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France Withholds Funds From Peugeot Over Iran Sanctions Fears -Sources

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08/21/2012 | 04:04pm CET

By Benoit Faucon

LONDON--PSA Peugeot Citroen SA (UG.FR, PEUGY) and hundreds of smaller firms are feeling the sting of sanctions against Tehran as the French government withholds 220 million euros set aside by an Iranian bank for future payments for exports, due to a fear of harming Peugeot's alliance with U.S. auto-maker General Motors Co. (>> General Motors Company).

The holdup has also dealt a blow to smaller companies by preventing them from fulfilling and receiving payment for pledged deliveries to Iran of European goods not under sanctions. It highlights France's struggle to balance the interests of its companies against the desire to apply international pressure over Iran's disputed nuclear program.

The French Treasury has refused to release any of the money previously set aside in a Bank Tejarat account in Paris to guarantee payments for exports. The deliveries had been committed before the European Union introduced sanctions on the Iranian commercial bank on Jan. 23, people familiar with the matter said this week.

Although the EU had allowed a two-month period for completing ongoing transactions with Bank Tejarat, the companies are still waiting for the French Treasury to permit the funds' release. This is because the French government first wants to ensure that allowing the release of some of that money to Peugeot, for spare parts orders from Iran Khodro Co. (IKCO1.TE), won't jeopardize the French auto maker's alliance with General Motors, one person said. Iran Khodro Co. assembles automobiles from kits provided by the French company.

General Motors became the second-largest shareholder in Peugeot in March, buying 7% for EUR240 million. The GM alliance with Peugeot--Europe's second-largest car maker after Germany's Volkswagen AG (VOW.XE, VLKAY)--also covers the joint development of new parts and platforms on which their brands will base new models.

That is seen as a key advantage in attempts to revive the fortunes of the French car maker, which is struggling amid a downturn in the European automotive industry.

"The 7% stake from GM is putting Peugeot's Iran payments under pressure," but the French government wants to, "minimize the social impact," of losing Iran's business, the person said. The Peugeot plant that used to manufacture spare parts for Iran employed 280 people until it suspended operations.

"The [French] Treasury is awaiting approval from above," because the matter is so politically loaded, one person familiar with the matter said, adding that it was unclear whether this was needed from the French presidency or another branch of government. The French Treasury didn't answer repeated requests for comment over a two-week period.

The French auto maker initially suspended deliveries to Iran because it could not be paid for its Iran exports, said Dominique Courgey, a trade union leader at a plant that supplied Iran.

To complicate matters further, the frozen funds are held at a correspondent account held by Tejarat at Societe Generale, which like many French banks has ended its Iran business to comply with sanctions.

A correspondent account is an account established by a large banking institution to receive deposits from or make payments on behalf of smaller financial institutions.

In total, Peugeot has EUR280 million worth of letters of credit blocked at the French bank, equivalent to 2.5 months of supply of parts to Iran the company has already produced, but cannot deliver, said Jean Paul Guy, a trade union representative at Peugeot.

They include the EUR220 million blocked at the Tejarat correspondent account hosted by Societe Generale, according to a person familiar with the matter.

A spokeswoman for Societe Generale said that, "[in] compliance with all applicable regulations, Societe Generale has frozen the accounts of Iranian banks with which it had dealings in the past," but declined to comment further. The U.S.' National Defense Authorization Act for Fiscal Year 2012, which was signed into law on Dec. 21, bans non-US banks from holding correspondent accounts for Iranian banks.

Any release of letters of credit to Peugeot could complicate matters for the General Motors tie-up, because Tejarat is under sanctions in both Europe and the U.S., a person familiar with the matter said. This leaves the future of the French auto maker's business with Iran in limbo.

Both Peugeot and General Motors declined to comment on the Tejarat funds.

A spokesman for General Motors did say that Peugeot had made the decision to suspend the shipments of spare parts to Iran prior to entering the alliance. "GM's agreement with Peugeot is fully compliant with US law governing trade with Iran, and is not intended to benefit Iran in any way," the spokesman for the U.S. automaker said.

Peugeot's Iran business is particularly sensitive because the U.S. Treasury holds a stake in GM. GM said in February that the Treasury held a 31.9% stake.

That could make the very institution that enforces sanctions in Washington an indirect beneficiary of Iranian business if Peugeot received payment from the Middle-Eastern nation. Yet while confirming Peugeot had suspended deliveries to Tehran for the time being, a Peugeot spokeswoman said the company has not permanently pulled out of Iran.

If Tejarat's funds are eventually released, one option is to use some or all of the EUR220 million to finance export deals by 200 French and German companies that also have blocked letters of credit from Iran, the people familiar with the situation at Tejarat said.

Mecatherm SA of Schirmeck, eastern France, which exports bakery ovens to Iran, and Sogeval SA, of Laval, western France, which markets its veterinary products in the Islamic Republic, are among those in this situation, the people said. The companies didn't answer messages seeking comment.

The EU sanctioned Tejarat in January as part of broader pressure against the Islamic Republic's nuclear program. The West suspects the program has military aims, which Tehran denies.

One person familiar with the matter said some people in the French government are confident the blocked letters of credit will be released, although it's unclear when. The funds are likely to be released because, "they have nothing to do with [nuclear] proliferation," the person said.

Write to Benoit Faucon at benoit.faucon@dowjones.com (David Pearson in Paris contributed to this report.)

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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