As negotiators from the P5+1 and Iran meet in Vienna to discuss an agreement on Iran's nuclear programme and sanctions, we look at the effect that the sanctions have had on businesses in the UAE and MENA, and what businesses are looking forward to after a possible relaxation of sanctions.
How have the sanctions affected firms in MENA?
The various sanctions instituted against Iran by the US, EU and other states have been steadily ratcheted up since the middle of 2010. The sanctions have targeted named individuals and entities, subjecting them to asset freezes, as well as particular sectors of the Iranian economy such as its energy and shipping sectors. Those sectors have been prevented from accessing western investment or obtaining some of the key equipment and technology that they require. The sanctions have also sought to isolate Iran from key EU and US financial markets, cutting off Iran's banking system from western banks, and stopping Iranian businesses from obtaining any insurance or re-insurance from EU and US insurers.
Firms in the MENA region seeking to comply with the sanctions have to grapple with the overlapping nature of the legislation from the EU and US, which is invariably complex, as well as the potential extraterritorial application.
Typically the sanctions can apply to US and EU firms carrying out business in the MENA region as well as their nationals working in the region. Furthermore, there is a category of so called US "secondary sanctions" capable of affecting all firms and individuals, irrespective of their nationality or domicile, who are providing "significant" support to Iran's energy, shipping or ship building industries, or dealing with certain specified Iranian companies. Firms providing significant support to those sectors of the Iranian economy can face "denial of access" style penalties from the US which range from travel bans, to prohibitions on receiving loans from US financial institutions, and in some cases asset freezes.
However, it is the indirect consequences of the sanctions that have perhaps had the most wide ranging extraterritorial effect on businesses in the MENA region.
The financial institutions that are critical to modern international trade, particularly the US dollar clearing banks, have been targeted by legislators attempting to isolate Iran from the international trading system. In the face of heavy fines, many major banks have ceased to service any customers or business lines that might expose them to Iran.
That has been a concern for businesses in MENA, and the UAE in particular with its close historical links to Iran. Businesses that might otherwise be entitled to legitimately trade with Iran have found that they are unable to obtain the ancillary financial services, such as banking or insurance, that are essential in today's globalised economy.
The effect on the ground
In an attempt to find out more about how businesses in the MENA region have been affected by these sanctions, Clyde & Co has carried out an anonymous survey of firms. Respondents included businesses from the insurance, financial services, shipping, oil/gas/energy, and aviation sectors that have been specifically targeted by sanctions against Iran, as well as firms from sectors not directly targeted by sanctions, such as the hospitality, telecoms, consulting, real estate, accounting, IT, and food and beverage industries, but who might be affected indirectly.
In terms of the effect upon businesses in the region, on a scale of 1-5 (one being no appreciable effect upon their business, 5 being a very significant effect) only 15% of the respondents reported that sanctions had no appreciable effect upon their business. 67% of respondents reported an effect of between 3 and 5 on the scale, with 19% reporting a very significant effect upon their business.
Interestingly, 46% of the respondents attributed a reduction in trade to indirect factors such as confusion or lack of clarity on the effect of sanctions, difficulties in obtaining finance or insurance, and the inability to remit funds to/from Iran rather than on the specific prohibition of the activities they were carrying out.
Future opportunities in Iran?
After years of sanctions and limited foreign investment, there is considerable appetite in Iran to modernise infrastructure. Iran has a population of 77m, of which 43m are aged under 30. It is also, therefore, an attractive prospect for consumer goods retailers.
In terms of protection for foreign investors, Iran has a relatively new foreign investment law, the Foreign Investment Promotion and Protection Act (“FIPPA”), which came into force in 2002. FIPPA provides for investment by foreign investors in, amongst other things, major infrastructure projects, financing schemes such as buy-back agreements, and BOT (Build Operate Transfer) projects if the investor is the operator of the project. There is no limitation on the amount of foreign investment authorised under FIPPA and a company established for the purpose of implementing a project pursuant to a FIPPA investment licence can be wholly-owned by non-Iranians. Investments authorised and registered under FIPPA enjoy full protection of the law including a sovereign guarantee in case of expropriation or nationalisation. FIPPA also includes a number of foreign currency exchange mechanisms for repatriation of profits in hard currency.
Iran also has a number of freezones in which investors are able to benefit from tax and customs exemptions, 100% foreign ownership and the repatriation of capital and profits.
This large, relatively untapped and investment hungry market would already be a significant source of trade for MENA businesses but for the sanctions in place against it. In anticipation of a relaxation of sanctions, firms in the region are considering the prospects for investing in and doing business with Iran once again.
Our survey has revealed that only 4% of the respondents would not consider expanding their business with Iran after any relaxation of sanctions. 18% indicated that they might consider expansion but that it was not something that they were actively considering at the moment. However, 43% said that they would consider expanding their business with Iran and were waiting until sanctions were relaxed before doing so and a further 35% indicated that it was already a high priority and that they were simply waiting for the relaxation to take effect.
Anticipating 24 November
Whilst there is no guarantee that a deal will be reached on 24 November, our survey has confirmed that businesses in the MENA region are already anticipating and planning for further trade with Iran following any compromise that is made.
However, given that our survey also shows that some of the causes of the slowdown in trade with Iran have been the effects of the targeting of banks, insurers and other such financial institutions, there may need to be some comfort provided to these key facilitators of international trade before there is any large scale increase in trade with Iran.