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Iran gets around US bank sanctions

Bank Mellat , Iran's third largest state-owned bank, is getting around US-imposed sanctions by establishing links with small and medium-sized banks that have less US exposure than bigger lenders, its managing director said.

Ali Divandari told the Financial Times that US sanctions had failed to prevent the bank's "links with the international brokerage network", adding: "We managed to quickly replace other banks."

The US in October imposed unilateral sanctions against three of Iran's commercial banks - Melli , Saderat and Mellat - to choke off Iran's access to dollar financing and the US financial system.

Analysts say financial sanctions have hit Iran harder than the United Nations-imposed sanctions, which are largely restricted to nuclear- and missile-related activities and people involved in such activities.

"The US sanctions initially had a negative impact on the bank's reputation and created troubles, but in practice there was no halt in our operations," Mr Divandari said. "We are now working with important international commercial and correspondent banks on a daily basis . . . including European, Asian and African ones."

He declined to give the names or nationalities of the foreign banks concerned. But he said the number of banks working with Mellat had increased under sanctions, because the big international banks that had withdrawn or scaled down ties to safeguard their interests in the US had been replaced by small and medium-sized banks with less US exposure.

"This economy has its own attractions, even under the worst conditions," he said.

Western diplomats agree that Iran's financial transactions have continued but stress that they have been much more costly, troublesome and time-consuming. Such difficulties, they say, have further hindered big investments in the country.

France and Britain recently joined the US in alleging that Iranian banks were involved in illegal nuclear activity and in financing terrorism. Iran denied the charges.

The European Union has been seeking financial sanctions outside the UN and has banned Bank Melli , Iran's largest commercial bank, from operating on its territory since June. The EU has also warned financial entities that doing business with Iranian banks will be carefully watched.

Bank Mellat has six branches outside the country, including one subsidiary in London called Persia International Bank, which still operate.

"It will be troublesome if Europe imposes unilateral sanctions on Iran's banks, but we will be able to again replace the outgoing banks," Mr Divandari said.

He warned the foreign banks that if they left it could be difficult for them to return.

There have been no foreign lenders in Iran since the 1979 revolution, when all banks were nationalised. However, big international banks have had representative offices, which have been scaled down or shut during the past two years because of sanctions.

Mr Divandari said Iran's market could not be ignored. "Domestic investment on its own cannot meet the country's needs, which makes Iran an opportunity for foreign banks, particularly as investment banks - not retail banks - to function as gates in attracting foreign investment." He reckoned the capital turnover for foreign banks could be as high as 40 per cent, almost double the rate in Europe, should they decide to enter the Iranian market.

He also urged foreign banks and companies to join his bank's imminent privatisation programme despite sanctions, and reminded them of Iran's geopolitical significance and enormous energy resources.

By Najmeh Bozorgmehr

© Financial Times 2008