Phased sanctions relief expected to open Iran's markets for Australia
On 14 July 2015, a historic deal was reached in respect of Iran's nuclear program, ending a 12 year stand off. The deal was made between Iran and the P5+1 (China, France, Germany, the Russian Federation, the United Kingdom and the United States of America), with the High Representative of the European Union for Foreign Affairs and Security Policy.
Through the Joint Comprehensive Plan of Action (JCPOA), Iran and the P5+1 have agreed to a long-term plan to limit Iran's nuclear program, in exchange for the comprehensive lifting of all UN Security Council sanctions, and multilateral and national sanctions in the areas of trade, technology, finance and energy.
Implementing the JCPOA will open up Iran's markets and make Iran more accessible for foreign investment. Businesses looking to invest in Iran will need be prepared to move quickly but carefully into what has been described as one of the last great emerging markets.
As detailed in our previous client alert, implementation of the deal is expected to bring opportunities for investment in Iran, particularly from an Australian perspective. Following the Minister for Foreign Affairs' visit to Tehran in April this year - the first by an Australian Foreign Minister in over 12 years - the nuclear deal represents a significant opportunity for the enhancement of bilateral relations between Australia and Iran in a number of areas.
The issue of sanctions relief for Iran under the JCPOA is complex, and will require close monitoring over the next few months. In order for sanctions to be lifted, all parties to the JCPOA will need to follow the phases under the Implementation Plan specified in Annex V.
For an overview of the sanctions relief under the JCPOA, please see Baker & McKenzie's sanctions blog.
Australia's sanctions regime for Iran
The Australian Government has welcomed the nuclear deal with Iran, noting that it would review Australia's autonomous sanctions on Iran in light of the agreement. Assuming the Implementation Plan is followed, it is likely the Australian Government will introduce legislation to gradually lift Australia's sanctions on Iran in line with the lifting of sanctions contemplated under the JCPOA.
As noted in our previous client alert, with trade between Iran and Australia at just AU$330 million a year, the lifting of sanctions could create significant opportunities for Iran and Australia to expand bilateral relations in various areas.
Lingering effect of US sanctions
Even after implementation and assuming Australian sanctions are eventually lifted, it is expected that the primary US embargo of Iran will continue for some time. The breadth and stringent enforcement of that US embargo (including outside the US, with some of the largest criminal enforcement settlements to date against non-US companies) will undoubtedly hamper the ability of foreign companies to take advantage of new opportunities due to continuing restrictions on, and the general reluctance of, banks, insurers and other service providers to support Iran-related transactions.
Key Iran markets
The JCPOA marks a turning point in relations with Iran, one of the world's last great emerging markets.
Sectors of the Iran market expected to open up include the following:
Under the JCPOA, businesses can directly invest in the sale of commercial passenger aircraft and related services to Iran. Previous international and US sanctions prohibited the sale of western planes and spare parts to Iran, meaning Iran's aircraft were aged, and heavily reliant on second-hand parts. Iran has announced plans to purchase a substantial number of new planes in the next decade.
Petrochemicals, gas and mining
Iran is estimated to hold the world’s fourth-largest oil reserves. With plans to double oil exports (having announced its intention to spend US$180 billion to review its oil, gas and petrochemical industries by 2022) and revise its standard oil contracts to lure foreign investment, this area will likely be targeted by foreign businesses looking to tap into Iran’s vast energy and resources sectors. Various oil majors have already publicly expressed their readiness to return to Iran.
Iran also hold’s the world's second-largest gas reserves, and has announced plans to produce about 250bcm of gas by 2018.
Iran also accounts for approximately 25% of the Middle East's minerals market, with significant zinc, steel, cement, iron ore and aluminium resources. The Iranian Mines and Mining Industries Development and Renovation Organization (IMIDRO), recently announced that it has US$9 billion of current projects, and US$20 billion of future projects planned in respect of the mining industry.
Renewable energy, climate change, and environment
Iran has a unique geographical position as the only country bordering both the Persian Gulf and the Caspian Sea and has significant interest in becoming a major geothermal energy producer. With Iran announcing plans to expand its renewable infrastructure, including 5,000MW of wind and solar power capacity by 2018, opportunities for cooperation between Australia and Iran in the area of renewable energy can be expected. Iran has also expressed a strong interest in moving away from a fossil-fuel intensive economy, with a push to develop environmentally sustainable practices and carbon markets through an Emissions Trading Scheme.
Iran requires significant investment to develop its ageing infrastructure. It has recently become a member of the Asian Infrastructure Investment Bank (AIIB) of which Australia is a founding member, and has close cooperation with the Shanghai Cooperation Organisation (SCO) and BRICS, which suggests there may be infrastructure investment opportunities in Iran in the future.
Consumer goods and telecommunications
Iran has a large population of about 80 million, 60% of which are under the age of thirty. With a young, highly educated consumer population, there is significant potential for the sale of consumer products such as technology, telecommunications and luxury goods.
Iran has one of the highest education-workforce ratios in the world, with 43% of its population possessing tertiary education qualifications. This represents a strong market for educational service exports, as well as opportunities for cross-cultural and skilled exchanges.
Given that 40 years ago, Iran was the largest importer of sheep from Australia, there is a large potential market in the export of sheep and cattle. Iran also has major agriculture hubs across its varied climates which present opportunities for Australian agricultural companies.
With the lifting of sanctions, many carmakers will be looking to restart local production of automobiles in Iran. This is likely to see competition between European and Chinese companies for a share of Iran’s large automotive market.
Carpets and foodstuffs
Like aviation, the importation into the US of Iranian origin foodstuffs, including pistachios and caviar, and Iranian-origin (Persian) carpets will directly be permitted under the JCPOA, and will see a clear increase in trade.
European movements in Iran
Since the signing of the JCPOA, several European countries have moved quickly to re-establish or enhance economic ties with Iran, including:
A recent trade delegation, led by German Economy Minister, Sigmar Gabriel, recently travelled to Iran to announce plans for significant cooperation with Iran in various sectors. It is expected that trade between Iran and Germany will increase in the short-term to €5 billion and €10 billion in the mid-term. Leading German aviation, telecommunications and automotive companies have also expressed a desire to return to Iran immediately.
The French Foreign Minister visited Iran recently, and various French aviation and railroad companies have announced their intention to heavily invest in Iran.
The Austrian President recently met with Iran’s Minister of Industry, Mine and Trade, expressing a desire to expand economic relations. Austria also recently hosted a major Iran-EU economic conference in Vienna, which was aimed at encouraging foreign investment in post-sanctions Iran.
Italy announced that it would send a large trade and business delegation to Iran, having recently concluded a trade insurance agreement with Iran. Italy has also sent technicians to observe Iran's port facilities, and set up a joint company for car design.