An important interim agreement was reached over the weekend among Iran and six other countries regarding the Iranian nuclear program. During a six month period, in return for Iran taking several steps to limit the progress of its nuclear program, certain US and EU economic sanctions on Iran will be lifted. The sanctions relief is limited to certain specific measures. It does not lift the broadest US or EU sanctions on Iran, or any of the UN sanctions on Iran.

Announcement and terms of the deal

The agreement to provide limited sanctions relief to Iran was announced early Sunday morning (November 24), following a third round of negotiations among the US, France, Russia, China, UK and Germany (generally referred to as the P5+1 or in the EU as the EU3+3), along with the EU High Representative Catherine Ashton.

The primary impact of the sanctions relief will likely be the ability of the Iranian government to more freely access and use $4.2 billion in crude oil sale proceeds currently on deposit at banks in countries purchasing Iranian crude oil. Our initial analysis suggests that the agreement will not make possible a broad range of transactions that have been prohibited by sanctions to date.

The apparent four page text agreed by the seven countries was posted on an Iranian news website on Sunday, and is available on several websites, for example here: http://online.wsj.com/public/resources/documents/iranpact_11242013.pdf.

President Obama delivered a statement and the White House issued a seven page fact sheet

Structure of the deal

The essential nature of the deal is that, during a six month confidence-building period:

  • Iran has agreed to several important interim steps to limit advances in its nuclear program that could help Iran to suddenly "break out" of the nuclear control regime and complete a nuclear weapon.
  • In return, as outlined below, the US and EU will lift certain specific economic sanctions measures, and will refrain from imposing any new nuclear-related sanctions on Iran.

Almost all of the broadest US and EU sanctions will remain unchanged, and the US government has stressed they will continue to be vigorously enforced.

Going forward, the seven countries will seek to work out a more comprehensive resolution of international concerns relating to Iran's nuclear program. If this is achieved, there will be a phased lifting of essentially all US and EU sanctions on Iran.

If not, the interim sanctions relief will be revoked. Between the text of the agreement and the US fact sheet, it is unclear whether this would occur as soon as six months from now, or only after a full year of unsuccessful negotiations.

Limited sanctions relief

The sanctions relief would include the lifting of a few specific US extraterritorial sanctions (which the US government refers to as "secondary sanctions"). Under these sanctions, the US government may penalise non-US persons, with no ties or contact to the US, if they engage in certain transactions involving Iran.

It may take some time for the mechanics of lifting the sanctions to be carried out. On the US side, we understand sanctions will be lifted by an Executive Order or other action by President Obama, which may occur fairly quickly. On the EU side, the EU will begin to take steps to lift the EU sanctions covered by the agreement, though this may take longer (perhaps not until 2014) due to the need to reach agreement among EU member states.

The sanctions to be lifted are those relating to:

  1. the Iranian automotive sector, imposed by the US in 2013;
  2. transactions involving Iranian-origin petrochemicals, and related financial, insurance or transportation services, imposed by the US and EU in 2012;
  3. transactions with Iran involving gold or other precious metals, imposed by the US and EU in 2013;
  4. the export to Iran of goods and services for civil aviation. This may include a more permissive US government policy to authorise the provision to Iran of spare parts and services necessary for civil aviation flight safety;
  5. the raising of the thresholds above which certain Iran-related payments to the EU require approval by the relevant member state. For example, certain payments into the EU larger than EUR 40,000 currently require approval and
  6. the Iranian government's access to proceeds from the sale of Iranian crude oil, up to a capped amount of $4.2 billion agreed by the parties.

Regarding this last element, currently, the non-US banks holding these crude oil proceeds for Iran (including various central banks) may be penalized by the United States if the funds are used for any purpose other than humanitarian transactions, or bilateral trade with Iran. The equivalent of US$4.2 billion of such funds will be released from this restriction, in seven monthly $600 million installments. It is not clear exactly how this will be implemented. This amount is a small portion of such crude oil proceeds, in various currencies, which are in total equivalent to tens of billions of US dollars.

In addition, the agreement provides that unspecified steps will be taken to support already-authorised sales to Iran of food, medicine and medical devices, and payments by Iranians for medical expenses outside Iran. This may involve specific authorisation by the US and EU to specific banks outside Iran, to handle payments for such sales, from certain specific Iranian banks. Specific banks may also be authorised to handle the equivalent of several hundred million dollars in payments for Iranian student tuition in third countries, or to pay Iranian dues to UN organizations.

Most sanctions would remain in place

All other US and EU sanctions on Iran will remain in place. On the US side, these include:

  1. the broad Office of Foreign Assets Control ("OFAC") regulations, which prohibit essentially all trade and transactions, by US persons and their non-US subsidiaries, with Iran, the Iranian government or sanctioned persons;
  2. these OFAC sanctions prohibit dealings with hundreds of Iranian persons on the US sanctions list (the "SDN list"). It appears there is no intention to remove any of these persons from the SDN list;
  3. most US extraterritorial sanctions. These include sanctions targeting non-US banks that carry out significant transactions with Iranian persons on the SDN list. Also remaining are sanctions targeting persons who deal in Iranian-origin crude oil, who are involved in the Iranian energy, shipping or military sectors, and who export petroleum products to Iran; and
  4. all US sanctions relating to Iran's support for terrorism, its role in the Syrian conflict, and human rights concerns.

There is no agreement to lift any of the rounds of sanctions imposed on Iran by the UN Security Council, and implemented by the EU and many countries around the world.

Iran's commitments under the agreement

In return, during the six-month period, Iran has reportedly agreed to do the following to limit the progress of its nuclear program:

  1. not increase its stockpile of uranium enriched to 3.5% purity, cease all enrichment above 5% purity, and process all of its near-20% enriched uranium by diluting it below 5% purity or converting it to a form that cannot be further enriched;
  2. sharply limit its number of operating centrifuges, and centrifuge production, particularly its most advanced centrifuges;
  3. not take specific major steps towards the completion or fueling of the Arak plutonium reactor, which is around six months from completion in Iran; and
  4. provide broad access to IAEA inspectors to most of Iran's nuclear facilities, and the P5+1, Iran and the IAEA will work together to verify the completion of Iran's other commitments as summarized above.

Anticipated reactions to the agreement

In assessing the likely impact of the deal, it will be important to closely monitor the reaction in US Congress, among US allies and other countries in the region, and in Iran and from Iranian leadership:

  1. the agreement follows the broad lines of the proposal that was previously rejected by US allies and by many members of the US Congress. Some in Congress may seek to disrupt the agreement by advancing proposed new sanctions that have been pending in the Senate for several months;
  2. Israel has been very clear, both before and after the agreement was finalized, that it is strongly opposed to the sanctions relief on offer; and
  3. within Iran, the situation is politically volatile and some may seek to oppose the agreement as giving away too much in return for the limited sanctions relief provided.