Monetary Policy in Hungary

Total Page:16

File Type:pdf, Size:1020Kb

Monetary Policy in Hungary MONETARY POLICY IN HUNGARY May 2000 Produced by staff members of the Monetary Policy Department of the National Bank of Hungary Edited by: Ilona Bozó The publication presents an overview of the monetary policy of the National Bank of Hungary. This, however, does not preclude the manifestation of personal views of the authors in certain chapters. These do not necessarily reflect the official standpoint of the NBH. Produced by the Monetary Policy Department of the National Bank of Hungary Headed by György Sándor, Managing Director Published by the Secretariat of the National Bank of Hungary Publisher in charge: Dr. József Kajdi Translated by Németh & Pásztor International Kft Design typography and typesetting by the Publications Group of the Information Division 1850 Budapest, V. Szabadság tér 8–9. Internet: http://www.mnb.hu ISBN: 963 9057 72X CONTENTS FOREWORD .................................... 5 I. THE ROLE OF THE CENTRAL BANK IN HUNGARY A BRIEF HISTORY OF THE NATIONAL BANK OF HUNGARY (Ilona Bozó, József Szabó ) ............................. 9 The Austrian National Bank and the Austro-Hungarian Bank.......... 9 The Independent Hungarian Central Bank ................... 11 Preparations ................................ 11 From the Foundation of the NBH until the Second World War ....... 12 Shift to a Command Economy ....................... 13 The Central Bank in the Period of the Socialist Command Economy ...... 13 The Transformation of the National Bank of Hungary and the Banking Sector in 1987................................... 15 THE ROLE OF THE NATIONAL BANK OF HUNGARY IN THE FINANCIAL SYSTEM (Ilona Bozó, Zsolt Érsek, József Szabó , Henrik Tóth) .............. 17 The Functions and Role of the Central Bank in the Financial System...... 17 Issue of Banknotes and Coins ....................... 19 The Central Bank as the Banker of banks ................. 20 The Lender of Last Resort Function .................... 21 The Central Bank as the Government’s banker............... 23 Foreign Exchange Reserve Management at the NBH ............ 25 The Regulatory Function .......................... 27 Bank Supervision.............................. 29 Maintenance of the Payment System .................... 30 Statistics .................................. 34 Organisational Structure and Decision-Making ................. 35 The Bodies of the NBH Defined by the Act on the Central Bank ...... 35 Central Bank Independence .......................... 38 The Importance of Independence...................... 38 Personal Independence........................... 39 Operational Independence ......................... 40 Financial Independence .......................... 41 The Requirement of Transparency in Central Banks ............ 42 MONETARY POLICY IN HUNGARY 3 II. THE OBJECTIVES OF MONETARY POLICY AND ITS IMPACT ON THE ECONOMY THE OBJECTIVES OF MONETARY POLICY (Áron Gereben, Zsolt Kondrát) .... 45 The Ultimate Goal of Monetary Policy ..................... 45 Price Stability versus Economic Growth .................. 47 The Ultimate Goal of Hungarian Monetary Policy.............. 49 Intermediate Targets .............................. 51 The Hierarchy of Objectives ........................ 51 The Intermediate Target of the NBH .................... 53 The Lower Level of the Set of Objectives .................... 56 The Operating Target of the NBH ..................... 57 INDICATORS (Gyula Barabás, Emma Boros, Csaba Horváth, Anna Kerekes) ... 59 Monetary Aggregates.............................. 59 Credit Aggregates and the Net Financing Capacity............... 62 The Information Content of the Yield Curve for Monetary Policy ........ 63 MONETARY TRANSMISSION (András Kármán) .................. 68 The Channels of Monetary Transmission .................... 68 Interest Rate Transmission ........................... 71 The Effectiveness of Transmission ..................... 71 The Effectiveness of Interest Rate Transmission in Hungary ........ 72 The Interest Rate Policy of the NBH .................... 73 Transmission Along the Yield Curve .................... 75 III. THE INSTRUMENTS OF MONETARY POLICY A HISTORICAL OVERVIEW OF THE DEVELOPMENT OF THE INSTRUMENTS (Ilona Bozó) .................................... 81 The Use of Direct Monetary Instruments .................... 81 Money Market Development—Use of Indirect Instruments ........... 83 THE OPERATION OF THE INSTRUMENTS TODAY (Ilona Bozó, Tamás Glanz, Henrik Tóth) .................................. 87 Foreign Exchange Market Intervention ..................... 87 The Operation of the Forint Instruments .................... 88 Reserve requirement system ........................ 89 The Basic Set of Current Central Bank Instruments ............ 94 Interest Rate Corridor............................ 97 The Policy Instrument ........................... 99 The Instruments of Sterilisation....................... 101 Liquidity Planning and Fine-Tuning (Quick Tender) ............ 104 Individual Elements in Operating the Instruments ............. 111 BIBLIOGRAPHY .................................. 113 ANNEX....................................... 115 GLOSSARY .................................... 117 INDEX ....................................... 129 4 NATIONAL BANK OF HUNGARY FOREWORD Hungary’s transition to a market economy has by now essentially come to an end. The judicious conduct of monetary policy has been an important factor in help- ing the economy develop along a balanced and sustain- able path. he National Bank of Hungary (NBH) re- households, have a good understanding of Tlies on an established and properly func- our intentions and of the conditions for the tioning set of instruments in the pursuit of its achievement of our objectives of maintain- monetary policy objectives. The success of ing economic equilibrium and reducing in- monetary policy depends, however, not only flation. Transparency and predictability im- on the instruments available to the central prove the effectiveness of monetary policy, bank and the experience gained in using because they enable economic agents to these instruments. External shocks and the anticipate monetary policy actions and cal- economy’s ability to withstand them, the culate with their effects in their economic stability of the financial sector and the matu- decisions. rity of the money and capital markets are To ease finding their way and with an equally important factors which influence intention of providing a compass, we annu- and constrain monetary policy decision- ally present the Monetary Policy Guidelines making. to the public in general and to Parliament in Hungary has coped successfully with particular. The NBH regularly publishes its the challenges of economic transition. The Inflation Report. Communications disclosed economy is now growing at a relatively fast about specific steps of the Central Bank and rate, inflation is declining steadily and the communiqués issued after meetings of the current account deficit is at a manageable Central Bank Council are discussed exten- level. Monetary policy has promoted this sively by the press. Once approved by its process through the deployment of mone- General Meeting, the NBH presents its An- tary policy instruments which have sup- nual Report to Parliament. Nevertheless, we ported Hungary’s fixed exchange rate re- feel that this publication, which focuses not gime. on the peculiarities of the momentary situa- tion but on the operating framework and the The expert deployment of monetary general features of the Central Bank instru policy instruments is a necessary, but not - sufficient condition for the effective func- ments, fills a vacuum. tioning of the transmission mechanism of This publication, Monetary Policy in monetary policy. An equally important fac- Hungary, was compiled by members of the tor is that economic agents, ranging from Monetary Policy Department of the NBH, professional financial organisations to who themselves are party to the everyday MONETARY POLICY IN HUNGARY 5 workings of monetary policy, decision sup- tion first and foremost to readers interested port activities and the formation and opera- in the subject matter of this publication. tion of the set of applied instruments. This is I trust that, in its own way, this hand- intended as a summary based on practical book will render the transmission mecha- experience which, by virtue of its very sub- nism of monetary policy smoother and, al- ject, cannot in all of its parts be regarded as beit indirectly, may contribute to the future easy reading. While required to report on its development of the Hungarian economy. activities to society at large, the National Bank of Hungary desires to provide informa- Werner Riecke 6 NATIONAL BANK OF HUNGARY I. THE ROLE OF THE CENTRAL BANK IN HUNGARY I. THE ROLE OF THE CENTRAL BANK IN HUNGARY MONETARY POLICY IN HUNGARY 7 I. THE ROLE OF THE CENTRAL BANK IN HUNGARY 8 NATIONAL BANK OF HUNGARY A BRIEF HISTORY OF THE NATIONAL BANK OF HUNGARY1 lthough historically the Sweden’s control by setting up an independent gov- ASveriges Riksbank, established in 1668, ernment’s banker. is the oldest central bank, institutions acting The Austrian National Bank (ANB), es- as the government’s banker came into being tablished by the Emperor’s patent on 1 June all over Europe, modelled in general on the 1816, was “a patented private institution Bank of England, which was established in under the special protection of public ad- 1694. ministration”2 whose business relations to On the continent, the Austrian central the state
Recommended publications
  • U.S Trade Policy-Making in the Eighties
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Politics and Economics in the Eighties Volume Author/Editor: Alberto Alesina and Geoffrey Carliner, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-01280-8 Volume URL: http://www.nber.org/books/ales91-1 Conference Date: May 14-15, 1990 Publication Date: January 1991 Chapter Title: U.S Trade Policy-making in the Eighties Chapter Author: I. M. Destler Chapter URL: http://www.nber.org/chapters/c5420 Chapter pages in book: (p. 251 - 284) 8 U. S. Trade Policy-making in the Eighties I. M. Destler 8.1 Introduction As the 1970s wound to a close, Robert Strauss, President Jimmy Carter’s Special Trade Representative, won overwhelming congressional approval of the Tokyo Round agreements. This was a triumph of both substance and polit- ical process: an important set of trade liberalizing agreements, endorsed through an innovative “fast-track” process that balanced the executive need for negotiating leeway with congressional determination to act explicitly on the results. And it was accompanied by substantial improvement in the nonoil merchandise trade balance. Both the substance of trade policy and the process of executive- congressional collaboration would be sorely tested in the 1980s. During the first Reagan administration, a mix of tight money and loose budgets drove the dollar skyward and sent international balances awry. The merchandise trade deficit rose above $100 billion in 1984, there to remain through the decade (see table 8.1). The ratio of U.S. imports to exports peaked at 1.64 in 1986, a disproportion not seen since the War between the States.
    [Show full text]
  • How Does a Surplus Affect the Formulation and Conduct of Monetary Policy?”
    Mr Meyer answers the question “How does a surplus affect the formulation and conduct of monetary policy?” Speech by Mr Laurence H Meyer, Member of the Board of Governors of the US Federal Reserve System, before the 16th Annual Policy Conference, National Association for Business Economics, Washington, D.C. on 23 February 2000. * * * This is a conference on fiscal policy, specifically on how to allocate any potential future surpluses among debt reduction, tax cuts, and spending increases. The question you and I might be asking right now is: what is a monetary policymaker doing here? You know, of course, that I always enjoy visiting with my fellow NABE members. But what contribution can I make to this important topic? My assignment is to answer this question: How do the prevailing surplus and, especially, decisions about the allocation of future potential surpluses affect the formulation and conduct of monetary policy? The best way to understand the issues involved, in my view, is through the concept of the policy mix. Using this concept will allow us to focus on the implications of alternative combinations of monetary and fiscal policies - yielding the same level of aggregate demand - for the real interest rate, the composition of output, and the current account balance. And it also will help us understand the key source of the interdependence of monetary and fiscal policy decisions. In planning my remarks today, I intended first to discuss the analytics and the politics of the policy mix and then to illustrate the power of the analysis by using it to explain some of the important features of our current experience.
    [Show full text]
  • Money Supply ECON 40364: Monetary Theory & Policy
    Money Supply ECON 40364: Monetary Theory & Policy Eric Sims University of Notre Dame Fall 2017 1 / 59 Readings I Mishkin Ch. 3 I Mishkin Ch. 14 I Mishkin Ch. 15, pg. 341-348 2 / 59 Money I Money is defined as anything that is accepted as payments for goods or services or in the repayment of debts I Money serves three functions: 1. Medium of exchange 2. Unit of account 3. Store of value I Any asset can serve as a store of value (e.g. house, land, stocks, bonds), but most assets do not perform the first two roles of money I Money is a stock concept { how much money you have (in your wallet, in the bank) at a given point in time. Income is a flow concept 3 / 59 Roles of Money I Medium of exchange role is the most important role of money: I Eliminates need for barter, reduces transactions costs associated with exchange, and allows for greater specialization I Unit of account is important (particularly in a diverse economy), though anything could serve as a unit of account I As a store of value, money tends to be crummy relative to other assets like stocks and houses, which offer some expected return over time I An advantage money has as a store of value is its liquidity I Liquidity refers to ease with which an asset can be converted into a medium of exchange (i.e. money) I Money is the most liquid asset because it is the medium of exchange I If you held all your wealth in housing, and you wanted to buy a car, you would have to sell (liquidate) the house, which may not be easy to do, may take a while, and may involve selling at a discount if you must do it quickly 4 / 59 Evolution of Money and Payments I Commodity money: money made up of precious metals or other commodities I Difficult to carry around, potentially difficult to divide, price may fluctuate if precious metal or commodity has consumption value independent of medium of exchange role I Paper currency: pieces of paper that are accepted as medium of exchange.
    [Show full text]
  • SOCIAL DIALOGUE and the EXPANDING WORLD the Decade
    Lajos Héthy SOCIAL DIALOGUE AND THE EXPANDING WORLD The decade of tripartism in Hungary and in Central and Eastern Europe 1988-99 European Trade Union Institute Bruxelles, 2001 The author: Lajos Héthy is one of the architects of social dialogue in Hungary. He holds degrees as an economist and sociologist, academic doctor of sociology and h. professor (Faculty of Economics, Janus Pannonius University, Pecs). As director of the Labour Research Institute, Budapest (1980-99) he headed the government’s Wage Reform Expert Group (1987-88), paving the way for the establishment of the tripartite Interest Reconciliation Council. In 1990-91 he was deputy secretary of state, and in 1994-98 political secretary of state of the Ministry of Labour and the government’s chief negotiator in the tripartite institutions. He has been working as an expert for the International Labour Organization since 1978. In 1994-98 he was Hungary’s government delegate to the ILO’s Governing Body. In 1996-97 he participated in the ILO’s exercise in developing tripartism in Albania. He was the founder and first president of the Hungarian Industrial Relations Association (1991-99). He has published widely on labour relations and labour administration issues in Hungary and abroad. At present he is director for labour and employment, UN Civil Administration, Kosovo. Acknowledgements The author expresses his thanks to his colleagues – Mr. György Kaucsek, Ms. Zsófia Fried and Ms. Edit Lakatos – who helped him in researching and in putting together this book. He extends his thanks to those colleagues and friends who contributed to the improvement of the manuscript by reading it and commenting on it – to Mr.
    [Show full text]
  • D Quantifying the Policy Mix in a Monetary Union with National Macroprudential Policies186
    D Quantifying the policy mix in a monetary union with 186 national macroprudential policies In a monetary union, targeted national macroprudential policies can be necessary to address asymmetric financial developments that are outside the scope of the single monetary policy. This special feature discusses and, using a two-country structural model, provides some model-based illustrations of the strategic interactions between a single monetary policy and jurisdiction-specific macroprudential policies. Counter- cyclical macroprudential interventions are found to be supportive to monetary policy conduct through the cycle. This complementarity is significantly reinforced when there are asymmetric financial cycles across the monetary union. Introduction Macroprudential policy in the euro area is primarily conducted by designated national macroprudential authorities, with a central coordinating and horizontal role for the ECB – especially since the establishment of the Single Supervisory Mechanism (SSM) which granted the ECB some macroprudential powers.187 The predominantly decentralised organisation of macroprudential policy-making in the euro area reflects inter alia the still incomplete integration of national banking sectors and heterogeneous financial cycles across euro area countries. In addition, as the single monetary policy mandate is to deliver price stability over the medium term for the euro area as a whole, monetary policy may actually look through financial stability risks building up in specific market segments, jurisdictions or individual countries. Such risks could also have implications for financial stability at the area-wide level. Hence, in a monetary union setting such as the euro area, nationally oriented macroprudential policies have a role to play in ensuring financial stability for all jurisdictions and supporting monetary policy conduct through the cycle.
    [Show full text]
  • List of Certain Foreign Institutions Classified As Official for Purposes of Reporting on the Treasury International Capital (TIC) Forms
    NOT FOR PUBLICATION DEPARTMENT OF THE TREASURY JANUARY 2001 Revised Aug. 2002, May 2004, May 2005, May/July 2006, June 2007 List of Certain Foreign Institutions classified as Official for Purposes of Reporting on the Treasury International Capital (TIC) Forms The attached list of foreign institutions, which conform to the definition of foreign official institutions on the Treasury International Capital (TIC) Forms, supersedes all previous lists. The definition of foreign official institutions is: "FOREIGN OFFICIAL INSTITUTIONS (FOI) include the following: 1. Treasuries, including ministries of finance, or corresponding departments of national governments; central banks, including all departments thereof; stabilization funds, including official exchange control offices or other government exchange authorities; and diplomatic and consular establishments and other departments and agencies of national governments. 2. International and regional organizations. 3. Banks, corporations, or other agencies (including development banks and other institutions that are majority-owned by central governments) that are fiscal agents of national governments and perform activities similar to those of a treasury, central bank, stabilization fund, or exchange control authority." Although the attached list includes the major foreign official institutions which have come to the attention of the Federal Reserve Banks and the Department of the Treasury, it does not purport to be exhaustive. Whenever a question arises whether or not an institution should, in accordance with the instructions on the TIC forms, be classified as official, the Federal Reserve Bank with which you file reports should be consulted. It should be noted that the list does not in every case include all alternative names applying to the same institution.
    [Show full text]
  • Intermediate Macroeconomics (Econ 300) – Spring 200 8 – Ilan Noy Practice Midterm
    INTERMEDIATE MACROECONOMICS (ECON 300) – SPRING 200 8 – ILAN NOY PRACTICE MIDTERM USE GRAPHS WHENEVER THAT IS POSSIBLE!!! 1) Based on your understanding of the AS-AD model and the IS-LM model, graphically illustrate and explain what effect an increase in government expenditures will have on the economy. a) Graph everything. In your graphs, clearly illustrate the short-run and medium-run equilibria. b) Explain (in words) why the medium-run equilibrium is different from the short-run. c) Was this increase in government expenditures neutral in the medium run? Explain. 2) Explain in detail what short run effect(s) a Fed sale of bonds will have on: (a) The money market diagram; (b) The LM curve; and (c) the IS curve. 3) Explain how the unemployment rate is calculated. In your answer, include an explanation of each of the variables used to calculate the unemployment rate. 4) Increases in the budget deficit are believed to cause reductions in investment (crowding out). Based on your understanding of the IS-LM model, will a tax cut cause a reduction in investment? Explain using a graph. 5) Use the IS-LM model to answer this question. Suppose there is a simultaneous increase in government spending and increase in the money supply. Explain what effect this particular policy mix will have on output and the interest rate. Based on your analysis, do we know with certainty what effect this policy mix will have on output? Explain using a graph. 6) Explain the difference between the GDP deflator and the CPI. Which one is a better indicator of inflation? Why? 7) Based on your understanding of the AS-AD model and the IS-LM model, graphically illustrate and explain what effect an increase in taxes will have on the economy.
    [Show full text]
  • Sudden Stops and Currency Drops: a Historical Look
    View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Research Papers in Economics This PDF is a selection from a published volume from the National Bureau of Economic Research Volume Title: The Decline of Latin American Economies: Growth, Institutions, and Crises Volume Author/Editor: Sebastian Edwards, Gerardo Esquivel and Graciela Márquez, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-18500-1 Volume URL: http://www.nber.org/books/edwa04-1 Conference Date: December 2-4, 2004 Publication Date: July 2007 Title: Sudden Stops and Currency Drops: A Historical Look Author: Luis A. V. Catão URL: http://www.nber.org/chapters/c10658 7 Sudden Stops and Currency Drops A Historical Look Luis A. V. Catão 7.1 Introduction A prominent strand of international macroeconomics literature has re- cently devoted considerable attention to what has been dubbed “sudden stops”; that is, sharp reversals in aggregate foreign capital inflows. While there seems to be insufficient consensus on what triggers such reversals, two consequences have been amply documented—namely, exchange rate drops and downturns in economic activity, effectively constricting domes- tic consumption smoothing. This literature also notes, however, that not all countries respond similarly to sudden stops: whereas ensuing devaluations and output contractions are often dramatic among emerging markets, fi- nancially advanced countries tend to be far more impervious to those dis- ruptive effects.1 These stylized facts about sudden stops have been based entirely on post-1970 evidence. Yet, periodical sharp reversals in international capital flows are not new phenomena. Leaving aside the period between the 1930s Depression and the breakdown of the Bretton-Woods system in 1971 (when stringent controls on cross-border capital flows prevailed around Luis A.
    [Show full text]
  • Central Bank Interventions, Communication and Interest Rate Policy in Emerging European Economies
    CENTRAL BANK INTERVENTIONS, COMMUNICATION AND INTEREST RATE POLICY IN EMERGING EUROPEAN ECONOMIES BALÁZS ÉGERT CESIFO WORKING PAPER NO. 1869 CATEGORY 6: MONETARY POLICY AND INTERNATIONAL FINANCE DECEMBER 2006 An electronic version of the paper may be downloaded • from the SSRN website: www.SSRN.com • from the RePEc website: www.RePEc.org • from the CESifo website: www.CESifo-group.deT T CESifo Working Paper No. 1869 CENTRAL BANK INTERVENTIONS, COMMUNICATION AND INTEREST RATE POLICY IN EMERGING EUROPEAN ECONOMIES Abstract This paper analyses the effectiveness of foreign exchange interventions in Croatia, the Czech Republic, Hungary, Romania, Slovakia and Turkey using the event study approach. Interventions are found to be effective only in the short run when they ease appreciation pressures. Central bank communication and interest rate steps considerably enhance their effectiveness. The observed effect of interventions on the exchange rate corresponds to the declared objectives of the central banks of Croatia, the Czech Republic, Hungary and perhaps also Romania, whereas this is only partially true for Slovakia and Turkey. Finally, interventions are mostly sterilized in all countries except Croatia. Interventions are not much more effective in Croatia than in the other countries studied. This suggests that unsterilized interventions do not automatically influence the exchange rate. JEL Code: F31. Keywords: central bank intervention, foreign exchange intervention, verbal intervention, central bank communication, Central and Eastern Europe, Turkey. Balázs Égert Austrian National Bank Foreign Research Division Otto-Wagner-Platz 3 1090 Vienna Austria [email protected] I would like to thank Harald Grech and Zoltán Walko for useful discussion and two anonymous referees for very helpful comments and suggestions.
    [Show full text]
  • Hong Kong's Currency Board and Changing Monetary Regimes
    NBER WORKING PAPER SERIES HONG KONG’S CURRENCY BOARD AND CHANGING MONETARY REGIMES Yum K. Kwan Francis T. Lui Working Paper 5723 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August 1996 This paper was presented at NBER’s East Asian Seminar on Economics, and the NBER conference “Universities Research Conference on the Determination of Exchange Rates.” This work is part of NBER’s project on International Capital Flows which receives support from the Center for International Political Economy. We are grateful to the Center for International Political Economy for the support of this project and to Barry Eichengreen and Zhaoyong Zhang for helpful and constructive comments. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. O 1996 by Yum K. Kwan and Francis T. Lui. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including @ notice, is given to the source. NBER Working Paper 5723 August 1996 HONG KONG’S CURRENCY BOARD AND CHANGING MONETARY REGIMES ABSTRACT The paper discusses the historical background and institutional details of Hong Kong’s currency board. We argue that its experience provides a good opportunity to test the macroeconomic implications of the currency board regime. Using the method of Blanchard and Quah (1989), we show that the parameters of the structural equations and the characteristics of supply and demand shocks have significantly changed since adopting the regime. Variance decomposition and impulse response analyses indicate Hong Kong’s currency board is less susceptible to supply shocks, but demand shocks can cause greater short-term volatility under the system.
    [Show full text]
  • Iran: US Concerns and Policy Responses
    Order Code RL32048 Iran: U.S. Concerns and Policy Responses Updated March 13, 2007 Kenneth Katzman Specialist in Middle Eastern Affairs Foreign Affairs, Defense, and Trade Division Iran: U.S. Concerns and Policy Responses Summary According to the Administration’s “National Security Strategy” document released on March 16, 2006, the United States “may face no greater challenge from a single country than Iran.” That perception, generated first and foremost by Iran’s developing nuclear program, intensified following the military confrontation between Iranian-armed and assisted Lebanese Hezbollah and Israel in July-August 2006. To date, the Bush Administration has pursued several avenues to attempt to contain the potential threat posed by Iran, but the Administration’s focus on preventing an Iranian nuclear weapons breakthrough — as well as on stabilizing Iraq — has brought diplomatic strategy to the forefront. The Bush Administration announced May 31, 2006, it would negotiate with Iran in concert with U.S. allies if Iran suspends uranium enrichment. However, Iran did not comply with an August 31, 2006, deadline to cease uranium enrichment, contained in U.N. Security Council Resolution 1696 (July 31, 2006). After almost four months of negotiations during which Russia and, to a lesser extent, China, argued that diplomacy with Iran would yield greater results than would sanctions, the Security Council imposed modest sanctions on trade with Iran’s nuclear infrastructure and a freeze on trade with and the assets of related entities and personalities. (Resolution 1737, passed unanimously on December 23, 2006). Iran remains out of compliance, and the international community is discussing further sanctions against Iran.
    [Show full text]
  • Secondary Sanctions on the Iranian Financial Sector Create De Facto Embargo with Lasting Implications for the Biden Administration
    Secondary Sanctions on the Iranian Financial Sector Create De Facto Embargo with Lasting Implications for the Biden Administration Abigail Eineman IRAN WATCH REPORT John P. Caves III January 2021 1 Introduction During their confirmation hearings last week in the U.S. Senate, President Joe Biden's key national security nominees noted that the new administration was prepared to return to the nuclear accord with Iran, but warned that such a return would not be swift. First, Iran would have to resume compliance with the accord's nuclear restrictions in a verifiable manner, according to Secretary of State designate Antony Blinken, at which point the United States would resume compliance as well. President Biden’s choice for director of national intelligence, Avril Haines, estimated during her confirmation hearing that “we are a long ways from that.”1 Compliance for the United States would mean reversing at least part of the Trump administration's “maximum pressure” campaign—a set of overlapping trade and financial restrictions on almost every part of Iran's economy. The outgoing administration made such a reversal more challenging, particularly as a result of the sanctions imposed on Iran's financial sector in the administration's final months. On October 8, 2020, the United States designated Iran’s financial sector pursuant to Executive Order (E.O.) 13902 and sanctioned eighteen Iranian banks.2 In doing so, the U.S. Treasury Department applied secondary sanctions to Iran's entire financial sector for the first time, potentially barring foreign entities from the U.S. financial system should they do business with Iranian banks.
    [Show full text]