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Iran and World Bank (con't)

Last week, I wrote that I was going to consider Iran’s complaints about how the World Bank has been handling loans to the country. The gist is that Iran has complained that the World Bank is acting politically in disbursing loans instead of maintaining a neutral stance as a facilitator of world development and poverty reduction. Although Reuters reports that the United States has threatened to withhold U.S. funding for the World Bank should new lending to Iran be approved, this does not prove anything about the World Bank’s motives.

In an October 8, 2010 speech at the World Bank and International Monetary Fund plenary session, Iranian Minister of Economic Affairs and Finance, Dr. Shamseddin Hosseini, took a questioning tone-not quite as strident as media reports might lead one to believe . One of Dr. Hosseini’s concrete complaints is less about the denial of any particular loan than about a lack of progress in the formulation of a new Country Assistance Strategy (CAS) for Iran. The Bretton Woods Project notes, a CAS “sets out the indicative level and type of assistance the World Bank Group will provide to a country, usually for a four-year period.” According to the World Bank, they prepare a CAS for each active borrower. The most recent CAS document that is readily available on Iran was a 2001 Interim Assistance Strategy document.

Returning to substantive points, Dr. Hosseini’s main contention is that the International Bank for Reconstruction and Development cannot, by its own Articles of Agreement, engage in political activity. In his speech, he cites to Article IV, Section 10. This provision states that “[t]he Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned. Only economic considerations shall be relevant to their decisions, and these considerations shall be weighed impartially in order to achieve the purposes stated in Article I.” He also cites Article III, Section 4, to point out that Iran has not violated any conditions on which the Bank makes loans.

Ironically, one of these lending conditions is that “[t]he Bank is satisfied that in the prevailing market conditions the borrower would be unable otherwise to obtain the loan under conditions which in the opinion of the Bank are reasonable for the borrower.” If anything, then, political sanctions that dry up funding for a country might make it hard for a borrower to “otherwise . . . obtain [a] loan.” U.S. sanctions have made it difficult for Iran to hold on to certain investments, particularly in the energy sector. Although the U.N. sanctions exempted the energy sector, the United States has unilaterally gone further. Recently, on June 24, 2010, Congress passed the “Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010.” Among other things, this law imposes sanctions on companies that invest in Iran’s energy sector beyond certain thresholds. For example, the law allows the government to penalize foreign companies investing more than $20 million dollars into Iran’s energy sector. It is worth noting that China has exerted pressure to avoid any sanctions being applicable to Chinese companies. In fact, China is reported to now be Iran’s largest trading partner, and Chinese firms are expanding business.

So who has lost out? Total, Shell, Statoil, and Eni have all pulled out of Iran. And, in the wake of the United States imposing sanctions on the Swiss-based Naftiran Intertrade Company, Japan’s Inpex has decided to withdraw from the Azadegan Oil Project. On the other hand, one analyst points out that this will not necessarily impact Iranian oil exports and suggests that Japan’s imports of Iranian oil will likely remain high.

Ultimately, for every company that withdraws, there are others with less to lose that might rush in. In fact, Washington’s strategy is dubious for this very reason. By forcing companies with ties to the United States to leave Iran, the U.S. is potentially destroying what leverage it and its allies have in Iran. Although the short term impact might be hard for Iran, eventually other interests without strong U.S. ties will migrate in to take advantage of the abandoned economic opportunities. Burning up all of one’s leverage is a gamble because the very pressure it exerts cannot be used again in the future. It also potentially hurts the international position of the United States for it to cause foreign companies to withdraw from potentially lucrative projects, because the U.S., and not the foreign countries from which the companies hail, has decided that they should not deal in such projects. But sanctions are often a gamble of such costs and benefits. Perhaps, if this leads to Iran’s willingness to negotiate, it may prove to be worth the cost.

So what about last week’s question? What about the legality of the Bank’s actions vis-a-vis Iran? Dr. Hosseini complained in his speech that “[t]he bank has actually stopped disbursement, so all the projects suffered loss, while the bank charges interest and other fees.” On the other hand, Reuters reported that a World Bank Official told them that “[a]s we have informed the (Iranian) authorities, because of recent sanctions and uncertainty surrounding individual banks, we are reviewing all our disbursement arrangements[.]”

One wonders: what are they reviewing the disbursement arrangements for and under what authority in the Agreement? Perhaps Article III, Section 5(b) is relevant: “The Bank shall make arrangements to ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency and without regard to political or other non-economic influences or considerations.” Although (at least on the face of the Agreement) the Bank cannot look at political concerns, it can worry about whether the funding is being used as promised. The idea may be that certain “individual banks” in Iran might be misusing the funds. This seems perfectly legitimate under the Agreement, as long as it is done within a reasonable time frame.

What comes across as political to Iran may only reflect the Bank’s attempt to avoid politics altogether and make sure its funds are being used for development purposes, not political ones. Whether this is true, only time will tell, but there is nothing necessarily political about administrative delay.


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