The incumbent Iranian President, Hassan Rouhani, has won a huge endorsement from the Iranian electorate for the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in a comprehensive victory in Iran’s presidential election on Friday. He becomes the fifth consecutive Iranian president to be re-elected for a second term in office claiming 23.5 million votes with his closest rival, conservative Ebrahim Raisi, on 15.8 million.
The reformist President Rouhani’s campaign promises included opening further the way for foreign and private investment and lifting the remaining non-nuclear sanctions. The JCPOA, which lifted US and EU nuclear sanctions against Iran, was a significant foreign policy achievement for President Rouhani in his first term, but the question of how the Iranian people have benefitted from the JCPOA was a frequent criticism used against him during the campaign.
Foreign investors have remained lukewarm following the JCPOA deal. Whilst some have concluded headline making deals, including Boeing, Airbus and French oil major Total, and small to medium sized retailers and traders have cautiously entered the market, many others have waited, constrained by the reluctance of tier one financial institutions to support trade or investment in Iran and concerns about the involvement of sanctioned entities in the economy. More recently, the election of President Trump, and a lack of clarity as to his intentions towards the JCPOA (he has variously described it as a “lopsided disgrace” and “the worst deal I’ve ever seen”), has not helped. Stephane Michel, Total’s president for Exploration and Production in the Middle East, summed up the problem at the EU-Iran Oil and Gas forum in April: “If at the end of the day, it is only words and no facts, there’s a problem”.
But the re-election of President Rouhani by a significant majority is nonetheless a powerful affirmation of the JCPOA by the Iranian electorate. It comes just days after President Trump renewed the US secondary sanctions relief required under the JCPOA. The Trump administration has refrained, thus far, from carrying out his campaign threat to tear up the JCPOA amidst concerns about the complexities of abrogating a multi-lateral deal which includes the EU, Russia and China as parties. Such actions as Trump has taken so far have been limited to the designations of a small number of persons and entities as “SDNs”, including, last week, the designation of some entities in Iran and China who were suspected of involvement in Iran’s ballistic missile program. They have not included designations of Iranian financial institutions or large state-owned Iranian companies, or the wholesale targeting of sectors of the Iranian economy, which would have had a much greater effect.
President Rouhani now faces the challenge of attracting more foreign – principally European and Asian - investors into the Iranian market. If he can make good on campaign promises to decrease the involvement of SDNs in the Iranian economy, this will certainly assuage some fears. Persuading non-US financial institutions to support trade and investment with Iran is outside his control and is something that even the Obama administration did not achieve. That is likely to require, in the long run, the lifting of the non-nuclear sanctions against Iran including the long-standing US sanctions which currently prevent US companies from engaging in business with Iran and prevents US banks clearing US Dollars for Iranian trade.
But in the short term, President Rouhani's victory is a timely fillip for foreign investors. And whilst there are still challenges for foreign firms looking to invest or do business in Iran, it is by no means impossible to do so provided that the legal and practical obstacles are understood and managed at an early enough stage. Identifying and quantifying any sanctions risk, conducting due diligence on counterparts to identify possible SDN involvement and understanding the extent of any banking/finance restrictions are crucial pre-requisites that can and should be carried out at the earliest stages of business planning. Understanding the local Iranian investment regime is also essential so as to structure appropriate investment and trading vehicles, obtain any investment protection available, and mitigate tax liabilities.