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Bahrain: Sanctions and Investments

Bahrain's financial sector appears to have shrugged off news that Washington had imposed financial sanctions against one of the kingdom's banks due to its links to two Iranian lenders accused of supporting terrorism.

The US announced on March 13 that it was enacting sanctions against Future Bank, an equal joint venture between Bahrain's Ahli United Bank, Bank Melli Iran and Bank Saderat Iran .

According to the US, Bank Melli in particular is allegedly carrying out illicit business activities and backing terrorism through its financial support for Iran's nuclear programme.

" Bank Melli goes to extraordinary lengths to assist Iran's pursuit of a nuclear capability and ballistic missiles, while also helping other designated entities to dodge sanctions," Stuart Levey, the US treasury undersecretary for terrorism and financial intelligence, said when announcing the sanctions. "Banks and other entities owned or controlled by Bank Melli pose a serious threat to the integrity of the international financial system," he added.

However, Shahram Razavi, Future Bank's deputy chief executive officer, said the sanctions would have little impact, though he acknowledged the bank had lost a few customers.

"The sanctions have been imposed by the US, not the United Nations," Razavi told local press on March 16. "What that means is that US citizens cannot use our bank. It also means we can't clear dollars in the US. But it does not affect our standing as we have no exposure in the US," he said.

Razavi was also quick to assure clients that the bank had enough liquidity to respond to the needs of its customers and was in no way a political entity.

"We are operating in Bahrain with the support of the Central Bank of Bahrain," he said. "This is about the political situation in Iran and we intend to be temperate and hope things will change when the sanctions go away."

The day after Washington unveiled its sanctions against Future Bank, the Central Bank of Bahrain issued a statement saying that, in light of the US decision, a reminder had been sent to the bank concerning its obligations towards its customers. Not exactly a full broadside fired by the regulator of the kingdom's financial sector.

The US sanctions came less than two weeks after a delegation from Washington, headed by Levey, had conducted a tour of the Gulf trying to drum up support for a further isolation of Iran's banking and financial sector.

During the trip, Levey said many banks in the region were "deciding that the risk of being drawn unwittingly into illicit transactions is not worth it, and they are rejecting all transactions".

However, while this may be the case in some instances, with Ahli United Bank itself suspending direct business with Iran in January, there does not seem to have been a large scale severing of economic ties with Iran on the part of Bahraini firms.

Bahrain is close to sealing a deal to import Iranian natural gas via a pipeline to be built beneath the Gulf, while on March 16, Bahraini Prime Minister Sheikh Khalifa bin Salman Al Khalifa said his country backed the consolidation of Iran-Gulf bilateral cooperation. There have also been talks on Bahrain making direct investments in Iran's gas sector.

Bahrain's investors do not seem to be put off by US sanctions on another Middle Eastern country, Syria. There are a number of Bahraini banks either operating or planning to expand into the Syrian market. But the US sanctions against Damascus are nowhere near as stringent or wide-ranging as those targeting Tehran and have as yet done little to dampen the enthusiasm of Gulf investors.

Last year, Bahrain's Albaraka Banking Group (ABG) was granted a licence to operate in Syria, and the Bahraini-based Global House said it was launching a new Islamic bank in Syria with a capital of $500m, of which an initial $250m was already paid.

Announcing the launch of its Syrian venture, Ahmed Bin Hussein Al Dawsary, the chairman of Global House's board of directors, said Syria was a fertile country for investment, with a promising outlook that has become more open and liberal to foreigners.

Bahrain may be one of Washington's closest allies in the Gulf, with the US Fifth Fleet based at the island kingdom, but it is clear that Manama is seeking to balance its relationship with its most powerful friend while at the same time looking to do business with those Washington eyes with deep suspicion.

© Oxford Business Group 2008