South Korean banks have stopped guaranteeing transactions on companies trading with Iranian firms in the wake of the United States’ renewed economic sanctions against the Middle Eastern country.

According to sources from the finance industry on Sunday, Woori Bank and state-run Industrial Bank of Korea (IBK) stopped buying usance letters of credit for local firms doing business with Iranian firms from last month.

A letter of credit is issued by a bank to guarantee a buyer’s payment to a seller in international trading. With the issuance of a usance letter, the bank is required to cover the purchase of the buyer when the buyer fails to make payment after a certain period agreed between the two parties.

Korean exporters usually receive payments by withdrawing from won-denominated accounts of the Iranian central bank that are generated by Iran’s oil sales in Korea. Korean banks back guarantees on such transactions.

The Korean lenders stopped buying usance letters of credit out of fear of payment failure as the U.S. government is readying to re-impose economic sanctions on Iran following its decision to walk away from a historic nuclear deal with Iran. U.S. President Donald Trump announced on June 8 that he will give 180 days to companies and countries to stop transactions with Iran, according to sources.

The banks, however, keep up with purchases in sight letters of credit that require immediate payments. They may consider resuming the purchase of usance letters of credit if the U.S. lifts its sanctions on Iran or exempts Korea from the financial sanctions.

The Korean government is reported to seek exemption on trading of non-oil products between Korea and Iran from the U.S. sanctions. It is also expected to persuade the U.S. government to help Korean exporters keep making transactions on some restricted products.

The renewed U.S. sanctions on Iran have splashed cold waters on Korean deals in Iran.

Korean construction and petrochemical company Daelim Industrial Co. pulled out of a 2.2 trillion won ($ 2 billion) contract to expand an oil refinery in Iran.

By Noh Seung-hwan and Choi Mira

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]