On Friday night, July 18, at the conclusion of several days of high-level negotiations, Iran, six other countries and the EU agreed to extend for four months the Joint Plan of Action ("JPOA") agreed to late last year, along with the limited sanctions relief provided for by the JPOA.

Iran and the P5+1 countries had agreed to the JPOA in late November 2013 and began its implementation during a six month period beginning January 20, 2014 (which would have expired July 20). The JPOA provides limited US and EU sanctions relief to Iran in return for Iranian government undertakings relating to its nuclear program, focusing on the reduction of its stockpiles of enriched uranium.

The six countries negotiating with Iran are referred to as the P5+1 (or in Europe are referred to as the E3/EU+3). They consist of the five permanent members of the UN Security Council (the US, France, UK, China and Russia) plus Germany, along with the EU High Representative for Foreign Affairs.

Status of the negotiations

Generally positive statements have been released by the United States, European Union and Iran, citing progress made in the negotiations towards a comprehensive agreement on the Iranian nuclear program and US and EU economic sanctions based on concerns relating to that program. The statements note that the IAEA has verified that Iran has met its JPOA commitments relating to its nuclear program.

In part these positive statements are intended to help convince some skeptical members of US Congress, and skeptical officials in the Iranian government, of the value of extending the negotiations. However there may be some hope of an eventual agreement, if only because there appears to be commitment and momentum among the foreign ministers and their teams.

For example, Secretary of State John Kerry's written statement notes that the seven countries "have a draft text that covers the main issues," though "there are still a number of brackets and blank spaces in that text." That said, the statement did acknowledge the remaining gulf between the parties on the scope of Iran's future uranium enrichment program, an issue widely covered in the press in recent weeks.

What has been agreed

On July 18, the seven countries agreed to extend the JPOA for a further four months until November 24, 2014. To further build confidence and momentum in an effort to reach a broader agreement, the US has agreed to release additional Iranian government funds held at various central banks in third countries, in return for further limited Iranian commitments regarding its nuclear program.

The US will release additional restricted funds, which primarily consist of the proceeds of Iranian crude oil sales to the countries where the funds are located, equivalent to US$2.8 billion in local currencies. We understand Iran will be free to use these funds as it wishes, including sending them to banks or companies in third countries. We understand that, as with the similar releases of funds over the last six months, banks will be prohibited from sending the funds to any Iranian bank or entity specifically designated under US sanctions. Also, it is not intended that Iran use the funds to purchase goods or services that cannot be exported to Iran under US, EU or other trade controls.

Practical impact of the extension

In addition to the potential for non-US creditors of Iranian companies being paid out of the additional released funds, the primary practical impact of the extension is that the limited sanctions suspended since January 20 will remain suspended until November 24 (or earlier, if the negotiations break down).

As we have set out in our prior briefings on November 24, 2013 and January 20, 2014, since January non-US banks and non-US companies have been able to carry out certain limited categories of transactions without penalty under the suspended EU sanctions or US extraterritorial sanctions (which the US government refers to as "secondary sanctions"). The most significant such categories of transactions are:

  1. Secondary US sanctions imposed in mid-2013, under which non-US companies can be penalized for the sale of goods or services to the Iranian auto industry.
  2. EU sanctions, and US secondary sanctions, imposed in 2012 prohibiting transactions involving Iranian-origin petrochemicals, and related financial, insurance or transportation services, and prohibiting transportation of Iranian crude oil and related insurance.
  3. The US government may be willing to issue licenses, upon application, authorizing the export to Iran of equipment and services necessary for civil aviation flight safety. This is the one area of sanctions relief that may benefit US companies.
  4. Certain transactions with Iran involving gold or other precious metals, imposed by the US and EU in 2013.
  5. The threshold amounts for transfers of funds between the EU and Iranian persons that trigger an authorization requirement remain at higher levels, generally ten times their pre-January 2014 levels.
  6. Regarding Iranian crude oil sales, during the suspension of sanctions, the US government will not seek to pressure any of the remaining countries that import Iranian crude (China, India, Japan, South Korea, Taiwan and Turkey) to further reduce their purchases.

It bears repeating that the US government, including the Office of Foreign Assets Control (“OFAC”), have said that they will continue to “vigorously enforce” the US sanctions on Iran that are not suspended. EU member states will also continue to consider enforcement action where appropriate for breach of the broad EU sanctions that are not suspended.