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U.S. effort to isolate Iran gains ground as European bank restrictions take hold

U.S. effort to isolate Iran gains ground as European bank restrictions take hold By GLENN R. SIMPSON in Brussels and DAVID CRAWFORD in Berlin

The Wall Street Journal – The U.S. government’s attempt to isolate Iran’s economy will get a significant boost this month when the last European bank known to be clearing large volumes of that country’s dollar transactions in the U.S. halts the practice.

Commerzbank AG, Germany’s second-largest bank, said it will stop handling dollar transactions for Iran at its New York branch by Jan. 31.

Over the past year, most European banks with longstanding relationships with Iran have bowed to U.S. pressure and sharply curtailed transactions with Iran’s state-controlled banks, which the U.S. says support terrorism. The U.S. also is seeking to financially quarantine Iran because of Tehran’s vows to press ahead with its nuclear program in defiance of international will.

In a related move, the Treasury Department yesterday named Iran’s fifth-largest state-owned bank, Bank Sepah, and its subsidiaries as weapons proliferators and barred banks operating in the U.S. from handling any transactions on their behalf. Last year, Commerzbank became Bank Sepah’s principal clearer of dollar transactions in the U.S. Stuart Levey, Treasury’s undersecretary for terrorism and financial intelligence, said Bank Sepah served as the key financial conduit for Iran’s main missile firms, which were singled out in a United Nations sanctions resolution against Iran’s nuclear program last month.

U.S. analysts say there is evidence that Iranian firms are feeling the pinch of the U.S.-led drive. Iranian banks and companies, for instance, are now having to put up large deposits — as high as 100% — in foreign banks to get them to issue letters of credit for foreign transactions, they claim.

Iranian officials deny the nation’s banks handle money for terrorist organizations or purposes. Mohammad Jafar Mojarrad, vice governor of the country’s central bank, said that while the U.S. has "put a lot of pressure on Iran" and some foreign banks have scaled back dealings with the country, operations of the country’s banks haven’t been affected.

Choking off Iran’s financial ties to Europe is key to Washington’s effort to isolate the country. The European Union is Iran’s largest trading partner by far. Trade between the two topped $25 billion last year, but trade growth is stagnating, largely because of U.S. pressure.

Because many big European banks have stopped dealing with Tehran in recent months, the fundamentalist Islamic regime of President Mahmoud Ahmadinejad has relied on Commerzbank and a handful of smaller banks to handle its dollar-based transactions.

The result: Iran’s beleaguered economy is having a harder time moving hard currency around the globe in an easy and cost-effective way. That implies a higher cost of doing business for Iranian companies and the government, which are being forced into more expensive, alternative financial markets.

U.S. pressure isn’t likely to bring Iran’s economy to its knees, but it could cause serious pain. Iran receives tens of billions of dollars annually in oil revenue. But it spends much of those funds to import refined fuels and other goods. As Iran’s access to hard currency becomes more restricted and costly, the country could see a reduction in its ability to pay for heavy machinery and other items essential to keeping its oil industry and other key parts of its economy going.

In response to U.S. pressure on European and other bankers who serve Iranian firms, Iran has said it wants to switch most of its business to euros, the currency of the EU. But oil is Iran’s biggest export, and many of the country’s trade partners in the Middle East will do business only in dollars — the currency of the international petroleum industry.

At present, Commerzbank handles both dollar and euro transactions for Iran’s state-owned banks. Like several other European banks, it will cease handling only dollar transactions. That is likely to limit the economic damage to Iran, enabling the country’s banks to continue paying suppliers who will accept euros or other currencies.

But it is likely to subject Commerzbank and its peers to further U.S. pressure. "The risks of doing business with Iran are the same in all currencies," said Mr. Levey. Intelligence officials say Bank Saderat, a large, state-controlled Iranian bank placed on a U.S. Treasury blacklist in October for allegedly funding terrorism, has been able to process dollar transactions through Commerzbank’s New York branch in recent months by using the accounts of two other Iranian banks.

Commerzbank says it ceased dealing with Saderat after it was put on the U.S. blacklist and has no knowledge of any subsequent transactions. "Commerzbank has no knowledge of Bank Saderat directly or indirectly using the accounts of other Iranian banks to process dollar transactions," the bank said in a statement. Commerzbank, in a response to an inquiry from The Wall Street Journal about its dealings with Iran, also said "all such [dollar clearing] transactions are currently being phased out" as of Jan. 31. It added that "any clearing conducted by our U.S. operations is in strict compliance" with U.S. government regulations.

The efforts to isolate Iran also appear to be yielding results in Italy, one of Tehran’s largest trading partners. In 2005, trade between the two countries topped $6 billion. In a sign of how some European banks are rethinking their dealings with Iran, Italy’s largest bank, Intesa Sanpaolo SpA, says its trade-finance business with the country has dropped significantly in recent months.

U.S. efforts to stop European banks from dealing with Iran are controversial. European banks view the campaign as an attempt to extend the reach of U.S. sanctions on Iran without the backing of the United Nations or the EU.

Indeed, there is no general international ban on providing financial and trade services to Iranian banks. But banks that assist Iran’s banks are increasingly exposed to U.S. regulatory scrutiny and political pressure from the U.S. Treasury Department. The U.S., a key market for most international banks, has long unilaterally imposed strict limits on what business banks and companies with operations in the U.S. can conduct with Iran.

In response to U.S. pressure, ABN Amro Holding NV, Credit Suisse Group and UBS AG of Switzerland, Credit Lyonnais and Société Générale SA of France, and Barclays PLC and HSBC Holdings PLC of the United Kingdom all limited or ended their dealings with Iranian banks over the past year.

Gabriel Kahn and Bill Spindle in Rome and Neil King Jr. in Washington contributed to this article