Sanctions relief announced under historic agreement concerning Iran’s nuclear programme
The E3/EU+3 (China, France, Germany, the Russian Federation, the United Kingdom and the United States, with the High Representative of the European Union for Foreign Affairs and Security Policy) announced an agreement on Tuesday 14 July 2015 with the Islamic Republic of Iran to limit Iran's nuclear programme in exchange for sanctions relief.
Under the new Joint Comprehensive Plan of Action ("JCPoA") agreed in Vienna, Iran has reaffirmed that under no circumstances will it ever develop or acquire any nuclear weapons. If fully implemented, the JCPoA will result in the comprehensive lifting of all UN Security Council sanctions as well as multilateral and national sanctions related to Iran’s nuclear programme, which will allow access to Iran's trade, marine, technology, finance, and energy sectors.
However, a number of hurdles remain to be cleared before any sanctions are lifted.
The UN must adopt a resolution to approve the JCPoA and put in place the framework to remove the UN Security Council sanctions. It is believed that it will only be a matter of days before the UN Security Council considers such resolution.
Under the Iran Nuclear Agreement Review Act of 2015, the US Congress will have an opportunity to review the JCPoA and, if it passes a joint resolution of disapproval, may prohibit granting relief from US statutory sanctions (although it appears as though President Obama will do all he can to ensure safe passage of the sanctions relief). The US will only provide relief under the JCPoA from nuclear-related sanctions, not from sanctions imposed on Iran in connection with terrorism, ballistic missiles and human rights issues.
Although the JCPoA will come into effect once all of the participants have approved it, there will be no relief from sanctions at that stage. Instead, Iran must first begin implementation of the agreed "roadmap" to address past and present issues of concern relating to its nuclear programme as previously raised in a report by the International Atomic Energy Agency ("IAEA"). This includes Iran allowing the IAEA to monitor the implementation.
Only once the IAEA has verified that Iran has taken the agreed steps to reduce its nuclear programme, will sanctions begin to be lifted. It is understood that JCPoA sets out a ten year programme for Iran to continue with a peaceful nuclear programme before the complete removal of UN Security Council resolutions in respect of the Iran nuclear issue. The JCPoA is also reported to include provisions allowing the IAEA to continue monitoring activities in Iran for up to 25 years.
The realisation that the JCPoA did not represent an immediate end to Iran's isolation was mirrored in the price of oil on Tuesday 14 July 2015. With Iran's sizeable offshore stockpile likely in mind, the price of Brent crude and US crude each fell by just over $1 a barrel (to $56.70 and $51.40 respectively) following news of the agreement. While estimates vary as to the quality and volume, up to 40million barrels of oil are believed to be stored by Iran offshore in the Persian Gulf. Once it became clear that the numerous procedural steps mean that sanction relief is unlikely until the first half of 2016 at the earliest, prices recovered by the end of the day.
Iran's oil industry has been hit hard by the sanctions. The country, which has the world's fourth-largest oil reserves, has seen sanctions halve exports to just over 1 million barrels a day according to Reuters. Its oil fields will need significant foreign investment and time to get production back up to pre-sanction levels. With the threat of the so called 'snap back' provisions, which would allow for sanctions to be immediately re-imposed if Iran violates the agreement, foreign investors are likely to adopt a cautious but enthusiastic approach to negotiations with Iran. In the meantime, there is debate as to whether the JCPoA will cause a significant longer term impact in crude oil prices. Given the market is currently oversupplied, and that implementation of the JCPoA will take time, it seems unlikely that the effect on prices will be seismic in the short to medium term. More likely is a gradual softening in price over time although unrelated global factors may of course intervene.
For those wishing to engage in trade with Iran, this announcement will bring excitement and opportunity and is seen as a historic moment between Iran and the international community.
Once the JCPoA has been published, Clyde & Co will produce further updates on the possible easing of Iranian sanctions.