On 16 January 2016 the financial and trading sanctions which the international community imposed on Iran were significantly reduced. This move followed strenuous political negotiations concerning the future of Iran’s nuclear capabilities. In return for agreeing to curb its nuclear weapons programme, Iran will be allowed to re-enter global markets and trade agreements.
The agreement was signed between the so called G3+3 (comprising of China, France, the UK, Germany, Russia and the USA) and Iran with the EU and the UN providing consent. The finalised agreement is known as the Joint Comprehensive Plan of Action (JCPOA).
Iran is a prosperous country with a highly educated workforce. It is the second most populous Middle Eastern state and only Saudi Arabia has a higher GDP in the region. The opening of Iran therefore presents opportunities to western businesses and the opportunity for investment. However, despite the political consensus trading with Iran remains complex.
This briefing note will attempt to simplify the new sanctions regime and highlight the risks which remain. There remain regional differences when trading with Iran so this note will be of most relevance to EU based entities.
The new regime
Prior to the implementation of the JCPOA it was virtually impossible for European businesses to invest in Iran. The removal of sanctions opens Iran to trade with the rest of the world. In the UK, the FCO has commented that this represents the largest market to enter the global economy in decades. The government has said that it supports businesses expanding their trading relationships in Iran.
The primary sanctions which have been lifted are economic and financial. This will allow European businesses to renew trade with their Iranian counterparts and the transfer of funds between EU financial and credit institutions and most Iranian persons and bodies will be permitted. The insurance and shipping industries will now also be able to invest in Iran.
Crucially, Iranian oil is now able to return to western markets. This extends beyond simply allowing EU businesses to buy Iranian oil as it includes financial products linked to oil.
Remaining EU Sanctions
It is only sanctions which were imposed against Iran in relation to its nuclear ambitions which have been lifted. Sanctions in relation to human rights violations and support of terrorism remain. Indeed, many of these sanctions predate the nuclear issue.
In relation to the EU, this includes a complete asset freeze and visa ban on a number of named Iranian individuals and entities. Any businesses looking to invest or trade with Iran should be particularly careful not to infringe this embargo and continue to perform robust due diligence of their Iranian trading partners.
In the US Iranian sanction regime there is a distinction between Primary Sanctions and Secondary Sanctions. Primary Sanctions apply to any “US Person” including financial institutions. A US Person is broadly defined to include any entity organised under US law which catches the US subsidiaries of non-US companies. The Primary Sanctions prohibit US Persons from having economic or financial dealings with Iranian businesses, persons and governmental organisations.
Secondary Sanctions apply to non-US Persons in order to limit Iran’s ability to engage with the rest of the world.
On the Implementation Day of the JCPOA the Secondary Sanctions were lifted essentially allowing the rest of the world to trade with Iran. However, the Primary Sanctions remain. This means that for US Persons the position has not changed and trade with Iran remains heavily restricted. This can also have an impact where Non-US persons are considering exporting goods which contain US-sourced components, or US Persons are involved in their business.
For Non-US persons, there should now be no prohibition on trading with Iran subject to the remaining EU sanctions noted above. However, there is a degree of uncertainty as to how far European Financial Institutions are willing to test the new US position. European banks and clearing houses (most of whom have some form of presence in the US) have faced high penalties for breaching US sanctions against Iran and many will not wish risk entering the market until a clear practice has been established. This could make it difficult for EU businesses to get the necessary funding to move into Iran. In March 2016, Prime Minister David Cameron wrote the Chief Executive of Barclays Bank querying the banks refusal to forward funding to a British company looking to invest in Iran. Barclays responded that the continued existence of Primary Sanctions prevented it from dealing with Iran and that this was standard practice with its competitors.
It is likely that the banks will soften their approach with time and once other financial institutions can show a record of dealing with Iran. Both the EU and US have clarified that it is policy that non-US persons should be able to trade with and invest in Iran.
In the USA, the Obama administration has been the driving force behind lifting the sanctions and encouraging international partners to do so. However, Obama’s term of office ends at the start of 2017 and there is no guarantee that his successor will continue the policy. Texan senator, Ted Cruz, who is one of the main contenders for the Republican nomination for president, has indicated that reinstating the sanctions will be one of his first acts if elected.
The political situation in the Middle East remains highly sensitive. As in the USA, the JCPOA has been criticised by conservative members of the Iranian establishment. Should Iran act in significant non-performance of its obligations, the JCPOA contains provisions which allow the immediate re-introduction (or “snapback”) of sanctions. Reintroduction of sanctions would not have retrospective effect. However, the risk that investment returns could be significantly curtailed due to a political shift is something which businesses should be wary of.
The lifting of sanctions against Iran gives EU businesses access to a largely untapped market. However, entry into that market comes with some highly politicised risks which should be considered and understood as clearly as possible.