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Bush Gets Help From UBS, Deutsche Bank in Iran Sanctions Effort

Business Materials 19 January 2008 04:43 (UTC +04:00)

( Bloomberg ) - President George W. Bush is getting from UBS AG and Deutsche Bank AG what is eluding him at the United Nations: effective pressure on Iran to curb its nuclear ambitions.

U.S. officials are telling bankers around the globe that Iran is funding terrorists and seeking the know-how to build a nuclear bomb. And the banks, fearful of an implied threat of being cut out of the U.S. market, are restricting loans to Iran, making it harder for industries from oil to steel to buy modern machinery.

``To the degree that both the dollar and the U.S. banking system are critical cogs in that international system, it allows us to use those cogs to influence state behavior'' even as Russia and China have blocked stiffer UN sanctions, said Gary Schmitt, a scholar at the American Enterprise Institute in Washington. ``Countries and banks and everybody else have to move money through the U.S. system.''

In the past two years, the number of banks doing business with Iran has plummeted. The institutions used by Bank Saderat, one of Iran's biggest, to conduct international transactions has dropped to 8 from 29 in 2006, according to Bankers' Almanac.

Six months ago, member countries of the Paris-based Organization for Economic Co-Operation and Development cut Iran's country-risk rating for export credits by a notch to the second-worst level. That put Iran, the Middle East's second- largest oil producer, in the same category as Albania, Bangladesh and Mozambique.

The lack of credit from foreign banks has made it difficult for Iranians to buy imported goods, financial analysts say. European Union machinery and transportation- equipment exports to Iran fell 20 percent to 3.9 billion euros ($5.8 billion) in the first nine months of 2007 from the year- earlier period, according to Eurostat, the EU data agency.

As a result, an Iranian steelmaker is paying a premium from small banks in Malta and Turkey for letters of credit, and in some cases must give European suppliers cash up front for purchases, according to an executive who asked that his name and the company's not be disclosed.

The reluctance of advanced industrial countries to sell equipment with possible military uses, such as graphite electrodes, had forced the steel company to buy inferior components from India, China and Russia, the executive said.

The U.S. effort is being spearheaded by Treasury Undersecretary Stuart Levey. Also involved is Deputy Treasury Secretary Robert Kimmitt, who flew to Bahrain and Iraq to reinforce the threat posed by Iran within two days of the release last month of U.S. intelligence findings that cast doubt on Iran's nuclear-weapons pursuit.

Major European banks already have heeded that message. ``We do absolutely no business in Iran,'' said Serge Steiner, a spokesman for Zurich-based UBS, Europe's biggest bank by assets. Frankfurt-based Deutsche Bank, Germany's biggest bank, said in July it was exiting its Iran business.

London-based HSBC Holdings Plc -- Europe's biggest bank by market value - Frankfurt-based Commerzbank and Zurich-based Credit Suisse Group have also decreased business or cut ties with Iran.

Levey has expanded his pitch to Chinese banks, a possible conduit for Iranian business. Hong Kong-based Industrial and Commercial Bank of China, the world's biggest lender by market value, doesn't have an office in Iran, spokesman Xie Taifeng said. Beijing-based Bank of China Ltd., the No. 3 lender, also has no Iran branch.

The Bush administration issued directives last year cutting off three Iranian banks from the U.S. financial system: Bank Melli, Iran's largest, Bank Saderat and Bank Mellat.

Levey said he shows banks classified information that Iran diverts money for peaceful purposes to its nuclear program and militant groups such as Hezbollah. `` Iran is engaged in a wide variety of deceptive practices,'' he said.

Iran Foreign Ministry spokesman Mohammad Ali Hosseini said in a faxed statement that Levey's accusations are ``baseless.''

``The Islamic Republic sees no need to resort to non- transparent undertakings in business and economic transactions with other countries,'' he said.

Iran has softened the blow of the banking sanctions by using its oil revenue to pay cash for goods, financial analysts say.

Still, banks risk running afoul of a December 2006 UN Security Council resolution banning trade with Iran in products aiding the country's uranium-enrichment program, Treasury officials say. Iran has spurned UN demands to suspend the enrichment, saying its program is for generating electricity and not fuel for a nuclear weapon.

Bankers are also mindful that Treasury's 2005 proposal to ban Macau, China-based Banco Delta Asia from U.S. transactions for allegedly laundering North Korean money sparked a run on that institution.

``Banks tend to be very, very conservative creatures,'' said Peter Djinis, formerly with Treasury's Financial Crimes Enforcement Network. ``There will not be any wavering until they hear directly from'' the U.S. government that Iran can be trusted, he said.

That leaves Iran on the outside of the international financial system looking in - a situation Schmitt compares to that of a soldier sent behind enemy lines: ``He's going to be pretty vulnerable.''

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