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West raises pressure on neutral Switzerland over Iran

By Emma Farge

GENEVA (Reuters) - Switzerland's neutrality is being tested as Brussels and Washington raise pressure over gaps in sanctions against Iran, in particular measures against its oil industry.

While Switzerland has replicated the western line on Libyan and Syrian economic sanctions, it has reasserted its traditional neutrality over Iran and opted out of some of the measures passed by Europe and the United States.

Washington and Brussels have severely tightened sanctions on Iran this year over accusations that Tehran is pursuing nuclear weapons. Iran says its nuclear program is peaceful.

The EU imposed a ban on Iranian oil imports that took effect in July. Both the United States and the European Union have imposed sanctions on Iran's central bank. New U.S. sanctions allow the White House to cut off access to the U.S. financial system by third countries that trade with Iran.

Switzerland says some of the measures simply go too far.

"We are not putting in place, or are applying differently, sanctions that seem to us to go too far and tend towards 'regime change'. In particular, that is the issue with the central bank, financial restrictions and the oil embargo," Foreign Minister Didier Burkhalter told Reuters.

Since the main U.S. and EU sanctions took effect in July, Iran's rial currency has tumbled and its oil exports have fallen, which Washington and Brussels say shows that sanctions are now having a real effect.

The Swiss government chose not to join the European Union's embargo on Iranian oil in July and did not add Iran's central bank to a sanctions list. The gulf widened further in October, when the EU voted to tighten sanctions again.

Burkhalter declined to comment on whether Switzerland plans to extend its sanctions this month.

Switzerland's prominence as a commodities trading hub means that its decision to stay neutral on the EU oil embargo could be more than symbolic. Geneva alone is responsible for over a third of global traded crude oil volumes and is home to top trading houses Vitol, Trafigura and Mercuria.

These firms say they have stopped trading Iranian oil. Still, some Western diplomats are concerned that Swiss neutrality could lead to a repeat of events during South African apartheid when oil traders used Switzerland as a base for bypassing sanctions.

Switzerland is also home to two Iranian oil firms - Naftiran Intertrade Company (NICO) and Petro Suisse Intertrade Company - which both feature on U.S. sanctions lists. NICO, an oil trading firm owned by the Iranian government, was added to the EU blacklist in October.

"It's not a secret to say that the United States and the EU have a problem with Swiss non-alignment. I think it's important for economic and for symbolic reasons for countries to stand shoulder to shoulder," said a western diplomatic source.

An EU diplomatic source said that the bloc had "tightened up the message" to Switzerland and was now "urging" the country to align with the last set of EU measures.

"Some daylight has emerged between the two systems and that has raised doubts among some member states," said the source who requested anonymity. Switzerland is not a member of the EU, but Brussels can influence Berne policy because of the EU's importance as a trading partner.

The Alpine country's decision to stay neutral on the EU oil embargo and the presence of NICO were raised at a meeting in London in October between Swiss officials responsible for sanctions policy and British Foreign Office representatives, according to a third western diplomatic source.

And this summer, the U.S. ambassador in Berne, Donald S. Beyer, said there was "disappointment" in the U.S. camp that Switzerland had not matched EU measures on Iran.

DEFENDING NEUTRALITY

Switzerland's neutrality has been useful to Washington: the Swiss embassy in Tehran has represented U.S. interests in Iran since 1980, following the Islamic revolution in 1979.

Asked how Switzerland could be expected to both represent U.S. interests in Tehran and toughen sanctions, one of the diplomats familiar with the U.S. position said: "Priorities have to be made. The U.S. priority is getting sanctions right."

Interviews with Swiss government officials point to ambivalence over sanctions.

The Swiss cabinet did vote to tighten some sanctions against Iran in January 2011. It held a secret vote on the EU's Iran sanctions shortly before this year's July embargo deadline, but that vote was split, resulting in only partial adoption of the EU package, said a source familiar with Swiss foreign policy.

According to the source, Burkhalter has privately lamented that mediation between Washington and Tehran had become more difficult since the Swiss decision to tighten sanctions in January 2011.

Jacques Neirynck, a member of the Swiss parliament's Foreign Affairs Committee, said ceding to U.S. pressure on Iran would be unpopular with voters.

"If the population thinks that we are selling off our neutrality because of U.S. pressure, that would be a huge scandal. Neutrality is absolutely fundamental and we can't stray from that," he told Reuters.

Western powers have already pointed the finger at Switzerland over its Iran policy in the recent past. In a 2007 official visit to Iran, Micheline Calmy-Rey, who then held the two posts of Swiss foreign minister and president, helped broker a 25-year gas contract for Swiss energy company EGL.

A diplomatic cable published on anti-secrecy website Wikileaks revealed that a U.S. diplomat in Berne raised "objections" to the deal in a secret meeting with Calmy-Rey.

The U.S. diplomat noted that a failure to end the deal "would have a severe negative effect on the international community's efforts to keep the pressure on Tehran to achieve a diplomatic solution" to the nuclear standoff.

EGL, which has been acquired by Axpo International, has since suspended the contract.

TRADE SECRETS

It remains unclear what portion of Iran's oil trade, if any, is now handled out of Switzerland. Since July, the Swiss government has required all transactions with Iran in the oil and petrochemical sectors to be reported to the authorities.

Erwin Bollinger, head of export controls and sanctions at the Swiss State Secretariat for Economic Affairs (SECO), said Switzerland had the authority to open up the books of a trading house suspected of concealing Iran transactions and could bring charges against it.

SECO rejected a Reuters request for a copy of the list in September under Switzerland's transparency law. The body cited commercial secrecy, risks to foreign policy and other factors. Reuters is appealing the decision.

Industry sources said most Swiss trading houses have stopped doing business with Iran because of fears of falling foul of other western sanctions measures and because of difficulties financing the deals.

The Presidents of the Geneva Trading and Shipping Association and the Zug Commodity Associations both said they had not discussed Iran sanctions with the government.

Swiss-based banks active in commodity trade finance, such as Credit Agricole and Banque Cantonale de Geneve, said that they had stopped financing Iranian transactions. Trade finance for food deliveries to Iran is still permitted so long as this is reported to SECO.

Still, for traders plucky enough to take on the risks of dealing with Iran, there are opportunities on Swiss soil. One self-employed oil trader told Reuters on condition of anonymity that he was trying to structure an oil deal with Iran using the Swiss loophole. He did not provide details.

"The biggest advantage that Switzerland offers is to niche traders who will still see the advantages of operating in a relatively lightly regulated environment," said Benjamin Knowles, a partner at law firm Clyde & Co. advising commodities companies.

Swiss reporting requirements do not apply to offshore branches of trading houses. Matthew Parish, partner at Geneva's Holman Fenwick Willan, said this opened doors.

"Even if the transactions are reported, authorities aren't entitled to impose a ban so it's just a list for intelligence authorities. In contrast to the U.S. and EU systems, the Swiss regime applies only to Swiss registered entities and doesn't apply to foreign-owned subsidiaries," said Parish.

The matter was raised by a group of seven Socialist Party politicians in parliament, and the Swiss cabinet is due to reply later this month on a proposal to extend the Iran reporting requirements to cover offshore branches of oil trading firms.

In September, Swiss-based top oil trader Vitol confirmed in response to a Reuters article that it had bought Iranian fuel oil via a Bahraini subsidiary this summer but said it has since stopped trading with Iran.

EXPORT PINCH

Even with its lighter version of sanctions on Iran, Switzerland's international exports have suffered, heaping pain on industries already hurting from the strong Swiss Franc.

Its exports to Iran including machinery, pharmaceuticals and watches were down by around 34 percent to 311 million Swiss Francs ($330.99 million)in the first eight months of this year, SECO said. Ironically, U.S. trade with Iran over the same period jumped by nearly a third to $199.5 million, chiefly because of grain sales, the Census Bureau said in October.

Switzerland has also blocked 35 million Swiss Francs ($37.25 million) in Iranian assets.

And while two Iranian oil companies, NICO and Petro Suisse, have so far escaped Swiss sanctions, another Swiss-based Iranian oil and gas services company, Pearl Energy, was added to a Swiss sanctions list last November.

Corporate registration documents show that the Lausanne-based firm went into liquidation earlier this year. The company did not reply to a request for comment.

Swiss industry sources previously involved with Iranian deals said fears of legal issues had caused them to cancel business with Iran, even where still permitted.

"Even with instruction books for machines in Iran I need special permission," said Rolf Muster, Chief Executive of Schaublin, a Swiss machine tools manufacturer.

"Now I won't even send a screw." ($1 = 0.9396 Swiss francs)

(Reporting by Emma Farge; Additional reporting by Stephanie Nebehay; Editing by Peter Graff)