the framework accord. Even if a final deal is reached, factoring implementation, there is still a long way to the lifting of sanctions. Therefore, the sanctions, compliance investigatons, and the general isolation faced by Iranian firms will remain in place for the coming year. As Iran’s Foreign Minister Zarif succinctly put it, "We're still some time away from reaching where we want to be.”

Based on statements made by official on both sides of the aisle, and a fact sheet released by Washington, the JCPOA contains a pathway for the removal of all nuclear related sanctions as the International Atomic Energy Agency (IAEA) verifies Iran’s commitments. Under the JCPOA terms, Iran will receive gradual relief from US and European Union nuclear sanctions as it complies with steps to eliminate or convert its nuclear facilities and increase the so-called “breakout time” that would be necessary to produce a weapons-grade nuclear material.

These terms allowed Zarif and his team to claim victory on the promise of sanctions relief by the P5+1. But as the negotiators of each country began the tough task of selling the deal to domestic constituencies, divergences emerged about exactly how gradual sanctions relief would be.

The simple fact is that implementation will take time, so CBI will need to navigate the new Iranian year of 1394 much the same way it weathered the last. It will enjoy only limited access to its foreign reserves, and continue to operate under general isolation.

Change in the Winds

Despite the sobering challenges of implementation, the JCPOA does allow Seif and the CBI bankers to think about the normalization of financial relations with the world. The positive psychological effect of the deal on Iran's foreign exchange market will definitely help the bank unify the foreign exchange regime– an elusive aim pursued by the CBI for over a year.

Notably, while the unification of the exchange rate system is a key priority, in the near term, Seif has signaled that CBI will allow the “appropriate currency rate set itself according to economic conditions.” The implication is that an improved mood among investors and business leaders will strengthen the wider economy to the point where CBI could pursue monetary policy more confidently. Already, the investment climate has improved. The Tehran Stock Exchange (TSE) saw big gains in response to the nuclear negotiations, with the rial making smaller advances against the dollar.

Of course, the removal of sanctions, coupled with the Rouhani administrations' cues about opening the market, means the prospect of increased foreign investment. All branches of the financial services industry stand to gain from this, including retail and commercial banking, asset management, investment banking, etc.

There are untold opportunities for bankers in the midst of the normalization process, even one as protracted as the JCPOA might entail. Many are getting ready for the battle that’s about to begin over market share in Iran's financial sector. For now, it seems Iran's misfortunes are coming to a (slow) end and the news could not have come on a more providential date than the 13th day of Farvardin. 

Photo Credit: Guardian