US cautions Europe on Iran investment

American attempts to persuade Europe to think again about financial involvement in Iran may be starting to bear fruit, according to European banking officials. Whether such "back-door sanctions" will work is far less apparent, experts say.

Troubled by a lack of speedy progress in the UN toward imposing economic sanctions on Iran over its suspect nuclear program, the US has stepped up efforts this month to persuade allies to shun Iran's financial system, claiming that Iran may tap banks to illicitly finance terror operations or the purchase of materials for nuclear weapons.

Already, the US has blacklisted the Iranian Bank Saderat. And last week, Stuart Levey, undersecretary of the Treasury for terrorism and financial intelligence, hopped through Britain, France, Switzerland, Italy, and Germany to urge Europeans to be wary in Iran, a message underscored by Treasury Secretary Henry Paulson at the recent G-7 meeting in Singapore.

"We wanted to provide our counterparts and financial leaders with information about how Iran uses and abuses the financial system in support of terrorism and proliferation, and wanted to hear of the risk they were hearing," says Molly Millerwise, a spokeswoman for Mr. Levey, adding that he found a receptive audience in Europe.

Europe has long taken a softer line toward Iran than the US, and has essayed a soft-power approach to its nuclear program, persisting with negotiations. Its companies, particularly German and French, rack up billions of euros' worth of exports each year, with a considerable presence in the oil, automotive, retail, and telecommunication sectors.

And while the EU is spearheading a delicate mission in southern Lebanon that might aggravate relations with Hizbullah and its Iranian backers, experts say the experience is unlikely to change its geopolitical strategy in the region.

"Europe will do what is in its own interest," says Hossein Askari, an Iran expert at George Washington University. "In the long run, Europe is going to have to import gas, and apart from Russia, the most competitive gas will come from Iran," Professor Askari adds.

Yet some European bankers are growing wary of the risk of doing business in Iran. Two of Europe's largest banks have recently decided to ramp down decisively their involvement in Iran. UBS canceled business with individuals, companies, and banks in the country earlier this year; Credit Suisse is conducting a "controlled withdrawal" by refusing new business.

Both banks are firm that they took their decisions independently, though UBS, fined by Congress two years ago for its dealings with Iran and other blacklisted countries, says it pays close attention to the US. "Of course banks listen to what the US says, because for most banks the US is an important partner," says Serge Steiner, a spokesman. "Most European banks wouldn't react like this – the US says something and they implement it. But that doesn't mean we don't listen. "

Although bankers say they are governed by business calculations, not US political pressure, the two may not be unconnected. Growing qualms about Iran's nuclear program and financial support for Hizbullah mean there are greater risks for firms doing business there. As Georg Soentgerath of Credit Suisse says: "It was our decision, made in the light of the increase in political, financial, and reputational risk."

Levey says this is what the US is trying to get at. Recently, he noted that even financial institutions not formally bound to follow US law closely observe US financial measures directed at individuals, key regime members, front companies, financial institutions, and corrupt charities.

"Keeping a few customers that we have identified as terrorists or proliferators is not worth the risk of facing public scrutiny or a regulatory action that may impact on their ability to do business with the United States or the responsible international financial community," he said.

But however many Europeans the US manages to enlist to its "coalition of the shilling," it may not be enough. Iranian leaders have begun moving assets away from European banks to alternative repositories in the Gulf, experts note.

Ali Ansari, with London's Chatham House think tank, argues that the only way to make financial sanctions bite "is if you have much greater international coordination, including with other countries in the Middle East and Asia."

"The Americans talk about economic and financial sanctions a lot because they don't have much at stake" in Iran, he adds. "EU countries are more anxious not to lose that business. And the Iranians are saying, 'You are more scared than we are because of our oil. We guarantee you will lose more than we will lose.' "

Experts say international sanctions have never really had the desired impact. "They have almost never been very successful in getting governments to change behavior," says Geoffrey Underhill, of Amsterdam University. South Africa was an exception, he says, as it was a partial democracy with a business community sensitive to outside pressure. But in Iran, "you are talking about an authoritarian regime that is very good at diverting the effects of sanctions so that the regime doesn't pay."

"If the Europeans are not convinced, any sanctions are going to be less effective," he adds.

"If you can get the whole world against Iran, then you have a chance," says Professor Askari. But persuading even allies like Germany and Japan, with formidable investments in Iran, will be tough. Then, there is the wider Muslim world, through which Iran is thought to be funneling its petrobillions. "I don't think you'll get a Muslim coalition. Everyone knows this, so they'll be reluctant to join sanctions they know are going to be ineffective."