Missile defence in Europe
Behind America's shield
A deal on missile defences angers Russia even though they may not work
THE east Europeans have little reason to fear a strike from Iran. So why are they eagerly signing up to America’s system to intercept Iranian missiles? Because they are scared of Russia. Within days of Russia’s invasion of Georgia, Poland had agreed to host ten American interceptors. Ukraine offered to link up its early-warning radars and contribute to surveillance in space. The Czech Republic had already agreed to host the missile-tracking radar.
“We have crossed the Rubicon,” said the Polish prime minister, Donald Tusk, as the deal was done. Russia said any country involved in America’s missile defences made itself a legitimate target for nuclear attack. Condoleezza Rice, the American secretary of state, who went to Poland to sign the deal this week, retorted that such threatening language “isn’t tolerable”.
Missile defences cannot fend off Russia’s huge arsenal, but countries hosting them place themselves under America’s umbrella, in effect becoming part of the defence of its homeland. American officials said the war in Georgia could have made further delay seem like surrender to Russia. But Mr Tusk offered another view: after Russia’s invasion, America at last accepted Polish demands for help in modernising its armed forces, and for the deployment of an American Patriot anti-aircraft (and anti-missile) battery in Poland.
Iran strengthened America’s case by boasting (apparently falsely) this week that it had tested a missile capable of launching satellites. Previously Iran claimed its missiles could reach targets as far away as Ukraine and the Balkans. But if it ever put objects into orbit, that would allow it to fire warheads a lot farther. The Kremlin still plays down the Iranian threat, and says America’s real objective is to neutralise Russia’s nuclear forces. America has invited the Russians to join in, to no avail.
Missile defences do not just pose a geopolitical risk that could worsen the West’s poor relations with Russia. They are also a technological gamble. The system is not fully proven. The two-stage interceptors that will be deployed in Europe have not been built yet, and the geometry of using ground interceptors against a future Iranian threat has still to be tested.
The Pentagon’s independent office to evaluate new equipment said last October that it was far from being able to certify “a high probability of [the system] working in an operationally effective manner once deployed”. It said intercepts of Iranian weapons were “very distinct” from past tests against simulated North Korean missiles over the Pacific, since shorter distances require a quicker response. The European system must also be able to deal with two kinds of missiles, intercontinental-range missiles fired at America and intermediate-range weapons fired at Europe, with different trajectories and speeds.
General Trey Obering, director of the Missile Defence Agency (MDA), calls Pentagon evaluators “very pessimistic”. He says the two-stage interceptor is a simplified version of the three-stage version used above the Pacific. The principles of missile defence differ little regardless of range. Yet critics insist that America is wasting a fortune for an impossible technological fix. It has spent more than $110 billion on missile defences since Ronald Reagan launched his “star wars” Strategic Defence Initiative 25 years ago, evoking an impossibly ambitious “shield that could protect us from nuclear missiles just as a roof protects a family from rain”. The new system is less ambitious, designed to fend off only a small number of missiles—but it will still cost as much as $10 billion a year.
The MDA is developing some 16 overlapping systems, designed to hit missiles in different phases of flight on the philosophy of “shoot early, shoot often”. The European system will try to intercept missiles in mid-course in space, where warheads separate. In several tests, the MDA has shown that it can “hit a bullet with a bullet” or even, in the words of General Obering, “hit a spot on a bullet”. In February an American ship shot down a spy satellite that had spun out of control.
But can the system be fooled by counter-measures? The lack of atmosphere in space means that missiles travel predictably, but it also means that decoys such as balloons move identically. How to identify a decoy dressed up as a warhead, or a warhead wrapped in a decoy? Critics such as Theodore Postol, of the Massachusetts Institute of Technology, say this problem is insurmountable, however powerful the radars and other sensors. “It is like trying to find a bomb hidden in a pile of suitcases only by looking at them, without being able to shake them and without sniffer dogs,” he argues.
Not so, says Keith Englander, chief scientist at the MDA. Even in space there are “residual” effects that help to identify warheads. He says the system can already distinguish between warheads and balloons. It cannot yet handle more complex counter-measures, he admits, but these are harder to deploy than critics imagine.
Yet some criticisms have hit the mark. The MDA wants to develop new ways of watching a missile’s flight “from birth to death” to try to identify a warhead. And if it cannot spot the real target, it is developing interceptors with multiple “kill vehicles” to destroy decoys too. Besides, the critics have a big weakness: if missile defences were just expensive junk, why would the Russians protest so loudly?
Aug. 21 (Bloomberg) -- Le Van Lua, the first North Vietnamese that Lieutenant Commander John McCain encountered in 1967, says he greeted the American aviator with the biggest kitchen knife he could find. He'd like to welcome McCain back as president of the United States.
He isn't alone. Former prisoner of war McCain has some unlikely supporters in Vietnam, a country he bombed 23 times. Like Le, many Vietnamese are cheering for the self-confessed ``air pirate,'' absolving McCain-the-bomber and embracing the senator who pushed to normalize diplomatic relations with Vietnam in 1995.
``They love the man who looks to the future,'' said Nguyen Dai Phuong, an editor at Tien Phong, a Hanoi daily. ``They don't love the pilot who came to kill their family.''
McCain's role as a ``frontrunner'' in the normalization process has convinced Vietnam's ruling class that his White House would increase bilateral trade, which was about $11 billion last year.
Some hold even higher hopes. Tran Trong Duyet, the former warden of Hoa Lo prison, better known as the ``Hanoi Hilton,'' where McCain spent 5 1/2 years, dreams of a free-trade agreement with his country's old capitalist enemy.
Many are also convinced that McCain, 71, the Republican candidate for president, will repay them for having shown him ``mercy'' after his mission ended prematurely on Oct. 26, 1967, low in Hanoi's flak-filled skies.
`Hands Up!'
After the right wing of McCain's A-4 Skyhawk met with a surface-to-air-missile, he parachuted into a tranquil Hanoi lake. Le said he swam toward the Navy pilot. Worried that the American might be armed, he shouted ``hands-up!'' in French. He grabbed McCain by his hair and hoisted him atop two bamboo pontoons, his knife held to the bomber's throat, he said.
``We were once face to face in a very difficult moment, between life and death,'' said Le, then an 18-year-old mechanic. ``We would be good friends if he were sitting in front of me now,'' he said, citing McCain's push for normal ties.
Le, joined by a crowd, paddled McCain to the shore. There, ``aggrieved citizens'' were waiting for him, as McCain writes in his memoir ``Faith of My Fathers.'' Moments earlier, he had released his bombs on the capital's Yen Phu power plant.
The mob stripped him to his underwear, bayoneted him in the groin and smashed his shoulder with the butt of a rifle, shattering his bone. That added to his busted knee and arm fractures, from when he ejected from the aircraft.
Taming the Crowd
McCain, an Arizona senator, credits ``a woman, who may have been a nurse'' with yelling at the crowd and taming their anger. She offered him herbal tea and put bamboo splints on his broken bones.
Today, that nurse, Nguyen Thi Thanh, says her ``first feeling was to look at him as a patient'' and not the enemy.
The woman, now an 81-year-old grandmother of five, is also hoping for a McCain victory, because of the prospect of greater trade, she said in an interview, granted with the government's permission. He will remember that ``he has enjoyed the government's mercy'' and repay the country in kind, she said.
McCain has a less charitable view of his years in Hanoi. In his memoir and on the campaign trail, he describes the torture as regular and routine.
Eventually, the beatings broke his will. In 1968, he signed a false confession, admitting to being an ``air pirate.'' His signature haunts him to this day, he says.
No Grudge
Still, he says he bears no grudge against the Vietnamese and led the way, with Senator John Kerry, a Massachusetts Democrat, to restoring relations 13 years ago, providing cover for President Bill Clinton from conservatives. He has returned to the Southeast Asian nation almost a dozen times.
McCain's efforts were closely watched by some of those who knew him in captivity, including Duyet, 75, the former Hanoi Hilton commander.
The retired colonel likes to pretend he could vote for McCain, turning old envelopes from his prison days into make- believe ballots, writing out his preference for McCain. ``I would vote for John McCain,'' Duyet, speaking with the government's permission, said at his home in Haiphong. He denied any torture took place under his watch.
`Frankenstein'
A McCain victory would lead to closer bilateral ties and possibly a free-trade accord, said the former warden, whose appearance and past job description correspond with a camp commander the American POWs called ```Frankenstein, for his bulging forehead and numerous facial warts,'' according to McCain's book.
While McCain has made free trade a key platform of his campaign, Democrat Barack Obama has been more skeptical, pledging to rework the North American Free Trade Agreement and opposing pending deals with Colombia and South Korea.
Like other Communist Party officials, Duyet sees no tension between the premium he now places on chasing profit in the global economy and the doctrines upon which a united Vietnam was founded.
``Lenin once said that he would spend a huge amount of money to hire a good capitalist'' to help him run the economy, said Duyet, who still considers himself a communist.
The byproducts of capitalism -- and consumerism -- can be seen in Hanoi's traffic knots. Its streets, once the domain of bicycles and motor scooters, are choked with newly purchased sport-utility vehicles.
Fake Armanis
Electronic stock tickers adorn the front of banks. Much of the old Hanoi Hilton, built by the French colonialists, was demolished to make way for an office park. A small museum remains. Inside, across an exhibit depicting a French guard beating a Vietnamese prisoner, a stall sells fake Armani and Hugo Boss ties.
Trade has been embraced by the government as the fastest way to make Vietnam a ``middle-income country,'' said Ayumi Konishi, the Asian Development Bank country director for Vietnam.
Vietnam's exports for the first part of this year have increased more than 30 percent. ``It's not at all a communist country,'' Konishi said.
Still, some older Vietnamese hold grudges against the American pilots, said Phuong, the newspaper editor. They join with another group, where Obama has strong support, he said.
``The young people, especially the ladies, prefer Obama,'' he said.
Aug. 21 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's ``bazooka'' may be intimidating the same investors he intended to reassure.
The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
They say the threat of government action is creating uncertainty that is raising the companies' borrowing costs and increasing the odds Fannie and Freddie will need taxpayer funding.
``It is the lack of clarity of what exactly the government is going to do, and what Congress is going to do, that is sending shivers'' through investors, said Axel Merk, president and portfolio manager of Merk Investments LLC in Palo Alto, California.
``To make this politically viable, why would the government even think about coming in junior to somebody else?'' he said.
Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.
Paulson's Lobbying
In lobbying for the rescue plan, Paulson told lawmakers that giving him authority to bail out the beleaguered lenders would reassure their private sources of capital.
``If you have a bazooka in your pocket and people know it, you probably won't have to use it,'' he told U.S. senators at a July 15 hearing in Washington.
Instead, investors are betting Fannie and Freddie will have little option but to tap the Treasury.
Washington-based Fannie Mae stock has fallen 74 percent and McLean, Virginia-based Freddie Mac is down 63 percent since the law was signed. Fannie shares traded at $3.93 at 9:01 a.m. in early New York Stock Exchange trading, with Freddie at $2.88, bringing their combined market capitalization to about $6.8 billion from $92.6 billion two years ago.
Fannie Mae's 5.5 percent perpetual preferred shares have dropped 28 percent this week to $15.18. Freddie Mac's 5.57 percent preferred stock has fallen 38 percent this week to $7.15.
The companies' preferred securities are typically held by insurance companies, mutual funds and banks, analysts said. That may cause Paulson to stop short of eliminating their holdings in any government intervention.
`Wiped Out'
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''
Fannie Mae and Freddie Mac's securities probably would have performed even worse without the rescue plan Paulson pushed through Congress last month, said former Federal Reserve Bank of St. Louis President William Poole.
There ``might have been a total failure'' at Freddie Mac's sale of bonds this week ``if there had not been this legislation,'' said Poole, a Bloomberg contributor. Paulson's plan ``was necessary under the circumstances,'' he said.
``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Maturing Debt
Paulson's intention to not use the authority hinges on the ability of the companies to sell debt to finance their portfolios of mortgages and asset-backed bonds. The companies have $223 billion of bonds due by the end of the quarter, according to data compiled by Bloomberg.
``They need support from the U.S. Treasury'' to finance maturing debt, said Sean Egan, president of Egan-Jones Ratings Co., a Haverford, Pennsylvania-based credit-rating company that has met with lawmakers and officials about the Treasury's options.
Freddie on Aug. 19 sold $3 billion of five-year notes at the highest yields over benchmarks in at least 10 years. Asians bought 30 percent of the debt, down from 41 percent in a May sale, company data showed. Fannie paid a record-high yield in a $3.5 billion sale of three-year notes last week, with Asian investors buying just 22 percent, almost half the demand in May.
The jump in borrowing costs belies Paulson's testimony to Senate lawmakers last month that ``the credit spreads are very strong and holding in there. I think there's confidence in the market.''
``Explicit government support leaves the GSEs in an unpredictable situation,'' said Alec Phillips, who heads Goldman Sachs Group Inc.'s Washington office and is a former staffer on the Senate Finance Committee. Fannie and Freddie ``do not yet have additional public sector capital, but this possibility may hinder attempts to raise private capital,'' he said.
Aug. 21 (Bloomberg) -- Crude oil advanced more than $3 on speculation that rising tensions between the U.S. and Russia may disrupt the flow of oil, and as a weaker dollar bolstered the appeal of commodities.
Russia, which vies with Saudi Arabia as the world's biggest oil producer, criticized U.S. plans for a missile shield in Poland. Russia's invasion of Georgia has cut some export routes for Caspian Sea crude. Oil and gold climbed as the dollar fell to the lowest against the euro in a week.
``The fall of the dollar is sending a huge investor flow into commodities,'' said Gene McGillian, an analyst at TFS Energy LLC in Stamford, Connecticut. ``The tensions between Russia and the West were supposed to be simmering down but they are now ratcheting up because of Poland's agreement with the U.S.''
Crude oil for October delivery rose $3.72, or 3.2 percent, to $119.28 a barrel at 9:10 a.m. on the New York Mercantile Exchange. Futures are down 19 percent from a record $147.27 reached on July 11. Prices are up 71 percent from a year ago.
Brent crude oil for October settlement rose $3.48, or 3 percent, to $117.84 a barrel on London's ICE Futures Europe exchange.
``The dollar has been the big driver of both the rally and the pullback,'' said Kevin Kerr, president of Kerr Trading International in Wilton, Connecticut.
The dollar fell 0.3 percent to $1.4796 per euro, from $1.4747, and touched $1.4833, the weakest since Aug. 14.
``The hope was that Russia's fields would be developed and the barrels made available,'' Kerr said. ``If you are a multinational, you are already afraid of nationalization of your assets. Now, with the recent problems between Russia and its neighbors, nobody is going to invest there.''
Foreign Control
TNK-BP, a 50-50 venture between BP Plc and a group of billionaires known collectively as AAR, is embroiled in a dispute over strategy and management. BP, which relies on the company for almost a quarter of its output, is struggling to maintain control amid pressure on foreign employees.
U.S. gasoline supplies fell 6.2 million barrels last week, the U.S. Energy Department said in a report yesterday, more than double analysts' predictions. Crude-oil stockpiles rose 9.39 million barrels to 305.9 million barrels, the biggest gain since March 2001, the report showed. Stockpiles fell the previous week when Tropical Storm Edouard hit Texas.
Fuel Production
Refineries operated at 85.7 percent of capacity in the week ended Aug. 15, down 0.2 percentage point from the week before and the lowest since the week ended May 2, the report showed.
``The market shrugged off the big crude build because they attributed it to delayed imports that couldn't arrive during the week of Edouard,'' McGillian said. ``More attention was paid to the drop in gasoline stocks and refinery runs. If refiners continue to operate at this level we won't be able to build product inventories.''
Gasoline for September delivery rose 8.78 cents, or 3 percent, to $2.9981 a gallon in New York. Futures reached a record $3.631 a gallon on July 11.
Pump prices haven't increased since July 19, according to the AAA, the nation's largest motorist organization. Regular gasoline, averaged nationwide, fell 1.5 cents to $3.702 a gallon, the AAA said today on its Web site. Prices reached a record $4.114 a gallon on July 17.
Aug. 21 (Bloomberg) -- The index of leading U.S. economic indicators fell in July by the most in almost a year, reinforcing the darkening outlook for growth.
The Conference Board's gauge dropped 0.7 percent, more than forecast and the biggest decline since August 2007, after an unchanged reading in June, the New York-based group said today. The index points to the direction of the economy over the next three to six months.
The worst housing recession in a quarter century, rising job cuts and shrinking access to credit raise the risk that consumer spending will falter by year-end, bringing the economic expansion to a halt. A separate report showed manufacturing in the Philadelphia region shrank in August for a ninth month.
The numbers are ``consistent with the weak economy right now, probably an economy in recession,'' James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, said in a Bloomberg Television interview.
The index was forecast to decline 0.2 percent, according to the median of 63 economists in a Bloomberg News survey, after an originally reported drop of 0.1 percent in June. Estimates ranged from a decline of 0.9 percent to a gain of 0.1 percent.
Orders, Sales
Sagging orders and falling sales hurt factories in the Philadelphia region this month, a report from the Federal Reserve Bank of Philadelphia showed. Its general economic index rose to minus 12.7 from minus 16.3 in July. Negative readings signal a decline. The measure averaged 5.1 last year.
The leading index decreased at a 1.8 percent annual pace over the past six months. A decline of around 4 percent to 4.5 percent at an annual pace is one signal a recession is imminent, according to the Conference Board. The gauge met that requirement in January, when it dropped at a 4.7 percent pace.
Five of the 10 indicators in today's report subtracted from the index, led by declines in building permits and stock prices.
Housing subtracted 0.53 percentage point. Building permits, a sign of future construction, fell 18 percent in July, while work began on the fewest houses in 17 years, the Commerce Department reported this week.
A 0.25 percentage point drag came from the Standard & Poor's 500 index, which averaged 1257.3 last month, down from June's 1341.2.
Jobless Claims
First-time claims for jobless benefits took away 0.23 percentage point from the leading index. Claims rose to an average 420,800 in July, and jumped to a six-year high earlier this month.
Earlier today, a Labor Department report showed initial jobless claims fell to 432,000, a level that still indicates the labor market is deteriorating.
A decline in orders for consumer goods and a drop in the money supply adjusted for inflation, which has the biggest weighting, also hurt the leading index.
Seven of the 10 economic indicators that make up the index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours.
The Conference Board estimates the remaining three -- new orders for consumer goods, bookings for capital goods, and the money supply adjusted for inflation.
The index of coincident indicators, a gauge of current economic activity, rose 0.1 percent to 106.8, after being unchanged the prior month. The gauge reached a high of 107.3 in October.
Recession Arbiter
The index tracks payrolls, incomes, sales and production, which are the figures used by the National Bureau of Economic Research to determine whether a recession has begun.
The gauge of lagging indicators rose 0.4 percent following no change the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.
Americans are spending less as firings mount. Target Corp., the second-largest U.S. discount retailer, said profit fell for the fourth straight quarter after consumers cut purchases of clothing and goods for the home.
``We do not see any indication of meaningful near-term improvement,'' Target's Chief Executive Officer Gregg Steinhafel said on a conference call this week.
Aug. 21 (Bloomberg) -- U.S. stocks dropped, extending the first weekly loss in a month, as investors speculated credit writedowns at financial firms will increase and a rise in oil damped earnings prospects for automakers and airlines.
Goldman Sachs Group Inc., Morgan Stanley and Lehman Brothers Holdings Inc. led financial shares in the Standard & Poor's 500 Index to a one-month low after Citigroup Inc. cut their profit estimates. General Motors Corp. fell as much as 3.4 percent and US Airways Group Inc. plunged 8.1 percent as oil posted the first three-day advance in more than a month. Supervalu Inc. and Safeway Inc. slipped more than 2 percent on speculation inflation will cut into supermarkets' profits.
The S&P 500 slumped 2.65, or 0.2 percent, to 1,271.89 at 10:20 a.m. in New York. The Dow Jones Industrial Average lost 28.66, or 0.3 percent, to 11,388.77, and the Nasdaq Composite Index decreased 9.88, or 0.4 percent, to 2,379.20. Three stocks fell for every two that rose on the New York Stock Exchange.
``In the financial situation overall, there are still more hurdles,'' Kurt Brunner, a Philadelphia-based money manager who helps oversee about $1.5 billion at Swarthmore Group Inc., told Bloomberg Radio. ``It's still muddy out there, and it goes across the financial spectrum.''
The S&P 500 has dropped 13 percent this year as the worst U.S. housing slump since the Great Depression slowed consumer spending and spurred turmoil in mortgage markets that saddled banks with more than $500 billion of losses. Earnings at financial companies in the S&P 500 declined 91 percent last quarter, according to Bloomberg data.
Hard-to-Sell Assets
Goldman Sachs, Morgan Stanley and Lehman will write down a combined $6.4 billion during the third quarter, Citigroup analyst Prashant Bhatia wrote in a report today.
Lehman may post a third-quarter per-share loss of $3.25, wider than the 41-cent loss Bhatia had predicted earlier. Lehman's so-called hard-to-sell assets are the highest, at $75.6 billion, followed by Goldman, at $45.2 billion, he said. The hard-to-sell assets include commercial real estate, residential mortgages and leveraged loans.
Goldman fell $1.28 to $156.91, Morgan Stanley retreated 47 cents to $36.93 and Lehman slumped 52 cents to $13.21.
`Treading Carefully'
Financial shares in the S&P 500 lost 1.4 percent, the most among 10 industries, as the cost of protecting bank debt from default rose to a five-week high. Concern grew after the Financial Times reported Lehman failed to sell a 50 percent stake to Korea Development Bank and China's Citic Securities Co. They walked away after deciding Lehman demanded too high a price, the FT said, citing people familiar with the Asian lenders.
``Smart investors are treading carefully,'' said Chirin Gill, a London-based fund manager at Daiwa SB Investments, which oversees about $60 billion. ``Investors are confused about the outlook for the economy over the next few months.''
An advance in financial shares yesterday helped snap a two- day, 2.4 percent slide in the S&P 500, its worst retreat in a month. Concern funding shortages at Fannie Mae and Freddie Mac will add to banks' $500 billion in credit losses sent financial shares down 6.3 percent during the week's first two days.
GM, the largest U.S. automaker, dropped 23 cents to $9.93 and US Airways fell 61 cents to $6.90 as oil rose. Crude gained on speculation Russian crude may be disrupted because of rising tensions with the U.S., and as the weaker dollar bolstered the hedging appeal of commodities. Oil added 3 percent to $119.05 a barrel.
Supervalu, the second-largest U.S. supermarket chain, slumped 87 cents to $25.30. Safeway, the No. 3, lost 60 cents to $25.92. UBS AG said inflation will reduce industry earnings.
Salesforce.com Inc. dropped $9.79 to $55.51 after revenue growth slowed and the company said acquisition costs will trim profit.
JDS Uniphase Corp. slumped $1.57 to $10.33, the lowest price since February. The maker of phone equipment for AT&T Inc. posted an unexpected net loss after sales of products that test networks declined.
London's Terror Bank
In the war on terror, the U.S. has had no greater friend than the United Kingdom. And as the U.S. economy continues to suffer under the burdens of Sarbanes-Oxley, our British friends have demonstrated a more sensible approach to financial regulation.
For both of the preceding statements, however, there is an exception. Even as the U.K. stands with us in rallying the world against doing business with Tehran, an Iranian bank with a history of financing terrorism continues to operate in London.
On September 8, 2006, the U.S. Treasury announced it was cutting off all direct and indirect ties to the U.S. financial system for Iran's Bank Saderat, given the bank's history of financing terrorism. Treasury's press release did not mention the United Kingdom, but an October 2007 Treasury report connected the dots.
From 2001-2006, the London subsidiary of Bank Saderat transferred $50 million from the Central Bank of Iran via a Bank Saderat branch in Beirut to front groups for Hezbollah. Hezbollah also has used the bank to funnel money to other terrorist organizations such as Hamas. Almost two years after the U.S. cut off Saderat's access to American finance, and close to a year since the Bush Administration diagrammed the electronic money trail from Tehran to terror via London, Bank Saderat PLC continues to do business in the U.K.
In March, the U.N. Security Council imposed its third round of sanctions against Iran for its refusal to halt its nuclear weapons program. Included in the sanctions package was a warning to all countries "to exercise vigilance" on transactions with all Iranian banks, but especially Bank Saderat and Bank Melli, due to the risk that such transactions could support illicit nuclear activities. A June 14 statement by the G-8 finance ministers also singled out Saderat and Melli as rogue banks.
Better late than never, on June 23 the European Union, with support from the U.K., imposed tough sanctions, including an asset freeze -- but only on Bank Melli. The penalty was richly deserved. Melli is Iran's largest bank, and according to Treasury, "through its role as a financial conduit, Bank Melli has facilitated numerous purchases of sensitive materials for Iran's nuclear and missile programs."
Treasury further notes that Melli is the banker to Iran's Revolutionary Guards Corps and the Qods force. During the period 2002-2006, Bank Melli was the conduit for more than $100 million sent to the Qods force. This is the outfit, you'll recall, that provides weapons, money and training to insurgents trying to kill U.S. soldiers in Iraq and Afghanistan. The U.K. has not revoked the license of Bank Melli's London subsidiary, but the EU sanctions have left the bank largely unable to conduct new business.
The same cannot be said for Bank Saderat. Even though the U.N. Security Council makes no distinction between the two Iranian banks in warning of their potential to finance Tehran's nuclear ambitions, the EU and the U.K. have allowed Saderat a much longer leash. The bank's subsidiary continues to operate in London, while Saderat branches exist in France, Germany and Greece. The latter three countries aren't known as the most helpful of our allies, although France has worked closely with U.S. intelligence agencies.
The U.K. policy is more of a puzzle. Just this month, the Brits joined with U.S. and French officials in sending a letter to the U.N. Security Council warning against "Iran's continued attempts to conduct prohibited proliferation-related activity and terrorist financing." The letter said that Iranian banks were acting to evade financial sanctions. Given that Bank Saderat PLC has been precisely the mechanism to get money to terrorists, it's hard to understand why the rogue financial institution still enjoys a home in London.
Perhaps the Brits are wary of damaging London's reputation as a global financial center, and losing an advantage over New York. If there's another explanation, we haven't heard it; Her Majesty's Treasury in Britain declined comment when we called. In any case, we're told by a senior U.S. source that other countries are beginning to ask why they should cut Iranian banking ties if such business can still be conducted in London. Iranian Banks Sepah and Persia International, which have also been the target of U.S. sanctions, are also still operating in the U.K.
British action could be particularly beneficial now, as the policy of isolating Iran from the international banking system appears to be putting genuine stress on Mahmoud Ahmadinejad's government. Almost all of the world's commercial banks have ceased doing business with Iran, making even routine trade a logistical challenge. It's not a coincidence that Iran's economy has been struggling even amid an oil boom, or that internal dissent against the Iranian government is increasing.
Further help from America's best antiterror ally could be critical in forcing needed change in Tehran.
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