Corrs Chambers Westgarth Partners Alan Churley and David Yates consider the impact of the Trump administration’s recent sanctions on Iran and the implications for Australia’s trade relationship with Iran.

A novice.

That’s how Iran describes President Trump.

New sanctions announced last month following Iran’s recent ballistic missile test are the latest in a series of verbal volleys and policy measures that are escalating.

Trump says when it comes to Iran, ‘nothing is off the table.’ Iran says US threats are ‘useless’. Amid the emotive language used by high-ranking officials from both sides, what is really going on here? Is it a dramatic shift? What does it mean for organisations wanting to do business in the Middle East generally and in Iran in particular?

“New sanctions imposed”?

On 3 February 2017, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned 25 entities and individuals involved in procuring technology or materials to support Iran’s ballistic missile program or with links to Iran’s Islamic Revolutionary Guard. This step, in and of itself, means that all property of those designated which is subject to US jurisdiction is blocked and US persons are generally prohibited from engaging in transactions with them. Strictly speaking this step will have no impact whatsoever on most people doing business with the Middle East generally and Iran specifically.

It is the political rhetoric that may prove to be the most damaging, coming on the back of the travel bans imposed by the Trump government in respect of seven countries in the Middle East region, including Iran.

The Iran sanctions regime has not changed

On 14 July 2015 China, France, Germany, Russia, the UK, the US, the EU and Iran reached the JCPOA to ensure that Iran’s nuclear program would be exclusively peaceful. On 16 January 2016 (“Implementation Day”), the International Atomic Energy Agency verified that Iran had implemented its key nuclear related measures described in the JCPOA. Generally speaking, the US lifted nuclear related sanctions on Iran. Specifically, however, it is worth understanding what that really means.

On Implementation Day, the US lifted nuclear-related secondary sanctions, which are sanctions generally directed towards non-US persons for specified conduct involving Iran that occurs entirely outside of US jurisdiction. The US also removed over 400 individuals from OFAC’s list of specially designated nationals and blocked persons (SDN list).

Importantly, a number of US sanctions with respect to Iran remained in place after Implementation Day including:

  1. Primary US sanctions - US persons including US companies continue to be broadly prohibited from engaging in transactions or dealings with Iran or its government.

  2. Designation authorities - the US retained a number of authorities to counter Iran’s other activities including support for terrorism, human rights abuses, and proliferation of weapons of mass destruction; and

  3. Secondary sanctions continue to apply to non-US persons for conducting transactions with any of the individuals on the SDN list, or involving trade and certain materials involving Iran.

Australia’s approach hasn’t changed

Australia fully implements the United Nations Security Council (UNSC) sanctions regime in relation to Iran. Australia also implements an autonomous sanctions regime in relation to Iran, which compliments the UNSC sanctions. Despite the recent actions of the US government, neither the UNSC nor Australia has altered its sanctions regime in relation to Iran.

Even after Implementation Day, the UNSC prohibits the sale to Iranian entities of, for instance, nuclear material, equipment or technology. The Australian autonomous sanctions regime prohibits the sale of “export sanctioned goods” for Iran such as arms related material, particular forms of graphite, particular raw materials, particular semi-finished metals and certain software without a sanctions permit.

Opportunity for Australian companies

At its peak, Australia exported almost $1 billion worth of goods to Iran before the nuclear sanctions slashed the trade to below $350 million. The lifting of sanctions on Implementation Day has brought renewed opportunities for bilateral trade between the two nations. In October 2016, the Governor of the Central Bank of Iran said that “the lifting of sanctions has created unprecedented opportunities for investors”. The Governor highlighted Iran’s massive capacities of oil and gas, as well as its other opportunities in petrochemicals, steel, copper mining, pharmaceuticals, telecoms, aviation, tourism, and infrastructure.

In 2016 we saw the signs of a burgeoning trade relationship between Australia and Iran:

  • in December Australia announced that it would begin importing hexamine (a petrochemical product) from Iran;

  • also in December, Australian-based company Servcorp (an organization which sells serviced office space) inaugurated its first Iranian branch in Tehran. Servcorp is planning to open 10 branches in Iran; and

  • in September, delegates from several Australian companies travelled with Trade Minister Steven Ciobo to Tehran where Australia and Iran signed several MOUs. Ciobo described the occasion as “the dawn of a new age of the relationship with Iran”. During that trade mission Blackmores also signed a distribution rights agreement with Iran’s Tasnim Pharmaceutical Company.

A cautious approach in the short to medium term is appropriate. Perhaps the most significant barrier to fully normalized trade with Iran is the country’s banking system. Following years of economic isolation, Iran’s banking services are provided almost exclusively by domestic Iranian banks. Western banks have been hesitant to establish a presence in Iran, primarily due to the fact that restrictions on Iranian-related transactions being processed through the US financial system remain in place. Western banks are also jittery about dealings with Iran due to fears of punishment by the American government. The normalization of banking relations with Iran will be critical in increasing trade opportunities with Iran.

Nonetheless, these developments are promising signs. They suggest that we can look forward to a thriving trade relationship between Australia and Iran in the long term, particularly in the sectors of agribusiness and food, resources and energy, health, water resource management, education and training, and mining services.