Iran may clear its funds out of 2 Korean banksIran is reportedly considering closing its bank accounts at two Korean banks and repatriating 3 to 4 trillion won ($2.5 to 3.3 billion), a Korean government official told the JoongAng Ilbo on Wednesday.
The news was unexpected given that the Korean government has high expectations for resumed economic relations with Iran after Korea restricted trading with the country for five years in line with sanctions imposed by the international community.
The Korean government hopes the lifting of the sanctions on Jan. 16 will be a boon for Korean exporters and a turnaround from declines in exports over the past year. The new economic team of the Park Geun-hye government is targeting the reopened Iranian market.
According to the exclusive JoongAng Ilbo report, Iran wants to withdraw 3 to 4 trillion won in deposits from Woori Bank and the Industrial Bank of Korea (IBK), which have been trapped for the past five years after Korea and other countries imposed sanctions that froze Iranian assets worldwide.
The bank accounts were created in 2010 under the name of the Central Bank of the Islamic Republic of Iran. The money was part of the oil trade between the two countries.
“Iran has given a signal that it wants to take back some of the deposits as the sanction on Iranian financial assets abroad has been lifted,” said a Korean government official according to the report. “Our government is trying to dissuade Iran at the moment and asking them to keep the won-denominated bank accounts.”
The bank accounts, and making transactions in Korean won and Iranian riyals, are considered essential to maintaining a stable trade relationship because the U.S. dollar is still not allowed to be used in trade with Iran.
“The won-denominated accounts are safe in terms of foreign exchange fluctuations,” the official said. “So maintaining the accounts is useful for our companies and will help Iran restart oil trading with Korea immediately. We will persuade Iran of that.”
For the past five years, the Korean government put stringent restrictions on transactions of not only commercial goods but also financial assets with Iran. A small number of businesses maintained transactions with Iranian partners only under the approval of trade and financial authorities. Trade between Korea and Iran shrank from $17.4 billion in 2011 to $6.1 billion in 2015.
Trade relations could be maintained thanks to the Woori and IBK accounts. The accounts served as a roundabout way for the Korean and Iranian governments to continue their relations behind the scenes. Iran’s Bank Mellat branch in Seoul was “nearly closed” for the past five years.
When a Korean refiner buys oil from an Iranian company, the Korean buyer deposits the payment in Korean won into one of the accounts. When the Iranian central bank confirms the payment, it pays the seller in riyals. Korean exporters, on the flip side, were paid in won from the accounts.
The deposits reached 5 trillion won when oil prices were high, according to financial authorities.
The accounts were considered bonuses for Woori Bank and IBK, since they only paid interest of 0.1 percent on the deposits. In 2012, after they grew in size, the Iranian central bank pressed Korean financial authorities to raise the interest rate, saying they would stop using the accounts otherwise.
“After that, the two sides agreed to pay interest at a rate equivalent to that of Korean government bonds [about 1.6 percent],” another government official said.
According to the report, Iran hasn’t responded to the Korean government’s request that accounts be maintained. Seoul is planning to dispatch officials from the two banks to Iran on Jan. 30 for four days to discuss the issue with their counterparts at the Iranian central bank. The government also plans to talk about it at the Korea-Iran Joint Economic Committee scheduled to be held in late February. President Park plans to make a visit to Iran in April or May. The Ministry of Strategy and Finance said on Thursday that there hasn’t been any official communication on cancellation of the accounts between the two sides.
“There was an official request for a remittance from Iran’s central bank,” the ministry said in an official statement. “The Korean government has asked the Iranian bank to wait.” The official added that the remittance request was not very large.
Since Iran is in need of liquidity to start reconstruction projects, the country is going to reel back assets stranded for years in other countries, not only in Korea.
It is uncertain yet whether the Iranian central bank will keep the won-denominated accounts since it has said it will diversify the currencies it uses to trade with other countries. Even in trading with Korean companies, the Iranian central bank might demand yuan, euros or yen in the future.
The Korean Finance Ministry also has a plan to establish a euro-based payment system for its trading with Iran, but this requires discussions with the U.S. government.
Cancellation of the bank accounts could have a negative impact on Korea’s trade with Iran, making payments to local businesses in each country more difficult, since there is no available currency if Iran stops using the Korean won.
After the international sanctions were lifted, Iran seems to also want to be dominant in negotiations with other countries.
“In the past, Iran couldn’t take the money in the Korean accounts without U.S. approval, but now it can claim ownership of its assets whenever needed,” a Finance Ministry official said.
Credit Suisse said in a recent report that Iran’s withdrawal of the money could be one of the factors that weakens the Korean currency.
Although the Korean government is considering establishment of a euro-based payment system, that could take a significant period of time. The key question is whether the United States will allow it. Trading with the euro is also riskier than using the won.
“Under the euro system, the money will be transacted among a Korean company, European bank and the Iranian authority, which is impossible for Korean financial authorities to fully keep track of,” an official at the financial authority said. “If the U.S. dollar is involved, the relevant Korean business and financial institution might be slapped with sanctions by the United States.”
BY CHO MIN-GEUN, CHO HYUN-SUK [firstname.lastname@example.org]