StanChart charges expose absurdity of Iran sanctions
Last week Monitor suggested that the business model of banks serving clients in multiple emerging markets is under threat. The problem, the column argued, is that it is becoming impossible for international banks to meet the compliance demands of the US authorities, who automatically suspect any institution operating in Asia, the Middle East, Africa or Latin America of laundering money for tax evaders, drug barons and other evildoers.
This week we got a dramatic demonstration of the threat. Shares in Standard Chartered plunged 25 per cent after regulators in New York accused the bank of illegally processing US$250 billion in payments for Iranian financial institutions subject to US sanctions (see the first chart).
By yesterday lunchtime in London, the drop had wiped some HK$112 billion off StanChart's market value as investors dumped the stock, afraid regulators could strip it of its New York licence. To put that fall into perspective, it is 40 times the interim profit the bank announced last week.
In a statement yesterday, StanChart rejected the regulators' accusations, insisting that 99.9 per cent of its transactions related to Iran were fully compliant with US rules. It claimed that between 2001 and 2007 payments worth only US$14 million were suspect; a negligible amount for a bank that clears US dollar transactions worth US$190 billion each day.
That won't satisfy the US regulators. After all, no one who is prepared to press charges based on such a questionable premise is likely to be put off by a mere denial.
The US Treasury prohibits financial institutions with US operations from transacting business with a clutch of Iranian state banks because it believes Tehran to be developing nuclear weapons in defiance of the Non-Proliferation Treaty.
However, if Washington were to be consistent in its approach, it should also slap sanctions on Israel, India and Pakistan, all of which have developed nuclear arsenals without ever signing the treaty. Instead, Israel and Pakistan rank among the top four recipients of US military aid, while the US signed a nuclear co-operation deal with India in 2008.
But even leaving this aside, Standard Chartered appears a singularly inoffensive target for US enforcement efforts.
The US government says it imposes sanctions on Iranian financial institutions because it wants to deny Tehran access to US dollars to fund its nuclear programme. However, last year Iran exported 1.1 billion barrels of crude oil and petroleum products, largely to Asia. Almost all of that was paid for in US dollars. Assuming each barrel fetched on average the same price as a barrel of Brent crude, that means last year Iran was on the receiving end of petrodollar inflows worth US$123 billion.
If StanChart cleared up to US$250 billion of the Iranian National Oil Company's petroleum receipts over 10 years, as the US regulators claim, it is clear the bank was handling only a small fraction of Tehran's oil income. Last year China alone imported 204 million barrels of Iranian crude, for which it paid US$22 billion (see the second chart). Those payments were almost certainly handled by China's major state banks, all of which now operate branches in New York. Yet the US authorities do not appear to be imposing any penalties on them.
Nor do US regulators appear to be pursuing action against banks based in Japan or India, the other main buyers of Iranian oil.
It is impossible for the US to hope to fully enforce its trade and financial sanctions against Iran. Demand for Iranian oil is simply too great, its buyers too numerous and powerful, and the cash Tehran earns from its exports too plentiful.
For example, if the US really wanted to penalise all the financial institutions handling Iranian money, they would have to punish every major bank operating in Dubai, Iran's main offshore financial centre. And they include Wall Street's biggest names.
That's unlikely to happen. Instead the US regulators have decided to make an example of Standard Chartered. It is the bank's unfortunate shareholders who are paying the price.
Incidentally, there is nothing so likely to promote the internationalisation of the yuan as attempts by Washington to deny US dollar liquidity to major oil exporters. They must be laughing in Beijing.