UK banks to halt Iran business in response to IAEA report, U.S. move expected

Britain ordered its financial institutions on Monday to halt all business with Iranian counterparts, including the central bank, and the United States is also expected to tighten sanctions over Tehran’s nuclear program.

The British move however will not target trade in Iranian oil, a source familiar with the sanctions said. It also appeared unlikely that the U.S. Treasury would try to cut off the Iranian banking system entirely, a move that could disrupt global energy markets and harm the U.S. economic recovery.

Britain said the sanctions were in response to the International Atomic Energy Agency’s (IAEA) latest report on Iran, which highlighted fresh concerns about the possible military dimensions of Tehran’s nuclear program.

“The UK government has just announced new financial sanctions against Iran. We are ceasing all contact between the UK financial system and the Iranian banking system,” Finance Minister George Osborne said.

“We believe that the Iranian regime’s actions pose a significant threat to the UK’s national security and the international community. Today’s announcement is a further step to preventing the Iranian regime from acquiring nuclear weapons,” said Osborne.

Following Britain, in Ottawa, House Leader Peter Van Loan announced measures that would “block virtually all transactions with Iran, including those with the central bank.”

France went one step further, calling on international partners to impose a freeze of Iran's central banks assets and an oil embargo.

With speculation about a possible Israeli military strike against Iran reaching fever pitch, Paris also warned of “the added risk of a military escalation in the region.

“The consequences of which will be catastrophic for Iran and for the world.

In Washington, a U.S. official said the Treasury Department planned to designate Iran as an area of “primary money laundering concern” on Monday, a move allowing it to take steps to isolate the Iranian financial sector further.

Practical difference?

Henry Smith, Middle East analyst at the Control Risks consultancy in London, said the British move may not significantly affect Iran’s major oil customers.

“It essentially delegitimizes the country’s financial system but in reality it may not make that much practical difference. The Chinese, Indians and others will continue to engage, while many Western multinationals have already pulled out,” he said.

Smith said tighter sanctions had appeared more likely than any Western attack to knock out Iran’s nuclear facilities. “We wouldn’t regard Israel or indeed the U.S. as having the wherewithal to pursue the kind of military action required to destroy Iranian nuclear facilities,” he said.

U.S. sanctions have already made it extremely difficult for many global oil companies and traders to obtain bank financing to trade Iranian crude, of which less than a third goes to Europe with the rest flowing to China and India.

The Wall Street Journal reported earlier that the U.S. Treasury would not formally sanction Iran’s central bank, in part to avoid causing a sudden shock to oil prices.

Unclear steps

It was unclear what exact steps the U.S. Treasury planned. However, the decision, which the official said was to be announced by Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner, appeared designed as a warning about the risks of dealing with Iran’s financial institutions.

It follows a Nov. 8 report by the U.N. nuclear watchdog that presented intelligence suggesting that Iran had worked on designing an atomic bomb and may still be secretly carrying out related research.

The U.S. administration suspects Iran is pursuing a nuclear weapons capability under cover of its civilian atomic energy program. Tehran denies this, saying it has no interest in nuclear arms and its atomic program is purely peaceful.

The measures are expected to target Iran’s financial, oil and petrochemical sectors, after a report by the U.N. atomic energy watchdog strongly suggesting Iran was trying to build nuclear weapons.

They also follow U.S. allegations last month that Iranian officials were involved in a thwarted plot to kill the Saudi ambassador to Washington.

In Tehran, trade minister Mehdi Ghazanfari said sanctions were hitting the Iranian economy but warned Western countries threatening to tighten the measures they were harming their own interests.

“Sanctions are a lose-lose game in which both sides make a loss. If they don’t invest in our oil projects, they will lose an appealing market,” Ghazanfari told a news conference before the British announcement.

The comments from Ghazanfari, who is Minister of Industry, Mine and Commerce, marked a change of tone from Tehran’s usual line that sanctions have not damaged the economy.

President Mahmoud Ahmadinejad has often said sanctions are having little effect on the economy and in some cases have made it stronger by making Iran find domestic solutions to economic challenges.

Ghazanfari reiterated the stance that Iran had found alternatives to Western imports and investments, but did not deny the downside.

“Facing hardship in a fight is inevitable. I admit projects will get harder as our trading costs will go up, delays will hit projects and money transfer will get harder,” he said.

U.S. officials say there has been a debate within the Obama administration about whether to sanction formally the Iranian central bank, which many importers of Iranian crude oil use to clear their transactions.

Despite calls for such sanctions by Democratic and Republican lawmakers, U.S. officials have been reluctant to do so because of the fear that this could cause oil prices to jump, potentially impairing the U.S. economic recovery.

There is also a concern that importers of Iranian oil, including China and India, could be hurt by such a move, thereby antagonizing nations whose support Washington needs if it is to pursue wider sanctions on Iran.

The U.S. decision to take unilateral steps to sanction Iran reflects the difficulty of persuading Russia and China to punish Tehran further at the U.N. Security Council, where they hold vetoes and have supported four previous sanctions resolutions.

Several European firms including Italy’s Eni, France’s Total, Greece’s Hellenic and Royal Dutch Shell are still trading Iranian crude often as part of long-standing credit and other agreements.

Traders with several companies said they would need to see the new terms before taking any decision. “I will need to speak to my risk and finance department,” one trader said.

Snubs atomic forum

Amid growing tensions over Tehran’s suspected efforts to develop the bomb, Iran angrily stayed away Monday from a U.N. atomic agency forum on creating a Middle East free of nuclear weapons,

Iran’s ambassador to the Vienna-based International Atomic Energy Agency (IAEA), Ali Asghar Soltanieh, said Tehran’s decision was its “first reaction” to the body’s “inappropriate” recent report on its nuclear program.

On Friday, the IAEA’s board of governors passed a resolution of “deep and increasing concern” submitted by the five permanent members of the U.N. Security Council, Germany and 12 others in light of the report.

Israeli Defense Minister Ehud Barak meanwhile provided an ominous response Sunday when asked about growing speculation of a military strike.

The IAEA report “has a sobering impact on many in the world, leaders as well as the public, and people understand that the time has come,” he told CNN.

“Our greatest wish is that they commit such a mistake,” Iranian Revolutionary Guards commander Amir-Ali Hajizadeh was quoted as saying by the Fars news agency on Monday.

Soltanieh said another reason for not attending the two-day IAEA forum, aimed at learning from the experiences of other so-called nuclear-weapon-free zones (NWFZ), was Israel’s unofficial atomic arsenal.

“As long as the Zionist regime does not belong to the NPT (nuclear non-proliferation treaty)... this kind of conference is useless and cannot succeed,” Soltanieh told Iranian television channel Al-Alam.

Israel is widely believed to possess nuclear weapons but has never confirmed it. Unlike Iran it is not a signatory to the NPT and therefore not subject to IAEA inspections.

Syria, reported by the IAEA to the Security Council over a suspected covert reactor allegedly bombed by Israel in 2007, was however present at the forum, along with Israel, 17 other Middle East states and Palestinian representatives.