What U.S. Sanctions Mean for Iran’s Coronavirus Fight

(Bloomberg) -- Since Iran emerged as the epicenter of the coronavirus pandemic in the Middle East, its leaders have called on the U.S. to suspend economic sanctions so that they can more effectively fight and contain the pathogen. The U.S. has instead forged ahead with its strategy and sees the pandemic as an opportunity to further weaken and destabilize the country. The U.S. State Department says that humanitarian goods, including medicine and medical supplies, are exempt and not subject to any trade restrictions. Yet it has imposed sanctions on 18 Iranian banks, including lenders that were still able to carry out trade in foods and medicines.

1. What do the sanctions laws say?

The Office of Foreign Assets Control says the U.S. has “consistently maintained broad exceptions and authorizations to support humanitarian transactions with Iran.” Exemptions for medical goods and medicine came into effect in 2001 under President Bill Clinton, who imposed the first major sanctions against Iran in 1995. These exemptions were periodically widened so that by 2012 they included agricultural products and most foods. After the U.S. and other world powers reached a 2015 deal with Iran on its nuclear program, the State Department made efforts to reassure banks and traders over transactions with Iran through roadshows and meetings at embassies. That approach was abandoned after President Donald Trump withdrew the U.S. from the deal and began a campaign of “maximum pressure,” seeking to force Iran’s leaders to abandon uranium enrichment and end support for militias and proxies such as Hezbollah, designated a terrorist group by the U.S.

2. So what’s holding back humanitarian imports?

There are several problems:

• Years of various sanctions regimes mean most banks see little to no commercial incentive to deal with Iran, given the volume of due diligence and compliance involved. That makes finding a way to pay for purchases difficult for Iran, to say the least.
• Many items require additional authorization because the U.S. considers them “dual use,” meaning they could have applications in other areas like defense. Examples include hazmat suits, some air filters, face shields and the sort of oxygen generators that are needed in the life-support machines used to treat severe coronavirus cases. Decisions can take months.
• Expanding sanctions to Iran’s banks, including two that had financed humanitarian goods, makes imports even more problematic, time-consuming and complicated for Iran’s health ministry and scores of pharmaceutical companies in the country.
• The reimposed sanctions on Iran’s oil exports led to a dramatic decline in revenue and has severely weakened Iran’s currency, leaving the country with fewer resources to pay for even non-sanctioned humanitarian goods.
• That squeeze has also forced the government to severely limit the amount of foreign currency it makes available to private-sector importers. It also has led Iran to seek a loan from the International Monetary Fund for the first time since 1960, for some $5 billion.

3. Why are the banks uninterested?

Most see any link to Iran as a “stain,” according to Carlo Giacoma, director general of the Brussels-based European Institute for Export Compliance, which advises businesses that want to trade with Iran. As with other sanctions campaigns, U.S. leverage rests with the central role American banks -- and the U.S. dollar -- play in the global economy. Anyone who violates the sanctions could see their U.S.-based assets blocked or lose the ability to move money via the U.S. banking system. That makes doing business tricky in a country where so many state institutions and associated conglomerates are sanctioned. “There is very little profit to be made from these exports,” said John E. Smith, an attorney at Morrison & Foerster who was the director of OFAC from 2015 to 2018. Meanwhile, the penalties for getting it wrong can top $1 billion.

4. Are there any exceptions?

Very few. Until October, there were just a handful of banks left in Iran that weren’t listed by the U.S. Treasury and could facilitate payments for humanitarian goods on behalf of Iranian importers. According to Giacoma, three European banks, which he declined to name, have been executing payments for various imports to Iran, including humanitarian aid, but the volumes have declined dramatically over the past three years and with all of their Iranian counterparts now sanctioned, it’s unclear how those goods will be able to reach Iran. Drug and medical supply companies in Iran are like to be left increasingly dependent on a small network of informal money changers overseas who can execute financial transfers but who might also find themselves in Trump’s crosshairs under the new sanctions.

5. What’s been the impact?

One indication of the tougher policy’s effect is the drop in applications for licenses to import medical goods that aren’t covered by OFAC’s general license. (Goods covered by general licenses can, in theory, be exported to Iran without any additional paperwork.) According to the Treasury, such applications dropped from 220 in the last quarter of 2016 to just 36 in the first quarter of 2019.

6. What does it look like on the ground?

Hundreds of businesses and importers, from local pharmacists to large companies producing generic drugs, have been affected, and the repercussions are felt by the general public. Pharmaceutical imports from the European Union in 2019 were down 15% from three years earlier, while U.S. shipments of mostly non-sanctioned humanitarian goods dropped to $3.9 million in February -- down 88% from February 2016. Advocacy group Human Rights Watch says the worst-hit include patients with serious and rare conditions such as leukemia, epilepsy or eye injuries from exposure to chemical weapons during the Iran-Iraq war. An Iranian NGO that helps treat a rare skin condition said 15 children had died after Swedish companies stopped shipping specialist dressings to comply with sanctions.

7. Are there domestic issues?

Iran has for years developed ways to adapt to embargoes and sanctions, but the strain of the coronavirus outbreak -- the worst in the region -- has stretched its health system enormously at a time when money is extremely tight due to low oil exports and prices. The government has carved out 20% of the current annual budget to deal with the virus, is tapping an already depleted sovereign wealth fund for $1 billion as well as seeking to borrow from the IMF. Complicating things further, Iran’s health-care system is dogged by complaints of corruption and nepotistic practices. In one high-profile case, the daughter of a former industry minister was sentenced to 20 years in prison and 74 lashes for “illegally profiteering” by hoarding and smuggling pharmaceuticals. Iran’s own banking system is seen as lacking in transparency. After Iran’s parliament ratified legislation to bring lenders in line with global money-laundering rules, a senior political chamber, the Expediency Council, effectively rejected the bill. U.S. Secretary of State Michael Pompeo said in a March tweet that “the regime’s concerted effort to lift U.S. sanctions isn’t about fighting the pandemic. It’s about cash for the regime’s leaders.”

The Reference Shelf

• QuickTakes on U.S.-Iran enmity and how Trump gave Iran’s hard-liners an election boost.
• An assessment of Iran’s attempt to integrate with the global economy.
• A Human Rights Watch report on how sanctions are hurting health.
• Bloomberg Opinion’s James Gibney says Trump’s economic sanctions are losing their bite, and Esfandyar Batmanghelidj sees a way to help Iran fight the virus.

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