Iran Reportedly Built Covert Financial System to Trade With Foreign Countries Despite US Sanctions

The WSJ story about Iran's system to circumvent American sanctions casts a shadow on the prospects of the US and EU's recent sanctions succeeding in severing Russia from the financial and other global markets over the situation in Ukraine.

Iran built a clandestine banking and finance system that allowed the country to continue trading with other countries using foreign currency even under the weight of the US sanctions re-introduced in 2018, the Wall Street Journal reported, citing documents and accounts of anonymous Western diplomats and intelligence officials.

The volumes of Iran's obscured trade might have reached "tens of billions of dollars" and effectively allowed the country to restore the economy tanked by the sanctions and practically return it to the levels before the economic measures against it were re-introduced.

How the System Worked

While Iran never hid the fact that it had discovered a way to continue trading despite the American sanctions, it never revealed the scheme. The WSJ describes the system organised by the Islamic Republic as a combination of Iranian companies' proxies, accounts in foreign banks and internal transactions inside Iran itself recorded on a separate secret ledger.

Iranian banks reportedly serve as bridges between sanctioned companies and the firms that can maintain some connections with the outside world. The latter create companies outside the Islamic Republic to act on behalf of the sanctioned Iranian firms, the newspaper's investigation and accounts of Western officials suggest. These proxies then engage in trade with foreign companies selling oil and Iranian commodities, the WSJ reported.

A small portion of the proceeds from this trade is reportedly being smuggled into Iran in the form of currency which is used, among other things, to boost the exchange rate of Iran's rial, which also plummeted in 2018. However, the majority of the cash remains in foreign banks. These dollars, euros and other currencies are then used to buy imports for the Islamic republic. The sanctioned Iranian companies also trade this foreign-stashed currency with each other using ledgers that do not leave Iran.

Clandestine Financial System to Stay Even if New Iran Deal is Signed?

While the Iranian shadow trading and financial system shows the limits of the US sanctions campaign, it also has its downsides, the newspaper said. According to its sources, both in Western countries and in Iran, this system is inefficient and is susceptible to corruption.

However, despite these drawbacks, Tehran is likely to leave it in place – even if it negotiates the restoration of the Joint Comprehensive Plan of Action (JCPOA) with the US and the remaining signatories of the original 2015 nuclear accord, the WSJ sources said. The existing system will reportedly be kept in place as a safeguard in case the JCPOA parties decide to slap Iran with sanctions again, as well as to keep some of Tehran's transactions obscured.

Moreover, even with the sanctions lifted, foreign companies are unlikely to be quick to return to the Iranian market, fearful of the remaining sanctions and accidently violating the US rules with regards to the Islamic Revolutionary Guard Corps, which Washington recognises as a terrorist organisation.

With this secret economic vehicle in place, Iran's trade with foreign countries reached $80 billion a year in 2021, according to a senior Iranian politician, Gholamreza Mesbahi-Moghaddam. The figure could grow to almost twice that level in 2022, the International Monetary Fund has estimated.

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