U.S. Dollar Flexibility Towards Iran

The updated text of the guidance document from the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC), published on October 7, 2023, creates limited and conditional facilities in financial and banking relations with the Islamic Republic compared to the previous text (January 16, 2016). Section C of the OFAC guidance under the title 'Financial and Banking Measures' includes sixteen questions and answers, the seventh of which draws the most attention due to its differing text from what was previously published. The question is whether, after the implementation of the JCPOA, non-U.S. financial institutions and companies affiliated with U.S. financial institutions registered outside the country can conduct dollar transactions for the Iranian government and its affiliated institutions, such as the Central Bank and the National Iranian Oil Company, or open and maintain dollar accounts for them. OFAC answers this question positively, meaning that from the perspective of this office, non-U.S. financial institutions and companies under U.S. financial institutions that have non-U.S. legal personality can provide dollar services to Iranian individuals and entities, provided that the provision of these services has no direct or indirect connection to the U.S. financial system and U.S. individuals and entities. This raises the question of how non-U.S. financial institutions can provide dollar facilities to Iran without these services passing through the U.S. financial system. This question arises considering the role of the dollar in the international monetary system and its inherent subordination to U.S. banking regulations. It is assumed that the use of U.S. greenbacks, wherever it occurs in the world, requires final settlement at the U.S. Federal Reserve. So why does OFAC allow dollar services to Iranian entities, provided that the U.S. banking system is not involved? The answer to this question must be sought in that part of U.S. dollars that has a degree of autonomy from the U.S. banking system. We are talking about dollar deposits in non-U.S. banks. During the Cold War, the former Soviet Union deposited its dollars in European banks to prevent their possible seizure by Washington. These dollar deposits became known in the international monetary system as 'Eurodollars.' Later, dollar deposits in Asian banks were also referred to by this name, and the 'Eurodollar' market expanded independently of U.S. Federal Reserve regulations, including interest rates. It seems that conducting dollar transactions with Iran or opening and maintaining dollar accounts for Iran using the 'Eurodollar' market is allowed without involving the U.S. banking system and U.S. individuals and entities. This flexibility is likely included in the new OFAC document under the influence of two major factors. The first factor is the strong objections from Hassan Rouhani's government to the obstacles that have blocked the real implementation of the JCPOA in many areas. The inability to conduct dollar transactions with Iran makes many commercial transactions and foreign investments in Iran impossible. The U.S. executive branch (including the U.S. Treasury) is well aware that this deadlock places Mr. Rouhani's government in a very fragile position and creates a severe weakening of it against its rivals. Political and economic institutions in several European countries (especially France, Germany, and Italy) are extremely angry about the ambiguities and doubts regarding relations with Iran and are urging the United States to end this confusion. The second factor is the unfavorable atmosphere created by U.S. legal regulations in its relations with EU member states. In fact, the JCPOA only pertains to the lifting of sanctions related to the nuclear issue. The 'primary sanctions' imposed by the U.S. against Iran, which are independent of this issue and relate to matters such as human rights or terrorism, remain in effect and have caused many problems in economic relations between Europe and Iran. We know that European banks and investors, who showed great enthusiasm for trading with Iran after the signing of the JCPOA, have retreated under the pressure of these 'primary sanctions.' In this situation, political and economic institutions in several European countries (especially France, Germany, and Italy) are extremely angry about the ambiguities and doubts regarding relations with Iran and are urging the United States to end this confusion. The aim of publishing the updated OFAC guidance document, and the flexibility particularly included for conducting dollar transactions with Iran, is to reduce such tensions; but can this flexibility eliminate the existing obstacles to transactions between European companies and banks with Iran? A look at the 45-page OFAC guidance document shows that the U.S. Treasury's flexibility towards Iran comes with numerous limitations and conditions. Of course, this breathing space should be utilized, but there is no doubt that a long way remains until achieving an opening regarding the U.S.'s 'primary sanctions.' In fact, the collection of 'buts' and 'whys' and the obstacles in the OFAC guidance document is a very complex puzzle that requires an army of lawyers to solve. Companies that have high hopes for the Iranian market and its prospects will try to use this window to resolve difficulties and conduct some mandatory dollar transactions with Iran. Conversely, more companies and banks will prefer to wait for clarity on the situation rather than risk falling under the U.S. judicial system and its heavy penalties due to the complexities of the OFAC guidance document. It should also be noted that the U.S. executive branch has very limited maneuverability in interpreting its sanctions laws against Iran. There is no doubt that the U.S. President also seeks to reduce pressure on Rouhani's government, but given the legal texts approved by Congress, there is not much he can do, especially in a situation where the White House is awaiting another guest. It is clear that the imminent shift in executive power in the U.S. and the upcoming presidential elections in Iran will greatly impact the future relations between the two countries, and Iran's international economic relations will naturally not be unaffected by this impact; however, a noticeable improvement in both areas depends on reducing tensions between the two powers based on conducting bilateral dialogues between them.