Diplomacy – plus commodities – elevate Swiss role on Iran

Geneva hosts major oil traders such as Vitol, Gunvor and Trafigura Reuters

As a global hub for diplomacy and at least 20% of the world’s commodities trading, Switzerland is poised to play a central role in the anticipated opening of Iranian markets to the world.

Swiss traders used to deal Iranian oil through the back door, but an Iranian nuclear deal under discussion in Switzerland this week by six major powers and Iran would allow them to do the same thing – this time on the level. Iran stands to get about $7 billion (CHF6.7 billion) in relief from international sanctions that have badly damaged its economy, clearing the way for what experts say could be billions more in oil and raw material contracts flowing through Swiss trading networks.

Despite the “huge supplementary amount of money that would go through the Swiss economy”, the real significance of the deal would be the additional boost to Swiss credibility and prestige as a multi-dimensional commodity power broker at the centre of geopolitical deal-making, according to Emmanuel Fragnière, a professor of commodity trading at the University of Applied Sciences and Arts of Western Switzerland.

“It’s already a hub for commodities like oil and grain. And even if there is competition in the world, for instance with Singapore, to attract some of the commodities, there is still something that is unique to the hub in Switzerland, and that is it is multi-product, multi-commodity oriented,” Fragnière told swissinfo.ch, adding that the days when traders could focus on one particular item, or grain, were now over.

“Moreover, everything that is related to politics is all discussed in Switzerland. There is a strong geopolitical dimension. It’s to feed a region; it’s to get enough energy for a country,” he said of the Swiss low-tax havens, notably Geneva, Zug and Lugano, that serve as important centres of raw materials trade for companies such as GlencoreXstrata, Trafigura and Vitol.

Switzerland’s CHF20 billion ($21 billion) commodities trading industry accounts for 3.5 per cent of the country’s gross domestic product, making it bigger than tourism, according to the latest government figures. Geneva, aside from hosting major oil traders such as Gunvor, Trafigura and Vitol, also serves as an important centre for diplomats, policy-makers and officials attached to the European headquarters of the United Nations and hundreds of other international organisations, the Geneva Conventions and other treaties.

US Secretary of State John Kerry held another round of nuclear talks in Montreux this week with Iranian Foreign Minister Javad Zarif over Tehran’s nuclear programme. Some progress was reported toward their deadline for crafting a framework agreement in late March that allows for a final pact in June. The next round is scheduled for March 15. But the Iranians, who said a deal seemed close, so far have rejected President Barack Obama’s proposal that would effectively freeze nuclear development in Iran for at least a decade – more than the seven years some Iranians have wanted and less than the 15 years some other Americans have suggested.

Impact of a deal

In light of the nuclear talks, Swiss ambassador to Washington, Martin Dahinden, has told swissinfo.ch that Switzerland serves as “the protective power of the US in Iran”, by serving as an intermediary between those countries, which lack formal relations. But he declined to comment more specifically.

With the Iran nuclear negotiations still in flux, commodity industry representatives were reluctant to weigh in on the potential ramifications of an agreement. A representative of the Swiss Trading and Shipping Association declined to comment and said it had no specific numbers about what a deal could mean for the famously close-lipped industry that it represents in Switzerland.

According to the group’s latest figures, Switzerland has about 500 companies with some 10,000 employees directly involved in commodities shipping and trading, accounting for one-third of global trade in crude oil and other products. It says Swiss traders are No. 1 worldwide in the setting up the financing, shipping and inspections needed for commodity trades and in the handling of grains and oil seeds.

“We wouldn’t go out on a limb and speculate about what a deal might look like,” said a spokesman for the association. Representatives of some of the biggest players in the commodities sector also said they wanted to steer clear of speculating. It was too early to tell, they said, whether there would be a deal, how quickly sanctions might be lifted, and what might be the effects of more oil coming on the market.

A deal could open up lucrative oil development contracts to foreign investors. Iran, which holds the world’s fourth largest proved crude oil reserves and second-largest natural gas reserves, saw its oil production drop by more than half to just over one million barrels a day between 2011 and 2013 because of tightened sanctions imposed by the UN and Western nations. Iran increased production slightly in 2014, and Iranian officials said they could double oil exports if sanctions were lifted.

More supply of oil, whose prices have been tumbling lately, would drive prices down further, which would benefit commodity importers. Rising oil prices helps commodity exporters.

Joseph Di Virgilio, a commodities expert and chief investment officer for Ardour Asset Management, which specialises in energy and natural resources segments, told swissinfo.ch that more oil supply could translate to further deterioration in prices, particularly in benchmark Brent Crude.

Historically, Swiss commodities firms have dealt with oil from “blacklisted” jurisdictions more than other Western economies, said Di Virgilio, a former Geneva oil trader, and if sanctions lift Tehran probably won’t be able to increase production enough to disrupt global oil markets.

“In the case of Iran, we have seen the Swiss government go back and forth in trying to keep good relations or impose sanctions on Tehran. In 2006, Bern stopped importing Iranian oil and reversed that decision in 2012,” Di Virgilio said.

“Geneva will continue to provide liquidity. Many commodity dealers may find relief in potentially transacting with greater transparency moving forward with Iran, provided the deal is sealed,” he added. “Geneva will continue to be a major hub for commodities trading and not just energy related but also in the soft commodities space.”

Transparency

The potential opening of Iran’s markets isn’t a concern in and of itself for the non-governmental Berne Declaration group, which has called for the creation of an independent supervisory authority to oversee the Swiss commodities market. The group, which says the sector cannot regulate itself, has been campaigning against the systemic corruption, inequality and environmental abuses and opacity in the Swiss commodities trade.

“We’re not judging markets,” said Oliver Classen of the Berne Declaration, a financial watchdog. “We’re concerned with the lack of political regulation and control (in commodities trading). … If there are no sanctions, then just market rules apply.”

One of Glencore founder Marc Rich’s claims to fame was that he was the underground man for selling Iranian oil to Israel. Rich, who was known as the “King of Commodities”, fled from the United States to Switzerland in 1983 after he was indicted on more than 50 counts of fraud including trading with Iran during the US Embassy hostage crisis. He was pardoned in 2001 by President Bill Clinton.

Swiss law may be changing to insist on more transparency with commodities trading. A major financial services reform bill is being studied in parliament that would force commodities traders to provide more information about payments, dealings with other countries and political backers.

Meantime, financial measures imposed by the European Union and the US have made trade more difficult with Iran for food and other basic items. GlencoreXstrata and major agribusiness firms such as Archer Daniels Midland and Cargill that have large operations in Switzerland have all been big players in food trade with Iran.

Fragnière sees Switzerland’s real strength as those sorts of operations.

“Today, if you want to run a proper trading company, you need to develop all these synergies and you need to have a foot in all of these supply chains. In ten years, the context has changed. We started in a market run by specialists and have transitioned to a market that is inter-related and inter-connected,” he said.

“Switzerland is a hub, a very expensive hub, nevertheless it is the sole hub that is related to several markets, and because of this it has developed the skill to handle a commodity sector that is adapted to the new rules of commodity trading, meaning multi-commodities,” said Fragnière. “And there is a long tradition of solving the problems from the geopolitical dimensions of trade.”