The Iran nuclear deal – officially referred to as the Joint Comprehensive Plan of Action (“JCPOA”) – hit the world like a lightning rod. Many doubted the P5+1 negotiating countries could reach an agreement with Iran, and many others remain skeptical that all sides will see it to fruition. Still others object to transacting with Iran at all. Be that as it may, and notwithstanding the myriad obstacles that remain, the possible end to years of United States’ and other countries’ economic sanctions against Iran should cause businesses to consider what that world will look like for them. This blog discusses the time frame in which sanctions could be lifted, the ramifications of disputes over implementing the deal, and what effect sanctions relief might have on U.S. and global trade.
Iran Nuclear Deal Implementation Timeline
“Finalisation Day is the date on which negotiations of this JCPOA are concluded among the E3/EU+3 and Iran, to be followed promptly by submission of the resolution endorsing this JCPOA to the UN Security Council for adoption without delay.”
The Joint Plan was finalized on July 14, 2015, thus marking Finalization day. Each of the negotiating partners then had to approve the plan through their respective political processes. The United Nations Security Council adopted a resolution on July 20, 2015, approving the deal. And the same day, the European Union approved it as well. On October 11, 2015, Iran’s parliament voted to approve the deal and sent it to the 12-member Guardian Council, which had the option either to ratify the agreement or to send it back to Parliament for further consideration. Although not unanimous, the Council approved the deal without much fanfare. Finally, the Supreme Leader Ayatollah Ali Khamenei gave his approval on October 21. Meanwhile, in the United States, the Obama administration had already managed to defeat a measure aimed at constraining its ability to implement the Iran deal unilaterally, removing any obstacle to U.S. implementation.
“Adoption Day is the date 90 days after the endorsement of this JCPOA by the UN Security Council, or such earlier date as may be determined by mutual consent of the JCPOA participants, at which time this JCPOA and the commitments in this JCPOA come into effect. Beginning on that date, JCPOA participants will make necessary arrangements and preparations for the implementation of their JCPOA commitments.”
Since the UN Security Council adopted a resolution on July 20 approving the deal,  Adoption Day occurred on October 18, 2015, 90 days after that resolution. On that date, Iran along with the International Atomic Energy Agency (“IAEA”) began implementing Iran’s anti-proliferation obligations under the JCPOA. In order to get to Implementation Day (and for Iran to get any sanctions relief) Iran must fulfill those obligations and the IAEA must certify that Iran has fully complied. But, prior to any of that, in order to continue implementing the plan to get to Implementation Day, by October 15, 2015 Iran needed to have agreed to the Transparency Requirements with the IAEA under the “Roadmap for Clarification of Past and Present Outstanding Issues” – what the U.S. labels possible military dimensions (“PMD”) of the Iranian nuclear program. By December 15, 2015, the Director General of the IAEA will submit his assessment to the agency’s Board of Governors confirming Iran has met those transparency requirements.
Already, the PMD issue has become an obstacle to implementing the plan. Although Iran should now be complying with its non-proliferation obligations, Iran’s Supreme Leader is expressing reluctance. The day he approved the deal itself he also said that Iran should delay sending out its enriched uranium stock pile and delay reconfiguring the Arak heavy water nuclear reactor until the UN settles the PMD issue. As required under the plan, such reconfiguration is supposed to ensure that Iran cannot produce weapons-grade plutonium.
But emboldened by the Supreme Leader’s recalcitrance, it appears Iranian hardliners are now successfully pushing back against the deal. Recent news reports said that Iran has stopped dismantling centrifuges in two uranium enrichment plants because of “a warning.” The head of the Iranian parliament’s nuclear deal commission said that warning came in the form of a letter that some lawmakers sent to Iran’s president, Hassan Rouhani, complaining that forging ahead with dismantling Iran’s centrifuges before resolving the PMD issue directly contradicts the Supreme Leader’s decree. While such obstruction does not appear to have breached the agreement but merely delayed implementation, it nevertheless portends the bumpy road that lies ahead.
“Implementation Day is the date on which, simultaneously with the IAEA report verifying implementation by Iran of the nuclear-related measures . . . , the EU and the United States take the actions described in Sections 16 and 17 of Annex V respectively and in accordance with the UN Security Council resolution, the actions described in Section 18 of Annex V occur at the UN level [in other words, to grant sanctions relief].”
On Implementation Day, after the IAEA confirms that Iran has complied with its non-proliferation obligations, the negotiating powers will grant sanctions relief. The most immediate impact would be to release up to $100 billion in Iranian assets that have been parked in international banks, thanks to the extraterritorial application of sanctions implemented by the U.S. Treasury Department. Aside from providing an infusion of cash to the Iranian economy, it would also provide Iran with much needed hard currency reserves to intervene in currency markets to stabilize the Iranian rial. In addition to releasing assets, the sanctions relief would allow much of the rest of the world to begin transacting with Iran. But, as explained more fully below, the first round of sanctions relief will still leave U.S. businesses largely on the sidelines until much later.
Moreover, the timeline to get to Implementation Day is somewhat of a guess. United States policymakers admit they are unable to project an exact date (or even time horizon) for Implementation Day. Energy Secretary Ernest Moniz thinks it will be sometime in 2016. That uncertainty is largely because the ball will be in Iran’s court since it must first comply with its obligations under the JCPOA before it sees any sanctions relief. And that is not a guarantee. In October, Iran test fired a new precision guided missile that some experts, including the White House, believe violated the UN Security Council Resolution adopted just days after the plan was finalized.
“Transition Day is the date 8 years after Adoption Day or the date on which the Director General of the IAEA submits a report stating that the IAEA has reached the Broader Conclusion that all nuclear material in Iran remains in peaceful activities, whichever is earlier. On that date, the EU and the United States will take the actions described in Sections 20 and 21 of Annex V respectively and Iran will seek, consistent with the Constitutional roles of the President and Parliament, ratification of the Additional Protocol.”
That means that on Transition Day (eight years after Adoption Day) the United States will take steps to eliminate the rest of its sanctions. But, as explained below, U.S. businesses and their foreign subsidiaries will still face barriers to transacting with Iran until then. Furthermore, that provision does not even guarantee that the U.S. will actually eliminate its sanctions entirely when Transition Day arrives. Under the provision, all the U.S. is obligated to do is “[s]eek such legislative action as may be appropriate to terminate, or modify to effectuate the termination” of sanctions against Iran. So the JCPOA gives the U.S. flexibility in removing its sanctions regime entirely. That language is unique compared to the sanctions relief required of other negotiating parties, whose obligations to eliminate sanctions are more definitive. Moreover, that interpretation seems to conform to the Obama administration’s position that U.S. sanctions will be “suspended in a phased manner.”
“UN Security Council resolution Termination Day is the date on which the UN Security Council resolution endorsing this JCPOA terminates according to its terms, which is to be 10 years from Adoption Day, provided that the provisions of previous resolutions have not been reinstated. On that date, the EU will take the actions described in Section 25 of Annex V.”
On Termination Day, the EU will remove any lingering sanctions against Iran. But importantly, the agreement includes monitoring provisions for up to 15-25 years after Adoption Day giving the IAEA access to Iranian nuclear facilities to ensure Iran’s compliance with its obligations. And to make all parties comply, the JCPOA includes a comprehensive dispute resolution mechanism. A complaining party shall first submit the dispute to a Joint Commission, in parallel consideration at the ministerial level if desired. If the objection has not been settled within 30 days, the complaining party can treat the breach “as grounds to cease performing its commitments.” That means that if Iran breaks its promises and the U.S. cannot resolve it through the dispute resolution mechanism, the U.S. could unilaterally re-implement its sanctions. And other negotiating parties, many of whom we claim as our allies, could do the same.
Additionally, if a resolution has not been made, the UN Security Council will vote to continue lifting the sanctions it had previously imposed and that the JCPOA is removing. If the Security Council does not approve such resolution (either because one is not introduced or because it is vetoed), the old UN-sponsored sanctions would be automatically re-imposed – the so-called “snap back” provision. So to prevent snap back, Iran would need allies in the Security Council to usher through a resolution to continue lifting sanctions. For all practical purposes that procedure guarantees re-implementation of the old sanctions regime if Iran breaks its promises. The U.S. (and other allies) maintains a veto on the Security Council, which it would exercise if any other member introduced a resolution to continue lifting sanctions. That provides strong incentive for Iran to comply with the terms of the agreement.
However, even if Iran were to breach the agreement and sanctions were re-imposed, they would not apply retroactively to contracts entered into between Implementation Day and the date on which sanctions snap back. So presumably if Iran were to comply with its obligations for an extended period of time and non-U.S. businesses were aggressively entering the Iranian market, any snap back of sanctions could have muted effect. And it appears Iran understands that weakness in the “snap back” provision. On July 23, Iran announced a new “model contract” for the petroleum industry, which grants contracts lasting between 20-25 years. Iran could enter these long-term contracts, which should be enforced in the event of re-imposition of sanctions.
But since this is unchartered territory, questions remain over whether such contracts would face additional obstacles to enforcement if snap back occurs. Section 36 of the JCPOA says that if a dispute has not been resolved pursuant to the dispute resolution mechanism, then the complaining party “could treat the unresolved issue as grounds to cease performing its commitments.” Presumably, then, the U.S. could re-impose its unilateral sanctions – even those with extraterritorial effect – if Iran does not comply with the agreement. But in a different provision discussing snap back of the UN-sponsored sanctions, Section 37 says that in the event of snap back, “these provisions would not apply with retroactive effect to contracts” entered into during the implementation period. It is unclear whether that provision would protect, for example, European companies against U.S. sanctions should snap back occur.
Does it merely protect against UN sanctions, or does it prevent the U.S. from re-implementing its unilateral sanctions against companies who entered contracts during the implementation period? The EU is taking note of that uncertainty. European diplomats and executives are seeking concrete guarantees from the U.S. that it will not penalize Western companies if snap back actually occurs. Despite Secretary of State John Kerry’s initial promise that the U.S. would not penalize companies if sanctions were lifted, without such assurances European businesses will be cautious before aggressively transacting with Iran.
Sanctions Relief and U.S. Obligations On Implementation Day:
On Implementation Day, the United States will begin removing the sanctions regime the U.S. government has built over decades in response to Iran’s efforts to develop nuclear weapons. Businesses will, no doubt, wonder what that means for them and their bottom lines. After all, Iran represents a potentially huge un-tapped market for businesses around the globe that have been constrained by decades of sanctions.
U.S. Businesses (Mostly) Left Out
Unfortunately, U.S. companies will have to wait a little bit longer. Under the JCPOA, the United States will relax these sanctions only for non-U.S., entities. Specifically – under the title “Effects of the lifting of U.S. economic and financial sanctions” – the plan explains that “[a]s a result of the lifting of sanctions . . . , beginning on implementation day such sanctions, including associated services, would not apply to non-U.S. persons” engaging in certain transactions with Iran. So, it turns out, that negative construction means sanctions will still be applied to U.S. businesses. Moreover, under Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA), foreign subsidiaries of U.S. companies are prohibited from transacting with Iran to the extent of their parent companies – which is a blanket prohibition. And this nuclear agreement does not lift that provision. All of that is being interpreted to mean that most U.S. business interests will remain constrained by existing Iran sanctions. 
Few U.S. Industry Carve Outs
The JCPOA does, however, allow U.S. businesses in certain sectors to enter the Iranian market on Implementation Day. Specifically, the plan requires the U.S. government to license businesses providing commercial passenger aircrafts and associated parts and services to transact with Iran (and, oddly, to import Iranian carpets, pistachios and caviar). And that represents a huge opportunity for Kentucky’s most important export sector.
Although Kentucky is (rightfully) known for thoroughbred horses and bourbon whiskey, the aerospace industry is vastly more important to our economy. Last year Kentucky exported over $27.5 billion in exports, with the aerospace industry accounting for $7.8 billion of that – that’s over one quarter of Kentucky’s entire exports. Much of the growth in the Kentucky aerospace industry reflects the global trend of increased air travel. And, given that Iran has declared it wants to purchase between 80-90 airplanes a year to replace its aging domestic air fleet, the existing high demand in the aerospace industry could grow even more. All of which means that Kentucky’s aerospace industry stands to benefit under the Iran nuclear agreement if all goes according to plan.
However, Boeing might have already missed the boat. Recently, President Rouhani said that Iran would buy planes from Airbus, a European consortium and Boeing’s biggest competitor. But the president specifically left open the possibility of buying from other companies saying, “We already have Airbus planes and there are other companies that sell us planes . . . . We will indeed be purchasing (planes) from these big companies, including Airbus.” If Boeing is left out, that would be a departure from Iran’s previous pronouncement that it would buy planes from both companies in equal numbers. It is also worth noting that the president’s statement could be mere gamesmanship since it came on the eve of his trip to Europe and Iran had reportedly announced in early November that it was purchasing thirteen used Boeing 737s.
Rest of the World, Rejoice
Over the decades, the U.S. government has successfully utilized the United States’ robust financial markets to impose sanctions extraterritorially against non-U.S. entities transacting with Iran if those entities also used our financial institutions. In other words, if, for example, your company had bank accounts in New York – even if you were an entirely foreign company – you also were subjected to sanctions. Those are now going away, so non-U.S. entities will be able to engage Iran in a variety of sectors:
- Finance and banking
- Energy and petrochemicals
- Shipping and shipbuilding
- Gold and other precious metals
- Software and metals
If Iran can comply with its obligations under the nuclear deal, the U.S. and other countries will begin lifting their sanctions that were designed to bring Iran to the negotiating table to limit its nuclear program. With a deal now having been reached, Iran will begin the process of reintegrating into the global economy. Unfortunately, U.S. businesses will be shut out for some time – except for the civilian aerospace industry, which could see a boost from Iran’s efforts at revitalizing its depleted air fleet. And that means that, as the world lifts sanctions, Kentucky – whose aerospace industry has been rapidly growing and now accounts for a quarter of all state exports – could soar as well.
(This is an updated version of an article published on The ExPatt Magazine Blog, which is the digital face of the Patterson School of Diplomacy and International Commerce’s student-run magazine.)