16 July 2016 marks six months since Implementation Day, when UN, US and EU nuclear-related sanctions against Iran were simultaneously suspended. This created significant legal space for non-US companies – and foreign subsidiaries of US companies – to do business in all sectors of Iran’s economy except defence.

However, business interest has been tempered by the very limited willingness of banks to transact with Iran. Despite criticism from Iranian officials, US officials have been engaging with non-US banks to encourage them to do legal activity with Iran as the US administration recognises the limiting affect that banks are having on the success of the nuclear deal. To that end, the US recently extended its guidance on sanctions compliance to provide companies with greater certainty about steps they can take to do business with Iran.

On a related note, the Financial Action Task Force (FATF), a multilateral body that focuses on combating money laundering and terrorist financing, in June maintained Iran’s status as a high-risk country. However, the FATF welcomed Iran’s steps to address its concerns and suspended for 12 months its recommendation to banks to impose counter-measures on Iran. It continues to encourage banks to conduct due diligence on business relationships and transactions involving Iran.

Sanctions outlook steady though additional targeted sanctions possible

  • We maintain our view that the nuclear agreement will hold in the next two years. Although investment and trade since Implementation Day has not met Iran’s expectations, this is unlikely to jeopardise the agreement. Iran agreed to the deal because it addressed national security concerns: it reduces the chances of external military action and provides an economic dividend that will prevent political instability. The deal still meets those aims despite the limiting effect of banks’ reluctance to transact with Iran. The mismatch between Iran’s expectations and reality since Implementation Day is costly to President Hassan Rowhani; his opponents will use it to criticise him and limit his power ahead of the 2017 presidential elections, but at this point we do not believe they can use it to cancel the deal.
  • Additional sanctions on Iranian individuals and companies are likely, but the consequences for foreign companies will be limited; our overall sanctions risk outlook remains constant. We expect the US – and possibly the EU – to sanction additional Iranian individuals and entities in the coming months. These sanctions will be motivated by non-nuclear issues: Iran’s support of proscribed terrorist groups, position towards Syria and Yemen, and domestic human rights record and ballistic missile programme. Such sanctions will not impose broad restrictions on sectors, but will increase the number of sanctioned individuals and entities that foreign companies need to avoid, and thus add to compliance burdens.
  • There is a low risk of a more consequential increase in sanction risks after the US presidential elections in November. Control Risks regards Democrat Hillary Clinton as the likely successor to Barack Obama, and her role in helping negotiate the deal means she is likely to take a similar approach to Obama. Clinton also has a strong change of leading her party to a majority in the US Senate (upper house), reducing Congress’ chances of damaging the deal. However, Congress will still need to compromise with a recalcitrant Republican-led House (lower house), and a minority in the Democrats opposed the deal. Nonetheless, we expect Obama and his likely predecessor to veto attempts by Congress to impose secondary sections, which would severely increase and complicate the sanctions risk to foreign companies.

Business impact

There are four areas that a company needs to consider to evaluate its compliance with sanctions: the sector of the economy in which it is operating; the extent of US components in goods and services delivered; whether and how the company’s US personnel can be restricted from Iran activity; and the ownership and control of any Iranian counterparties engaged. Provided that companies successfully address these points with legal advice and due diligence then they will be theoretically able to do business.

What to watch

Foreign companies will see continued public criticism of the US’s alleged duplicity in the nuclear agreement from Iranian politicians, with a good portion of this criticism focused on Rowhani and Foreign Minister Javad Zarif. This will continue up to the next major milestone in Iran’s calendar – the presidential elections in mid-2017 – as Rowhani’s opponents try to limit his re-election chances.

Republican-led attempts to pass secondary sanctions will be introduced in the lower house over the coming months. Obama and Clinton have indicated an interest in using economic pressure to protest against Iran's domestic and foreign policy, though the US president's ability to veto legislation will prevent major changes in the current sanctions regime.

We also anticipate further guidance from the US Department of Treasury in the coming months. This may include extending allowances for US persons to legally work on Iran-related business to a broader range of internal activities, such as compliance and legal functions; and providing specific guidance for banks about how they can structure transactions with Iran in a way that avoids exposing them to regulatory risks. If the US government adopts these steps in the coming months, it will add confidence to banks considering whether to transact with Iran. Similarly, if the FATF releases further positive assessments of Iran in the next 12 months it will make banks more confident to deal with Iran. Furthermore, companies should watch to see if a major commercial deal goes through under the permission and oversight of the US government – most likely civil aviation – as this will also inject confidence into banks that the US will allow legal business activity with Iran.

Outlook

Sanctions risks are likely to remain in more or less their current form over the next two years, meaning that companies will need to adhere to similar sanctions compliance practices.

The outlook for companies’ practical ability to do business is less positive, though we do expect banking facilities available to companies looking to do business with Iran to broaden in the coming months. This is because we expect non-US banks become confident and comfortable about transacting with Iran due to some of the factors described in the what to watch section. Nonetheless, this is likely to be a slow process and one that is dependent on the factors described above happening. Even if these steps to happen, we are not expecting a wholesale shift in non-US banks’ willingness to transact with Iran over the next two years.

The wildcard would be if US Congress manages to impose secondary sanctions on Iran. We do not expect this to happen, though under both a Democrat and Republican president it is a conceivable, low likelihood scenario.