New opportunities in Iran following sanctions relief
Following the Joint Comprehensive Plan of Action (JCPOA) signed in Vienna on 14 July, Iran might be able to resume supplying oil to western markets. This will add even more pressure to an already depressed oil price, but perhaps also open up new opportunities.
The sanctions regime against Iran is among the widest in the world, covering both financial and trade activities. However, if all goes as planned, the JCPOA provides notably for the lifting of all nuclear-related sanctions. These target the energy, shipping, ship-building, financial and automotive industries. For the time being, the EU, UN and US arms embargos will remain in force, as well as US sanctions targeting terrorism and human rights abuse.
Having been subjected to crippling sanctions for almost a decade, the Iranian economy is hungry for foreign investment. Amid a young, well-educated population in a country high on the world list of proven oil reserves, investors can see the attractions. Analysts estimate that over the next five years Iran will need $230 to $260 billion in investment in oil and gas. Indeed, already, before the core sanctions have been lifted, the country has seen visits from large trade delegations from Germany and the UK. Companies looking to be first out of the starting gate would however be well advised to note the significant risks and obstacles that still remain.
First of all, while there was some relaxation during the JPCOA negotiation period, that is limited in scope, and the core sanctions will remain until all relevant bodies approve the JCPOA. This includes the Iranian authorities, from whom there was cautiously positive news recently, and the US Government. Also, the IAEA (International Atomic Energy Agency) must be able to confirm that Iran has first complied with its end of the bargain in making substantial nuclear infrastructure changes. Few expect any major hiccups in this process, but IAEA verification is not expected before the first half of 2016. Then, and only then, all nuclear-related sanctions will either be terminated or suspended.
Some sanctions will however remain. As noted above, the EU, UN and US arms embargos will still apply, likewise the US sanctions targeting terrorism and human rights abuse. There is also a very specific US exception that means that the sanctions to be lifted will continue to apply to US persons. This is a wide term and means that, for example, US citizens and companies will still be prevented from doing business in Iran, and that banks may not clear payments in USD to or from Iran. There is a possible exception in some cases for foreign subsidiaries of US companies, as the US authorities have taken on the obligation to grant such companies licences to engage in activities consistent with the JCPOA. Such include those for which sanctions relief is granted under the JCPOA, i.e. transactions related to the Iranian energy, shipping, ship-building, financial and automotive industries. Even then, it is assumed that any US citizen employed by a foreign subsidiary would be prohibited from participating in transactions with Iran unless personally licensed to do so.
Forward-planning will be needed, and great care must therefore be taken, in order to avoid any “US person” involvement (unless a specific licence has previously been obtained) and that will mean first identifying any “US person” who might ordinarily be involved.
For non-US companies the waters are less murky in the short-term, but a successful venture into the Iranian market is still contingent upon continued Iranian compliance with the terms of the JCPOA. If it is later claimed that Iran is in breach, there is a dispute resolution mechanism which if unsuccessful will lead to sanctions being re-imposed. It is important to note that this so-called “snap-back” of sanctions would not affect on-going contracts i.e. those already in place at that time.
While the assurance that any “snap-back” will not be retroactive is important, if not crucial, it certainly does not alleviate all concerns as regards any significant investment in Iran. Consider for example a European shipyard entering into a ship-building contract with an Iranian company. A snap-back of sanctions would not affect the yard’s right to perform under the contract and collect the purchase price. However, even if the transaction under the ship-building contract was exempt from the snap-back, the yard may find itself in a difficult position if there are subcontracts and purchase orders left to be placed. Similar troubles could also arise with for example banks refusing or delaying facilitation of payment of hire earned under charterparties with Iranian entities. Though the exception covers contracts entered into before any sanctions snap-back, performance may still be hindered by third parties not being contractually obliged prior to the snap-back.
Another area of concern is the general business climate in Iran. The Islamic Republic is ranked 130 out of 189 countries on the World Bank’s Ease of Doing Business Report, and 136 out of 175 on Transparency International’s Corruption Perceptions Index. The latter element not only poses problems in terms of legitimately gaining market shares, but should also put potential investors’ compliance departments on high alert. Especially when employing local agents to secure business in such an environment, it is extremely important to ensure that the level and format of compensation as well as the instructions given are beyond reproach.
Finally, when contemplating doing business in the Iranian market, one would be well advised to take a second look at the terms of one’s other contracts and loan agreements, specifically as regards compliance with sanctions. We have already seen that some sanctions will remain in place and that there is a risk that those to be lifted will be re-imposed – and also yet further sanctions might be applied – should Iran be deemed to have defaulted on its obligations. From the contractor/borrower’s point of view, a well-drafted sanctions clause should be limited to its group’s compliance with those sanctions which are applicable to it. However, we frequently see terms that go further, for example an undertaking that the contractor/borrower will not engage in any activity that the company/lenders would be prohibited from engaging in themselves. Such wide encompassing clauses may cause problems, typically if a European company has a loan facility with a syndicate that includes American banks or for example a charterparty with an American oil company.
Notwithstanding the above concerns, many will be looking for fresh business opportunities in Iran, especially service providers to the oil and gas industry. In these cases careful consideration must be given to the risks that remain when carrying out such business.