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( Source of the document: ICC Digital Library )
In April, SWIFT took the unprecedented step of blocking a number of Iranian banks from using its messaging service. The action came as the result of EU's tightening sanctions on the country.
Prior to SWIFT's draconian move, other countries - some of which had maintained good relations with the Islamic Republic - also began backing away from the country.
In India, exporters unhappy with letter of credit (L/C) arrangements with Iran called on the finance ministry to allow them to obtain advance payments from Iranian buyers. The calls follow a recent arrangement whereby rupee-denominated L/Cs can be used for transactions between India and Iran.
The L/Cs in rupees emerged to take the place of US dollar-denominated L/Cs, which became unavailable due to international sanctions on Iran. But Indian exporters are not entirely happy with the payment mechanism operated by India's UCO Bank and the Parsian Bank of Iran. This is because Parsian Bank's permission is required to clear payment guarantees for the Indian exporters. Under US-dollar trades, such guarantees were provided by the exporters' bank in India. As a result, there have been issues with the settlement of L/Cs when the price of goods shipped from India to Iran has fluctuated.
This prompted the Federation of Indian Export Organisations to lobby the finance ministry with a proposal that Iranian buyers pay an advance of 15- 50% of an order value to cover possible price fluctuations.
In China, exporters are refusing L/Cs from Iranian importers, though not as a direct result of international sanctions. However, exporters in China are concerned that the sanctions have so diminished liquidity in Iran's banking system that they now doubt whether banks will be able to meet their L/C obligations.
Despite international sanctions imposed on Iran, its importers still enjoy good relations with Chinese exporters, who are notionally not restricted from doing business with buyers in the Islamic republic. But L/Cs are perceived as increasingly risky financial instruments in light of the wide-ranging sanctions now imposed on Iran's financial sector.
As one example, the commercial director of an Iranian rolling mill was recently reported to have said he had been negotiating for some weeks with a Chinese supplier of flat steel products, but failed to persuade the supplier to deal on L/C terms.
Speculators in China who reckon to be dealing in copper are still using L/Cs to obtain credit at preferential rates. This is despite measures introduced by the authorities in an attempt to stop such practices.
Other tightening measures appear to be on their way. At the time of writing, the EU, which imports about 14% of Iran's oil, planned to institute an embargo on Iranian oil in July. This, added to the SWIFT action, could cripple the Iranian economy from selling quantities of a commodity that earns it the bulk of its foreign exchange. Some commentators point out, however, that there will always be ways for the country to sell its oil without using SWIFT.
The SWIFT action raises larger questions, one of which is whether other countries, seeing that SWIFT can be induced to act against one of its country users, may be tempted to set up systems to compete with the Belgian-based entity.