Give Iran’s New Central Banker a Chance to Reform

(Bloomberg Opinion) -- Next week, the U.S. will reimpose sanctions on the Central Bank of Iran, one of the steps triggered by President Donald Trump’s withdrawal from the Iran nuclear deal in May. This will be the first challenge facing Abdolnasser Hemmati, the veteran banker and insurance executive who was recently named the bank’s new governor.

His predecessor, Valliolah Seif, was a victim of the sanctions. Rising anxiety about their impact on Iran’s economy had accelerated the collapse of the rial, which has lost half its value since March, reaching a new record low of 100,000 rials to the dollar.

Seif was also sanctioned as an individual by the U.S. Treasury Department, which said he had assisted the Qods force, an arm of the Islamic Revolutionary Guard Corpsthat the U.S. designated a supporter of terrorism.

If the White House wants to engineer a collapse of the Iranian economy by any means possible, then Hemmati can expect no quarter. But if, as Secretary of State Mike Pompeo has said, the goal is to change “the behavior of the leadership in Iran to comport with what the Iranian people really want,” then the arrival of a new central banker – the first change in Iranian leadership since Trump tore up the nuclear deal – is an opportunity to recalibrate sanctions to make them work better.

The man who supervised the creation the sanctions regime would agree. In his final speech as Secretary of Treasury under President Barack Obama, Jack Lew focused on three “lessons” the U.S. had learned. First, they are most effective when American officials “work closely with partners to build support for a common objective.” Second, U.S. officials “must be prepared to provide relief from sanctions” when there is change in behavior. Finally, enforcing sanctions “means a commitment to due process.” By Lew’s reasoning, the responsible application of sanctions requires the U.S. to give Hemmati time and space to enact reforms.

The U.S. should use Hemmati’s arrival as a chance to synchronize its sanctions policy with the engagement efforts of its European partners. In June, the governments of the U.K., France and Germany formally requested sanctions exemptions that would allow European institutions to maintain “links with the Central Bank of Iran.” They were rebuffed. Sigal Mandelker, the Treasury’s under secretary for terrorism and financial intelligence, had a blunt message for European governments: “Don’t be fooled when you’re dealing with the Central Bank of Iran.”

It’s clear that the U.S. will continue its pressure campaign, and likely that Europe will continue to seek engagement. But it’s possible to combine European incentives and American deterrents to shape the Iranian central bank’s actions. U.S. waivers allowing the Europeans to use central bank payment channels would give European governments more leverage over the bank’s leadership. The possibility of sustaining trade and investment despite U.S. sanctions presents a powerful incentive for financial-sector reform.Behavioral change is usually easier to achieve with both carrot and stick than by the stick alone.

Hemmati should be allowed to strengthen Iran’s efforts to fight money-laundering and counter terrorism-financing. The Financial Action Task Force, a global body that promotes policies to combat financial crime, has given Iran until October to carry out the remaining items on its action plan, or else be put back on a blacklist.

There’s growing political support in Iran for meeting these requirements, in part because the Europeans have made it clear that their activities will be contingent on compliance. Hemmati needs to be able to make the case that changes in Iranian actions can lead to shifts in U.S. policy. The Trump administration ought not make that case harder by tightening sanctions.

Giving Hemmati such a grace period would also show that the U.S. is committed to due process in sanctions policy. To hit the new man with the same sanctions as his predecessor would be a political decision, enabled by a relaxation of procedural standards at Treasury’s Office of Foreign Assets Control. A commitment to due process would require regarding the new governor innocent until proven guilty.

There’s reason to be optimistic about Hemmati, an academic and author of papers on the relationship between income and the consumption of energy and water. (Iran is currently experiencing blackouts and a drought.) He has also studied the factors that influence inflation in Iran, concluding that for “every year that the severity of sanctions has increased,” inflation has increased by over 8 percent. In other words, he’s someone who understands sound financial management and the cost sanctions impose on his country.

In addition to satisfying American concerns about financial crime and funding for terrorists, Hemmati must regain control over Iran’s currency crisis, address burgeoning bank debt and repair Iran’s links to the international financial system. It would be good for the Iranian people, for U.S. allies in Europe and even for the Trump administration if Iran’s new central bank governor succeeds.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Esfandyar Batmanghelidj is the founder of Bourse & Bazaar, a media company that supports business diplomacy between Europe and Iran through publishing, events and research.

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