The EU puts a lockdown on the Mullahs’ economic transactions – but it will only buy time.

On Thursday, the European Union (EU) ordered the Society for Worldwide Interbank Financial Telecommunication (SWIFT) to block Iranian banks currently subjected to EU sanctions from using their service. SWIFT is a financial transaction company used by almost every bank around the world to send payment messages to each other. Since global financial transactions are virtually impossible to implement without SWIFT, the move represents the EU’s most determined effort to date to convince Iran that its pursuit of nuclear weapons is unacceptable. SWIFT announced it would comply with the order by Saturday. The decision is no doubt being met with high anxiety from diplomacy advocates. International sanctions have so far been woefully unsuccessful, and options are dwindling. Economic isolation, coupled with upcoming talks with the Iranian regime, have opponents of military intervention scraping the bottom of the diplomatic barrel.

“This EU decision forces SWIFT to take action," said Lazaro Campos, SWIFT's chief executive. "Disconnecting banks is an extraordinary and unprecedented step for SWIFT. It is a direct result of international and multilateral action to intensify financial sanctions against Iran.”

SWIFT was set up in Belgium by banks in 1973. In 1987, non-bank financial institutions were allowed to join, followed by corporate customers of banks in 2000. The service has more than 10,000 users in 210 countries, and sends approximately 17 million messages every day. It is overseen by the central banks of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, the United Kingdom, the United States, Switzerland, Sweden, and the European Central Bank. It neither holds nor transfers money, but provides a common language and a secure private system allowing banks to communicate payment messages to each other.

Yet the system, while effective, is far from perfect. On the plus side, it will hinder Iran’s ability to sell as much oil as it is currently selling, and may even force the nation to sell oil at below-market prices as a result. Financial institutions outside the SWIFT umbrella may hesitate to cooperate with Iran out of fear of being banned from doing business with other nations. Furthermore, the ban could force Iran to use hard assets like gold to complete transactions, making trading inefficient and risky.

On the minus side, some banks, notably those in China and India that are still planning to purchase Iranian oil, could communicate with Iran outside the network. And since SWIFT outsources some of its messaging to regional contractors, it remains possible that Iran could co-mingle its oil with oil that flows through international pipelines, masking its origin. Iran could also accept payments for transactions in a bank outside the country, purchase goods and services in that country, and import them back into Iran.

Some critics contend the move could backfire, forcing oil prices higher and undermining SWIFT’s reputation. Others worry that ordinary Iranians, even those hostile to the current regime, will be cut off from money sent to them by relatives living outside the country.

In addition, there is currently a lack of coordination between the EU and the United States. The EU measure only affects sanctioned Iranian banks, and 30 of those banks and their subsidiaries have been cut off as a result. On the other hand, the U.S. Congress has proposed legislation that seeks to ban transactions with any Iranian banks. The U.S. currently bans 23 Iranian banks, the bulk of which are covered by the EU ban. But congressional lawmakers contend at least 20 additional banks are being used to underwrite both Iran’s nuclear program trade and provide support for terrorist groups. According to congressional aides, the new law could subject some European companies to penalties and sanctions, including banning them from the U.S. financial system, even if they fully comply with EU rules. Thus, the U.S., while appreciative of this latest move by the EU, seeks to pressure Europe to go even further. The EU does intend to ratchet up the pressure in July, when an embargo on the importation of Iranian oil will be implemented.

Iran has already been feeling such pressure, even before yesterday’s announcement by the EU, as the sanctions already imposed on that nation since November have had some effect. Reuters revealed that Iran is stockpiling food to blunt their effects. Ships carrying at least 396,832 tons of grain are lined up to unload, reflecting a frantic level of shopping in which Iran has purchased what amounts to a year’s supply of wheat in a little over one month. In order to work around the sanctions, they are paying premium prices for the shipments, and using non-dollar currencies such as Japanese yen and Russian rubles to pay for them.

“There is no doubt in my mind it is geopolitical hedging. They are trying to get as much (wheat) as they can in the country to blunt the effect of any further escalation in international sanctions,” said Rabobank commodities analyst Nick Higgins. “I think they hit the market hard and early and that from their perspective, limited the chances that anyone could react to such large purchases." Food shipments are not targeted by sanctions, but the Iranian government is well aware that the price of food as well as the collapse of the local currency could fuel the same kind of unrest that has roiled other Middle East nations. Rory Lamrock, intelligence analyst with security firm AKE confirms that analysis. "If left unchecked, significant hikes in food and basic commodity prices on the ground are likely to be a key source of social unrest,” he noted.

On March 6th, the EU announced that a new round of negotiations between Iran and six nations, the US, UK, France, Germany, China and Russia, will be resuming soon. EU foreign policy chief Catherine Aston said it was time for “real progress." Real progress reportedly consists of a joint request that Iran freeze production of uranium enriched to 20% purity (a level just below weapons-grade), and then ship its stockpile of the nuclear fuel to a third country. In addition, it is likely they will demand greater access to Iranian nuclear facilities by the International Atomic Energy Agency (IAEA).

How much teeth will the move by SWIFT add to the equation? According to its annual report, 19 Iranian member banks and 25 financial institutions sent and received 2 million messages through SWIFT in 2010. This is SWIFT’s first expulsion of any institution in its 39 years of existence, and its effect is being likened to being expelled from "what is the financial equivalent of the United Nations" according to Mark Dubowitz, a sanctions specialist in Washington, who advised U.S. lawmakers on the SWIFT legislation.

Yet as Foreign Policy reveals, the European Central Bank (ECB) guidelines for SWIFT inadvertently demonstrate the limitations of the system: The guidelines specifically bar access to SWIFT institutions that engage in "money laundering and the financing of terrorism[.]” Over the years, Iran has become quite adept at money-laundering. Last November, Iran was designated as a “Primary Money-Laundering Concern,” by the U.S. government, which imposed new sanctions on Iran’s energy sector. Furthermore, a report titled "Time for the Collapse,“ reveals a strategy envisioned by Iranian military elites to destabilize the West through terror, drugs – and money laundering. Moreover, critics contend that SWIFT has breached the sanctions requirements, violated both U.S. and European laws and its own corporate rules in facilitating Iranian transactions. Taking such realities into consideration, it would seem the latest move by the EU may be less effective than advertised.

Nevertheless, the announcement has had an effect on overseas Iranian businessmen, who are shocked. "It will make life even more difficult for us than before, because this is like our lifeline to the outside being cut,” said Naser Shaker, who owns an oil and gas trading company in Dubai. Morteza Masoumzadeh, a member of the executive committee of the Iranian Business Council in Dubai, and managing director of the Jumbo Line Shipping Agency, called the news “devastating” and predicted “the collapse of many banking relations and many businesses.”

Yet even as these moves occur and Iranian businessmen despair, the ultimate question arises once again: can sanctions work? If history is relevant, the answer is no. Nothing up to this point has dissuaded Iran from pursuing its nuclear ambitions. Moreover, a regime with religiously inspired visions of facilitating an apocalypse they believe will engender the return of the Twelfth or Hidden Imam hardly sounds like the “rational actors” many wishful thinkers in the West want them to be. Add the reality that, despite their participation in the latest round of negotiations, Russia and China have been more than willing to use Iran as a counterbalance to U.S. interests and that the Iranian mullahs have a track record of ruthlessness in dealing with internal opposition, and it becomes far more likely the current regime will once again persevere.

As for negotiations, political reality suggests that Iran is not the only entity interested in buying time. The Obama administration would like nothing better than to avoid any serious confrontation with Iran until after the 2012 election. The president is already getting beat up in polls by Americans blaming him (rightly or wrongly) for higher gas prices that would skyrocket if hostilities ensued. No doubt Mr. Obama is also hoping that this latest move by the EU and the upcoming one by the U.S. Congress will persuade Israel to give non-military options one more chance to succeed.

Ironically, the severity of these sanctions may undercut such political calculations. If Iran survives its isolation and/or continues its pursuit of nuclear weapons, only two realistic options remain: a military confrontation – or a nuclear-armed Iran. Meanwhile, the clock continues to wind down.