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Commentary | 6 May 2020

As Iran faces virus, Trump admin fails to use Swiss channel to ease medical exports

Iran JCPOA Sanctions Transatlantic relations United States Global Security Iran

Just a few days after Iran announced its first deaths from COVID-19 in February, the Trump administration’s Special Envoy for Iran Brian Hook was asked during a briefing for an update on the Swiss Humanitarian Trade Arrangement (SHTA), a payments channel intended to ease the sale of medicine and medical devices by Swiss companies to Iran. Responding to the question, Hook acknowledged that no further transactions had been processed since a pilot transaction involving a $2.55 million sale of medication a month earlier, but insisted that there were “more transactions coming.”

Two months later, over 6,000 Iranians have lost their lives to COVID-19, and the Swiss channel has yet to process any further transactions. 

Since the Trump administration reimposed secondary sanctions on Iran in November 2018, the Swiss government has worked to establish a dedicated banking channel to ease the export of medical supplies to Iran. Switzerland is the second largest supplier of medicine to Iran after the European Union. While technically exempt from sanctions, the sale of medical supplies has been made more difficult as banks refuse to process Iran-related transactions. In a recent client note, former Director of the US Office of Foreign Asset Control (OFAC) John Smith detailed how “the Trump administration’s maximum pressure campaign has likely dissuaded many companies from exporting medicine and medical devices to Iran that they otherwise could.” 

New data from the Swiss Federal Customs Administration makes clear that the export of medicine to Iran has weakened over the last year. As a result of these disruptions, ordinary Iranians face rising prices and shortages of sorely-needed medication, a situation all the more unacceptable during a global pandemic. As COVID-19 spread in Iran, the Trump administration faced increased pressure to ease humanitarian trade. A statement organized by the European Leadership Network and The Iran Project and signed by 24 former senior officials from the United States and Europe warned that “failure to provide relief could have significant and long-lasting consequences for the reputation of the United States and Europe among the Iranian people.” But the administration has failed to respond with any sense of urgency, deflecting questions on humanitarian trade by pointing to the channel “set up through the Swiss to help the Iranian people.”

While Swiss officials originally hoped the payments channel would be ready in February 2019, it took nearly a year to complete negotiations with the Trump administration and launch the framework. Hawkish officials, including John Bolton, saw the channel as an unnecessary concession to Iran. The administration also proceeded with new sanctions designations that complicated implementation of the channel, including a move in September 2019 to impose new sanctions on the Central Bank of Iran that eliminated long-standing exemptions allowing the bank to play a role in humanitarian trade. The Swiss channel was only “finalized” by the US Treasury Department on 27 February, the same day a new general license was issued restoring key humanitarian exemptions for Iran’s central bank. 

While the failure to process any further transactions through the channel over the last three months may be surprising given the reported interest among “dozens” of Swiss companies, the Trump administration has failed to address two key impediments. 

First, companies wishing to use the channel are faced with extraordinary reporting requirements. European officials have likened these requirements to a “fishing expedition” for information about Iran’s financial sector. Rather than simply revive the arrangement that enabled Swiss entities to sustain sales of medicine to Iran after the Obama administration imposed devastating financial sanctions on Iran, the Trump administration increased the documentation and reporting requirements, demanding unprecedented disclosures by Swiss companies on the financial holdings of the Iranian banks from which they expect to receive payment. Even if Swiss exporters are prepared to overcome these hurdles, the channel is obviously ill-suited as a means to ease trade during a global pandemic when purchases of medical supplies need to be made quickly and reliably. Peter Harrell, who worked on Iran sanctions in the Obama administration, has argued that the Treasury Department ought to “temporarily relax some of the most oversight stringent requirements for this” in light of COVID-19.

Second, the Trump administration has apparently failed to ensure that there was sufficient liquidity available to allow Iranian importers to pay their Swiss suppliers, leaving Swiss officials in a lurch. The Central Bank of Iran is believed to maintain CHF 50 million in reserves at Banque de Commerce et de Placements (BCP), the bank which has long played a central role in Swiss-Iran bilateral trade and around which SHTA has been designed. In addition, several Iranian private sector banks also hold funds at BCP. A rough estimate of the combined holdings is CHF 150 million. By comparison, Switzerland’s total exports of pharmaceutical products to Iran in 2019 was just over CHF 150 million.

Iranian authorities are reluctant to draw down these reserves, which would be nearly impossible to replenish while the country remains under “maximum pressure” sanctions. In a revealing interview from last December, Brian Hook suggested that Iran maintains access to just 10 percent of its foreign currency reserves. Notably, Iran’s central bank governor, Abdolnasser Hemmati, has suggested that Iran’s request for an emergency loan from the International Monetary Fund (IMF) could help address liquidity issues facing SHTA, stating that the IMF loan could be paid out via the Swiss channel in order to assuage concerns voiced by the Trump administration over the potential misuse of funds. 

The successful operationalization of SHTA requires Iranian buy-in. Authorities in Tehran will be concerned about funnelling critical trade of medical supplies through a channel made unreliable by precarious access to financial resources. Meanwhile, recent enforcement actions taken against Halkbank in Turkey and the Industrial Bank of Korea –two banks that have historically supported humanitarian trade but which failed to maintain rigorous compliance standards – will test the resolve of executives at BCP. In another warning shot, OFAC last week announced a $7.8 million settlement agreement with Swiss technology firm SITA, which inadvertently used US-based servers to provide baggage handling services to an Iranian airline making it the “the first company to pay a large settlement merely for routing otherwise lawful transactions through U.S. computer servers.”

The troubled launch of the Swiss channel offers a cautionary tale for other countries seeking to ease humanitarian trade with Iran through good faith engagement with the Trump administration. Since November of last year, the South Korean government has been in discussions with the Trump administration over measures that could revive falling humanitarian exports to Iran. In December 2019, Korean pharmaceutical exports to Iran were down 47 percent year-on-year. Recently, Korean authorities announced that they had made some headway and that they are working to establish the Korean Humanitarian Trade Arrangement, an analogue of the Swiss channel that would be built around Woori Bank. 

The Swiss government is advising the Korean government on how to meet the stringent requirements set-forth by officials in Washington. While South Korea is not a major exporter of pharmaceutical products to Iran, it is a former buyer of Iranian oil and Iran maintains significant reserves in the country. One possible solution to the liquidity problems facing SHTA may be to allow Iran’s central bank to draw on reserves held in South Korea in order to make payments to Swiss exporters. In March, Iranian Foreign Ministry Spokesperson Abbas Mousavi complained that the United States was “creating an obstacle for the transfer of Iran’s financial resources into the channel,” and cited an effort to draw “other financial resources in various countries” for use in SHTA. 

Against this backdrop, references made by Trump administration officials to SHTA as evidence of efforts to protect humanitarian trade with Iran have been deceptive, if not deceitful. The Treasury Department’s recent reply to congresswoman Alexandria Occasio-Cortez’s letter warning of the impact of sanctions on Iran’s COVID-19 response tellingly omits any reference to the Swiss channel, suggesting that the administration is aware that their failure to operationalize the channel during the COVID-19 crisis undermines voiced commitments to humanitarian trade.

Swiss officials should be applauded for continuing to pursue operationalization of the channel despite the hurdles put in front of them. They remain confident that further transactions will be made soon and note progress on a solution that would give Iran freer use of its foreign currency reserves. But the Trump administration abjectly failed to ensure its much-touted channel eased Iran’s access to medical supplies at the moment of greatest need for the Iranian people.

The opinions articulated above represent the views of the author(s) and do not necessarily reflect the position of the European Leadership Network or any of its members. The ELN’s aim is to encourage debates that will help develop Europe’s capacity to address the pressing foreign, defence, and security policy challenges of our time. The report is published in partnership with Bourse&Bazaar.

Photo: US State Department Flickr