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© Reuters
The sanctions vice is tightening on Iran, cutting it out of key global financial networks, but Tehran is taking urgent steps to withstand the pressure over a nuclear program the West suspects is intended to produce bombs.

The SWIFT system, which handles most cross-border payments, said in Brussels on Thursday it would disconnect Iranian institutions blacklisted by sanctions from its messaging system on Saturday at 1600 GMT, after a European Union order and pressure from the United States.

Money exchange houses in the Gulf said they were ceasing dealing in the risky Iranian rial, in another blow to Tehran's trading channels.

Meanwhile, Reuters shipping data showed that vessels carrying at least 360,000 tons of grain are lined up to unload in Iran, in a sign Tehran is stockpiling huge amounts of food to blunt the impact of tougher Western sanctions.

The Islamic Republic has even begun buying wheat from its arch-enemy - the United States.

The sanctions make it difficult to obtain letters of credit or conduct international transfers of funds through banks.

So instead, Iran has bought around 2 million ton of wheat since February at a premium to international prices in currencies including Japanese yen and Russian roubles.

"There is no doubt in my mind it is geopolitical hedging. They are trying to get as much as they can in the country to blunt the effect of any further escalation in international sanctions," Rabobank commodities analyst Nick Higgins said.

The sanctions regime exempts food.

Lifelines Cut

Nineteen banks and 25 affiliated institutions from Iran exchanged a total of 2 million cross-border payments using SWIFT in 2010. They include banks the U.S. accuses of financing Iran's nuclear activity or terrorism - Mellat, Post, Saderat and Sepah.

The EU order "forces SWIFT to take action", SWIFT Chief Executive Lazaro Campos said. "Disconnecting banks is an extraordinary and unprecedented step for SWIFT. It is a direct result of international and multilateral action to intensify financial sanctions against Iran."

Some overseas Iranian businessmen said the move could strangle their operations.

"This is like our lifeline to the outside being cut," Naser Shaker, who owns an oil and gas trading company in Dubai, told Reuters. "All the transactions will be stopped. Through the banks, there are no more options."

Morteza Masoumzadeh, of the executive committee of the Iranian Business Council in Dubai and managing director of the Jumbo Line Shipping Agency, said it was "devastating news".

"If Iranian banks cannot exchange payments with banks around the world then this will cause the collapse of many banking relations and many businesses," he said.

The Obama administration applauded the EU order to SWIFT and said it reflected consensus in the international community that "substantially increased pressure" was needed to convince the Iranian government to address their concerns about its nuclear program.

But U.S. lawmakers pushing for tougher sanctions on Iran said SWIFT needed to eradicate all Iranian financial institutions from its network, not just those blacklisted by the West.

"The impact of financial sanctions will not come close to full potential if Iran can simply go across the street to a non-designated bank to conduct the transactions with those still willing to do business with it," said Democratic Rep. Brad Sherman, who is working with Republican Sen. Mark Kirk on legislation that would extend sanctions to all Iranian banks.

Since late last year, Iran has largely been frozen out of the global banking system. Washington has used anti-money laundering legislation to make it risky for banks around the world to do business with Iran, including trade financing.

Iranian businessmen have continued to conduct some trade with Dubai and other places, however, by transferring funds through money exchange houses. But over the last few weeks, many of those houses have stopped doing Iranian rial business as well.

Mohamed al-Ansari, chairman and managing director of Al Ansari Exchange, one of the UAE's top two exchange houses, said the weakness of the rial, which saw its black market rate roughly halve against the U.S. dollar in the year to January, had made it too risky to handle the currency.

"Most exchange companies have stopped dealing in Iranian rial mainly because of its devaluation in the last few months, as well as the regulations imposed by the U.S. regulatory authorities on the financial sector," he told Reuters.

Oil to be Released

Speculation is growing that Israel, with or without U.S. support, could launch some form of military strike against Iranian nuclear installations, which the Jewish state sees as a threat to its existence.

Iran insists its nuclear energy program is purely non-military and has been adamant it will not abandon them under external pressure. On Wednesday it welcomed a new round of nuclear negotiations with six world powers, saying the two sides should set the date and venue of the talks.

U.S. President Barack Obama warned Tehran on Thursday that "the window for solving this issue diplomatically is shrinking".

British sources said Britain had decided to cooperate with the United States in a bilateral agreement to release strategic oil stocks, in an effort to prevent high fuel prices derailing economic growth in a U.S. election year.

While there is no significant disruption of world oil supplies at the moment, sanctions on Iran are expected to cut its output when a European Union embargo takes effect from July.

Minor stoppages from South Sudan, Yemen and Syria also have contributed to a sharp rise in oil prices.