January 16, 2016, marked “Implementation Day” for the Joint Comprehensive Plan of Action (JCPOA), the historic nuclear non-proliferation and sanctions reduction agreement reached between the “P5+1” countries (the United States, the United Kingdom, China, Russia, France and Germany), the European Union (EU), and the Government of Iran on July 14, 2015. Canada was not party to the JCPOA agreement.
Under the JCPOA, Iran promised to scale back its nuclear program in exchange for the lifting of certain economic sanctions on the country. On Saturday, the International Atomic Energy Agency (IAEA) officially verified that Iran had met its commitments under the agreement, triggering the sanctions reduction commitments of the other parties. Although the JCPOA marks a positive shift in diplomatic relations with Iran, a wide range of international sanctions on Iran remain in place. These include all of the “primary” unilateral sanctions imposed by the United States that apply to the activities of U.S. persons and trade in U.S. products.
The newly elected Liberal government has hinted that it plans to reopen diplomatic relations with Iran and review the comprehensive sanctions imposed by the previous government. Those signals were publicly reiterated by Foreign Affairs Minister Stephane Dion yesterday, noting the negative consequences for Canadian companies of maintaining broad sanctions against Iran while other countries’ sanctions are being relaxed.
The phased lifting of the JCPOA sanctions will dramatically reduce the constraints on Iranian companies’ ability to do business internationally, particularly in Europe. It is estimated that as a result of the loosening of the sanctions, Iran will gain access to more than US$100 billion in assets previously frozen overseas, and it will be able to resume selling oil on international markets and using the international financial system to facilitate trade.
The changes could represent significant new business opportunities in Iran for companies that can successfully navigate the patchwork of remaining restrictions. The Canadian government can be expected to amend its Iran sanctions program in short order in light of these developments to level the playing field for Canadian businesses competing with foreign companies for these new opportunities.
Lifting of UN, EU and U.S. Sanctions
The sanctions removed as a result of JCPOA Implementation Day notably include the following:
The UN Security Council has terminated its resolutions that had imposed nuclear-related sanctions on Iran and UN members, including Canada, will be expected to amend or repeal their domestic implementing legislation for these sanctions. However, the UN will retain certain specific restrictions, including restrictions regarding the transfer of proliferation-sensitive goods. The sanctions will also be re-imposed if subsequent IAEA inspections identify significant non-performance by Iran of its JCPOA commitments.
The European Union’s sanctions reductions represent the most significant change that will impact business with Iran. The EU has terminated all nuclear-related economic and financial sanctions contained in Council Regulation (EU) No 267/2012 and the related Council Decision 2010/413/CFSP, including asset freeze and travel ban restrictions on designated persons, restrictions on financial services (such as wire transfers, correspondent banking services, export credit, trade guarantees and insurance, grants and financial assistance among others), imports and transportation of Iranian oil, petroleum, gas and petrochemical products, exports of key equipment and technology for the Iranian oil, gas and petrochemical sectors and investment in these sectors, exports of gold, precious metals, diamonds, graphite, and semi-finished metals, exports of software integrating industrial processes, naval, aviation and transportation restrictions, and various associated services.
The United States has removed nuclear-related economic and financial “secondary” sanctions, i.e., sanctions directed toward non-U.S. persons for specified conduct (covering similar activities to those described in the EU section above) involving Iran that occurs entirely outside of the U.S. and does not involve U.S. persons. The United States also removed over 400 individuals and entities from its restricted parties lists. Most significantly, the U.S. took steps to (i) allow exports to Iran from the United States of commercial passenger aircraft and related parts and services, (ii) license non-U.S. entities that are owned or controlled by a U.S. person to resume trading with Iran to the extent that their activities are consistent with the JCPOA (more on this below), and (iii) license the importation into the United States of certain Iranian-origin carpets and food products such as pistachios and caviar. (Concurrently, however, the U.S. has added 11 individuals and firms to its restricted party lists for their links to Iran’s ballistic missile program. U.S. nationals—and foreign nationals under certain circumstances—are prohibited from doing business with these designated persons.)
All other U.S. sanctions against Iran applicable to U.S. persons remain in place, including the U.S. domestic trade embargo on Iran and asset freezes on the Government of Iran and Iranian financial institutions. Non-U.S. persons also continue to be prohibited from knowingly engaging in conduct that seeks to evade or circumvent U.S. sanctions (such as causing the export of U.S. origin goods or services to Iran, directly or indirectly). Non-U.S. financial institutions also continue to be prohibited from clearing U.S. dollar-denominated transactions involving Iran through U.S. financial institutions.
Lifting of Restrictions on Foreign Subsidiaries of U.S. Companies
Of potential significance for Canadian businesses is General License H issued by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which authorizes “Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person”. Under the previous U.S. sanctions on Iran, any foreign entity owned or controlled by a U.S. person was also fully subject to the U.S. sanctions. This included any foreign entity in which a U.S. person holds a 50% or greater interest by vote or share value, holds a majority on the board of directors or otherwise controls the actions, policy and decisions of the entity. This new general license means that Canadian subsidiaries of U.S. parents will no longer be extraterritorially subject to the U.S. sanctions restrictions on Iran (although they will continue to be subject to any Canadian sanctions that remain in place).
Canada has historically imposed economic sanctions only as a result of multilateral action such as UN Security Council Resolutions. The previous Conservative government departed from this tradition by imposing unilateral sanctions against Iran and several other countries (including Russia). Canadians can expect the current Liberal government to revert to a more multilateral approach to economic sanctions.
A timely response by the Canadian government is critical for several Canadian business sectors, including notably oil and gas services, engineering and construction, financial services, auto parts and civil aviation. Prior to the imposition of Canadian sanctions in 2010, Canadian oil and gas, engineering and construction companies had well-established competitive footholds in Iran. Canadian firms in these sectors are well-placed to quickly re-enter the Iranian market.
Other sectors, including financial services, auto parts and civil aviation, also have a potential competitive edge provided that the Canadian government moves quickly to align its sanctions with those of the EU and other trading partners. European and even U.S. companies have been actively positioning themselves to re-enter the Iranian market by establishing contacts with potential business partners. It is notable that the United States will move immediately to liberalize U.S. exports of civil aircraft in direct response to Iran’s stated intention of purchasing more than 300 passenger aircraft in the next few years. The Iranian auto sector is similarly in need of major investments and an expansion of its international supply chain. Canadian companies are poised to become significant players in these markets, provided that the Government of Canada takes prompt action. That competitive edge will quickly evaporate if the government delays action.