Editorial

Targeting Tehranʼs Euros‏

The United States has blocked Iran from easily accessing greenbacks as a means to slow down the Islamic Republic’s nuclear program. But those financial sanctions only go so far. With Iranian nuclear physics still outpacing Western economic pressure, Washington is looking to prevent the mullahs from accessing their second favorite currency: the euro. The key to the U.S. strategy is Target2, or the Trans-European Automated Real-Time Gross Settlement Express Transfer system. As the European Central Bank’s proprietary electronic interbank payment system, it’s the euro-zone equivalent of the U.S. Fedwire. If you’ve ever conducted a transaction in euros, you’ve probably used Target2—unless, of course, you’re doing cash deals out of the back of your car. The system facilitates untold numbers of legitimate euro transactions each year. But it also can be used unwittingly to aid Iranian sanctions-busting schemes. If an Iranian trader, for example, wants to convert euros from his Chinese bank account into yuan, and then transfer those yuan to an account held by a Chinese producer of maraging steel (useful for building advanced centrifuges), the Iranian trader’s bank will likely use the Target2 system. A regional bank in Asia or an Asian settlement platform, as well as a European bank, will also be involved in settling the euro transaction.
Target2 is crucial to Iran because U.S. financial sanctions have already curtailed much of Iran’s dollar-denominated business. In response, Tehran has transferred billions of dollars in foreign exchange reserves into euros, the world’s second largest and most liquid currency reserve holding. The regime also has denominated a substantial portion of Iranian international trade contracts in euros. The Journal reported last October that the regime holds around a third of its foreign-exchange reserves in overseas banks, and government sources have told us that euros are increasingly the currency of choice. The euros are held in Chinese, Swiss, Austrian, Russian, Turkish, Romanian and other foreign banks. Iran has
also converted some of these euro holdings into other currencies to facilitate the Islamic Republic’s remaining trade relationships. Since the implementation of U.S. financial sanctions, the euro has also
become the currency of choice for the Central Bank of Iran, which maintains foreign-exchange reserves to address a “balance-of-payments crisis.” Euros are Iran’s principal hedge against the impact of sanctions, which are designed to force the regime to make painful choices about its illicit nuclear program. That’s where the European Central Bank can play a role. The ECB’s own guidelines bar access to Target2 by those engaged in “money laundering and the financing of terrorism, proliferation-sensitive nuclear activities and the development of nuclear weapons delivery systems.” This describes the
Iranian regime to the letter. However, numerous Iranian banks, and foreign banks handling euro transactions on behalf of the Islamic Republic, can still access the Target2 system, as either direct or indirect participants.

Courtesy: Jonathan Schanzer, Mark Dubowitz – The Wall Street Journal