money matters

Congressional attention turns toward Iran and the International Monetary Fund

The congressional efforts to prevent Iran from utilizing its IMF Special Drawing Rights, explained

A picture taken on November 10, 2019, shows an Iranian flag in Iran's Bushehr nuclear power plant, during an official ceremony to kick-start works on a second reactor at the facility.

ATTA KENARE/AFP via Getty Images

A picture taken on November 10, 2019, shows an Iranian flag in Iran's Bushehr nuclear power plant, during an official ceremony to kick-start works on a second reactor at the facility.

As Congress works to cut off potential avenues of funding for Iran in the wake of the Oct. 7 Hamas terror attacks on Israel, some lawmakers are turning their attention to an avenue that Iran could use to access funds through the International Monetary Fund.

IMF member states are allocated, proportional to the size of their economies, Special Drawing Rights (SDRs) — a financial instrument that they can then sell, or loan, to other governments in exchange for currency. Iran holds more than $6 billion in SDRs, a potential financial lifeline for the regime, though it has not sought to tap those funds.

Lawmakers have sought avenues to choke off Iran’s ability to use these SDRs, most recently with a bill by Sens. Rick Scott (R-FL) and Joe Manchin (D-WV) and Rep. French Hill (R-AR) introduced in late December that would prevent the Treasury Department from engaging in transactions involving Iran’s SDRs. It also instructs the U.S. to “vigorously advocate” to IMF members not to engage in SDR exchanges with Iran and to oppose any future SDR allocations to Iran.

“We must hold Iran accountable for their sponsorship of Hamas and other terrorist organizations, and this includes doing everything we can to limit their ability to access international financial capital,” Manchin said in a statement. “Our bipartisan, bicameral legislation would prohibit the IMF from financing the world’s leading sponsor of terrorism and further demonstrate our solidarity with Israel.”

Scott added, “This legislation closes the door for Iran to receive U.S. support through the IMF, which has grossly acted as an open financial channel to Iran for too long.”

Hill raised concerns that Iran will look to China to convert its SDRs into cash that it will use to finance global terrorism.

Other bills, which recently passed the House Financial Services Committee, would ban the U.S. from using U.S.-held SDRs for transactions with state sponsors of terrorism and instruct the administration to apply pressure to attempt to prevent Iran from using its existing SDRs.

Other legislation seeks to provide Congress with veto power over future SDR allocations, require reporting on SDR transactions with Iran and instruct the administration to oppose SDR allocations to sponsors of terrorism.

While the U.S. does have power to block future allocations of SDRs to Iran, efforts to prevent Tehran from using its current SDR reserves are a more difficult task. The IMF does not give the U.S. the power to prevent a country from using SDRs that have already been allocated to it — although such transactions could run afoul of U.S. sanctions on Iran’s central bank. The IMF treaty can also compel countries to buy SDRs from countries looking to sell them if no country is willing to do so willingly.

“The idea of limiting Iran’s access to use the SDRs — that would be a tough one, given that the United States has by treaty accepted that it could be compelled to buy SDRs and the United States has pushed hard to to have countries agree to buy SDRs,” Patrick Clawson, director of research at The Washington Institute for Near East Policy, told Jewish Insider.

The U.S. could have blocked a new SDR allocation to Iran in 2021, but did not do so. In 2020, the U.S. did block Iran from receiving an emergency IMF loan.

“First, it undermines the U.S. sanctions. Any conversion requires transaction and cooperation with the Central Bank of Iran, which has been sanctioned for its role in funding terrorism,” Saeed Ghasseminejad, a senior Iran and financial economics advisor at the Foundation for Defense of Democracies, told JI. “Second, it offers Iran access to liquidity and further reduces Washington’s leverage over Tehran.”

Ghasseminejad told JI that the administration should communicate to other countries, their central banks and the IMF that it will impose “consequences” for SDR transactions with Iran. He also urged the administration to sanction the head of Iran’s central bank.

Iran has not used its SDR reserves in two decades, according to the Congressional Research Service, and it’s not clear that it plans to do so.

“Here’s a pot of money that’s readily available for Iran, that Iran has treaty right to use  — they’ve never tried to use it. At the same time that Iran was [complaining in 2020] that it couldn’t get this loan from the IMF… they made absolutely no move to try and use the money from the IMF that was available,” Clawson said. “Because mostly, the Iranians want to complain about how the U.S. is unhelpful… it’s not because they actually need the money.”

He argued that focusing on other funding sources, like a recently released tranche of $10 billion in electricity payments from Iraq to Iran would be a more productive avenue.

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