The economic impact of sanctions

US sanctions regimes are having a significant impact on regional banks and on trade itself. Bahruz Naghiyev, chief financial officer and a member of the executive board at Azerbaijan’s Pasha Bank, talks to Club@Sibos about the issue
By Heather McKenzie

What impact do sanctions have on Pasha Bank and on your clients? What happens to companies in Azerbaijan that wish to do business with Iran?

Bahruz Naghiyev: Since Pasha Bank aims to become a global bank and aims to expand its network base both locally and internationally, we make sure we follow all sanctions and avoid any type of business with either sanctioned countries or individuals. Therefore, as you could tell, Iran is not on our agenda and we do not support or provide any type of financial services to companies and individuals if exposed to any sanction list. Obviously, it has a negative impact on us since Iran is our neighbouring country and we have economic ties dating back over a long period. By avoiding business with Iran, we are giving up on USD324 million turnover. We refuse to process clients’ Iran business payments so this is where our clients are mainly affected. In order to continue their business, they end up changing their contract currency (from USD) so payments can be processed, or they try to find a bank which will process Iran payments through different channels.

There’s been a lot of talk about alternatives to Swift, particularly as a means of avoiding US sanctions. Do you think this is a viable way to deal with the sanctions environment? What type of actions do you think need to be taken to alleviate the impact of sanctions?

BN: I do not think those alternatives are way of avoiding US sanctions since at the end of the day they still apply KYC rules whenever they onboard any FI into their network chain. For example, Ripple is one of the platforms which is offering services that can replace Swift, however members of those networks established by Ripple are also applying KYC rules whenever they onboard each other. It is true that you enjoy one hub where you can easily transfer your payments, however you go through the same process in the beginning anyway. I believe avoidance is not an option, rather it is matter of strategic decision. If strategically you aim to establish your network base as one that is more concentrated on local banking and feed local transactions only, then surely you can ignore sanctions. However, if you are an international bank that is willing to expand and provide fully-fledged financial services, then you want to make sure you follow sanctions lists in order to maintain your international network.

What sort of benefits do you envisage coming from the Silk Road initiative? Do you think sanctions will have a negative impact on this, or are they not relevant?

BN: Yes, I believe sanctions will have huge negative effect on the region since the dominant currency to facilitate the business is USD. It will weaken the relationship of the CIS and Caucasian region with Europe and the US, both politically and economically. This is another reason why several countries in the region would like to come together and align their trade among each other in one of their local currencies. For example, China and Russia are in talks to facilitate their trade between each other in CNY; looking at their import and export level, this is quite feasible.

One of the major advantages of the Silk Road is the effort to improve regional cooperation and connectivity on a transcontinental scale. It will also reduce the transportation cost that many countries bear whenever transferring goods from one country to another. In a nutshell, it is another opportunity for emerging countries to develop their economies by being located on the Silk Road.

I personally think both the European Union and the US are missing huge potential in the region because even without including China in the picture, economically we are talking about USD105billion turnover, which is being reduced by the EU and the US imposing sanctions on Russia and Iran.