A transformative agreement
Earlier today an historic agreement was reached which will see curbs placed on Iran’s nuclear programme as well as inspections in return for phased sanctions relief over the next 10 years.
The agreement has the potential to transform an economy that has the world’s fourth largest oil reserves, the second largest stocks of natural gas and a population of 80 million people that generate significant demand for both services and consumer goods.
Both sides of the negotiating table are hailing the agreement as a success with Donald Tusk, the President of the European Council, describing it as “a game changer” and if fully implemented “a turning point in relations between Iran and the international community, paving the way to new avenues of cooperation between the EU and Iran”.
However, the deal remains subject to a minimum 60 day Congressional review period in the US followed by a new UN Security Council Resolution before any further steps to lift sanctions can be implemented. Similarly, within the EU there will be no immediate lifting of sanctions and the possibility of parallel but differing timetables for sanctions relaxation in the EU and US remains.
Proceed with caution
In the meantime, sanctions remain in force and the short/medium term outlook is that the Iranian trading environment will be subject to a complex process of regulatory unwinding.
In recent months, Western businesses ranging from oil majors and commodity trading houses to telecoms, tourism and internet services have been considering how best to maximise the massive opportunities the Iranian market provides. Indeed, it has been reported that Iran hopes to secure in excess of US$100 billion of fresh investment in its oil and gas sectors alone whilst at the same time re-negotiating the system of contracts issued by the Iranian authorities to provide greater flexibility to outside investors.
The most important area of the economy required to facilitate foreign investment will be the banking sector. Even if sanctions are lifted it may take months if not years for the banks to alter their risk appetite and welcome Iranian business. Recent years have seen financial institutions undertake widespread “de-risking” which has included the roll-out of robust sanctions clauses in facility agreements, investor side letters and more general terms and conditions. Having made these policy decisions (often in response to huge fines/regulatory pressure), institutions will be reluctant to make any immediate changes to their risk profile and/or to re-negotiate the terms of sanctions related provisions (at least in the short term). Either way, it will be important for businesses to consider carefully how sanctions provisions should/could be amended in light of the new environment, in particular to ensure the risk of so called “snap back” measures (in the event of a violation by Iran) are mitigated. Issues to consider include:
- representations and warranties as to past sanctions compliance, the ability of contracting parties to lawfully contract and the provenance of funds;
- express terms addressing the reintroduction of sanctions including termination rights, indemnities and conditions precedent;
- how licence applications to the relevant authorities should be dealt with; and
- how the costs of dealing with potential sanctions issues are to be apportioned.
Going forward, all eyes will be on the US Congress (as well as the high profile opponents of the deal who include Israel and Saudi Arabia) over the summer with reports suggesting the end of the year is a realistic estimate for material sanctions relief.
On both sides of the Atlantic a deal with Iran is being seen as a great foreign policy success story and with that one thing is certain – sanctions will remain a top agenda item for risk/compliance for the foreseeable future.