It has been a year since the Joint Comprehensive Plan of Action (JCPOA) was implemented and already the world looks very different to the one in which the deal was agreed. We look back at progress made, tribulations suffered and what businesses need to think about now in order to take advantage of future opportunities.
Undeniable progress has been made
There have been some definitive positives for Iran in the last year. Key achievements include:
- The IMF has forecast the Iranian economy will grow at an impressive rate of 6.6%
- Total became the first foreign oil major to sign a deal with Iran for a USD 2 billion South Pars 11 gas field development
- Oil cargoes exported from Iran rose to 563 in 2016, up from 66 in 2012
- In February 2017 Iran's oil exports touched 3 million barrels per day for the first time since the 1979 revolution
- Iran has signed with Airbus and Boeing to purchase up to 180 passenger aircraft to support its ailing civil aviation sector
- The value of planned but un-awarded non-hydrocarbon projects in Iran is USD 65.7 billion
On the political side, Iran's reformist president, Hassan Rouhani, who negotiated the JCPOA, has indicated that he will run in the Presidential election later this year.
Yet frustration remains at the lack of investment
The overriding feeling in Iran is one of frustration. Whilst a few foreign investors have looked to gain first mover advantage, the volume of foreign investors has simply not materialised in the numbers hoped for. Even Total is reported to have delayed the final decision on its investment until after summer 2017, whilst it waits to see whether US sanction waivers are renewed.
One cause of the relatively slow influx of investors has been reluctance within most tier one financial institutions to support any business with Iran. US financial institutions were, of course, still prohibited from facilitating business with Iran under the US primary sanctions that remained in force. But foreign financial institutions (FFIs) were, in theory, able to clear (non-US dollar) funds, lend money and support investment and business with Iran. The failure to do so, outside of a few small regional European and Asian banks,has been a persistent dampener on trade and investment. The Obama administration was well aware of this limitation. Secretary of State John Kerry was at pains last year to assure top European banks that they had nothing to fear from pursuing "legitimate business" with Iran. Prime Minister David Cameron publicly rebuked a British bank for refusing to process payments connected with Iranian business.
But the difficulties persisted, hampered by concern amongst FFIs about the attitude of US regulators, and US banks themselves. Indeed, in many instances US clearing banks have sought to restrict their correspondent counterparts from engaging in Iran related business, fearing the consequences of clearing US dollar sums for correspondents who might be undertaking significant volumes of Iran related business.
Adding to the cautious mood were the two major political events looming on the horizon: the US and Iranian elections. The first of those has of course produced a further complication.
President Trump’s attitude towards Iran
Trump’s description of the JCPOA during his presidential campaign as "a lopsided disgrace" and his pledge "to dismantle the disastrous deal with Iran" has not helped alleviate the concerns of investors. Whilst his language has cooled somewhat since his election, he still describes it as the "worst deal I’ve ever seen".
Yet, if President Trump is judged on his actions, then his position appears to be closer to that of his predecessor. The only new sanctions imposed by the US on Iran since President Trump’s inauguration was following Iran’s ballistic missile tests. Here the US imposed sanctions in the form of new designations of Specially Designated Nationals (SDNs).
The effect of these sanctions has been limited. Indeed, President Trump’s designation of just 13 individuals and 12 (relatively small) entities as SDNs was much closer in character to the designations made by the Obama administration. Thus far, therefore, President Trump’sactions on Iran appear to be fairly limited.
How likely is it that President Trump will rip up the Iran deal?
It would be difficult for the US to completely revoke the sanctions relief it has provided under the JCPOA. For one thing, the JCPOA is not a simple bilateral agreement between the US and Iran - Britain, France and Germany (as well as Russia and China) are also parties to it. The EU provides its own sanctions relief as part of the deal.
It is unlikely that the EU will follow any unilateral repudiation of the deal by the US. This would mean that the EU and the US would, for the first time in respect of sanctions against Iran, be taking diverging positions. This could lead to a situation where US targeted investments by European firms in Iran are legal as a matter of EU law. This harks back to previous transatlantic trade disputes including the Helms-Burton Cuba sanctions in 1996 or the Polish pipeline sanctions in the 1980s.
If the US is intent on imposing new sanctions against Iran, it is instead more likely to do so in respect of non-nuclear issues. This could include Iran's ballistic missile program, support for terrorist organisations, or even its activities in Yemen, Syria and elsewhere in the Middle East.
How can businesses plan for and mitigate the effect of any possible new sanctions?
The key to mitigating any effects of new sanctions is identify and quantify the potential risks involved. A firm investing significant capital sums into Iran in the form of FDI is likely to face greater risks than a trading firm selling directly into Iran or appointing distributors or agents in Iran.
The latter's risk is ultimately a credit risk: in the event of a re-imposition of sanctions which either designates a trading partner, forcing the foreign business to cease dealing with them, or shuts down an existing payment route, the risk is ultimately the credit exposure at the time of the sanctions.
Presuming that satisfactory terms, in the form of a force majeure style "snapback" clause, can be agreed at the outset allowing the foreign company to cease dealing in those circumstances that can be managed by prudent credit control.
However, a significant capital investment in, say, a joint venture for an infrastructure project presents greater difficulties. Even if a "snapback" clause can be negotiated at the outset, allowing the foreign partner to immediately cease dealing with an Iranian partner in the event of a designation, significant capital will be tied up in Iran without any means to lawfully repatriate it or receive dividend income. Thought should therefore be given at the outset to issues such as to how to allow the foreign partner to re-engage at a later date if/when sanctions are eased again and for the payment of any accrued dividends.
What steps do businesses need to take when looking to enter Iran?
The due diligence alone on counterparts can take considerable time and is worth proceeding with as early as possible. It is important you identify not only whether a counterparty is a SDN, but also whether it is owned or controlled by SDNs.
Market entry strategy needs to be given careful thought as well, so as to identify the appropriate investment vehicle to use. Is it better for you to invest through an onshore vehicle (in most circumstances foreign investors can own 100% of an Iranian company) or through one of Iran's 13 Special Economic Zones and 7 freezones which offer tax and employment benefits? Or will you need a joint venture partner because of local licensing requirements? Might a branch office suffice instead? Is there a bilateral investment treaty or double taxation treaty that can be taken advantage of in structuring the investment and, if so, will a "FIPPA" licence be required from the OIETAI in Iran?
Sellers of products will need to consider which distributorship options to use and navigate their way through the registration requirements for distribution agreements. Thought should also be given to local employment regulations and intellectual property protection.
Whilst the reaction amongst businesses to the Iran deal has been muted, there has been significant levels of investment in, and business done with, Iran. That cautious approach is likely to continue whilst businesses wait to see what the Trump presidency means for the future of the Iran deal. That is not to say that there are no steps that can and should be taken now by businesses serious about investing in Iran in the future.