For many years, the potential of the untapped Iranian market was viewed as an enticingly juicy apple that was just of reach. With the lifting of sanctions following Implementation Day, the opening up of an untapped and diverse economy with attractive demographics presents an exciting opportunity. Below, we discuss the legal factors that investors should take into account when planning a market re-entry strategy.

A world of possibility awaits

Much of the focus in recent months has been on the impact the lifting of sanctions will have on the oil and gas sector. Yet the impact will be no less significant in other sectors including agriculture, pharmaceuticals and metals. In fact, these industries may feel the benefit of the lifting of sanctions more quickly. We summarise the progress which has been made in reconnecting Iran to the global economy.

Reconnecting Iran to the global economy

  • The EU’s “nuclear” sanctions and US secondary sanctions have been lifted
  • Legal restrictions on doing business in Iran’s oil, gas, petrochemical and shipping sectors have been lifted
  • Iran can sell its oil on the open market and repatriate its foreign currency earnings
  • Iranian banks are no longer cut off from the world’s banking sector
  • The SWIFT financial messaging system has been re-connected to Iran
  • Foreign investors can make capital investments in Iran’s estimated USD 250 billion projects market
  • IP rights to protect brands can be registered within Iran

The new normal is not an unfettered ability to trade with Iran

There are many residual restrictions still in force and businesses need to be aware of these restrictions before entering Iran.

Restrictions in connection with ballistic missile and human rights violations remain. There are also a number of Iranian entities still designated for asset freezes. For example, both the EU and the US have maintained the designation of the Islamic Revolutionary Guard Corps (IRGC) which has interests in many areas of the Iranian economy. Businesses are unable to deal with these entities under these residual sanctions.

Iran remains designated by the United States as a “state sponsor of terrorism”. The Financial Action Task Force re­iterated its concerns in February 2016 about Iran’s failure to address anti-money laundering and combatting financing of terrorism deficiencies. The threat this poses to the integrity of the international financial system was highlighted.

Counterparty risks and KYC remain significant issues

The first key step for any international investor in Iran would be to identify not only whether its counterpart is designated in any way, but also whether that counterpart is owned or controlled by persons who are designated. That is likely to be a difficult conversation for a foreign investor (particularly a western investor) to have with an Iranian counterpart. Without a culture or history of “client due diligence” in Iran, requests for information about shareholders and directors of Iranian companies, not to mention passport copies, are likely to be met by strong resistance.

Banking issue remains a key concern

There was no relief for US clearing banks, or for foreign financial institutions who deal in US dollars.

Whilst Iranian banks are connected to the SWIFT financial messaging system, few, if any tier one financial institutions are listening at the other end. There is also a reluctance to support business with Iran in any currency because of the risks associated with accidentally handling US dollars. Whether that reluctance translates into a substantial handbrake on the potential for trade with Iran is the great unknown. If so, the anticipated windfall from Implementation Day will be substantially smaller than hoped for.

Workarounds exist

Foreign subsidiaries of US companies are now permitted to engage in business with Iran. This is provided that it does not conflict with the purposes of the Joint Comprehensive Plan of Action (JCPoA) and that it is not with the Government of Iran. The US parent company will need to be wary of unwittingly “facilitating” trade with Iran by giving any approvals for its subsidiary to carry out such business. General Licence H permits US parent companies to pass the necessary approvals to divest themselves of the decision making authority for the entry of that business, allowing the foreign subsidiaries to take the ultimate decision to engage in that business themselves. Understanding General Licence H is therefore a means by which conglomerates with links to, or even headquarters in, the US could carry on business with Iran, via their subsidiaries.

An exciting but challenging market

The “new normal” for business with Iran is brighter than it was prior to Implementation Day. The gradual evolution of a modern, investor friendly legal regime presents significant opportunities for foreign direct investment. This will be characterised by those first movers making tentative steps into an exciting but challenging market.