Iran sanctions: a new infrastructure market in the Middle East?

On 16 January 2016, a number of key EU economic and
financial sanctions imposed in connection with the Iranian nuclear programme
were lifted.  With those trade
restrictions removed, businesses in Europe will be considering how to approach one
of the world’s potentially most lucrative emerging markets.

What has changed?

As we explained in our recent article here, the lifting of nuclear-related sanctions followed confirmation by the International Atomic Energy Agency that Iran had implemented the measures required by the Joint Comprehensive Plan of Action, which it had agreed with the UK, France, Germany, US, Russia, and China. Other EU sanctions remain, in relation to human rights, nuclear proliferation and support for terrorism, so businesses must still carry out sanctions checks. Nevertheless, the ability to now make payments between EU and Iranian persons has removed one of the fundamental barriers to trading in Iran.

In contrast to the EU position, the US has only lifted so-called ‘secondary sanctions’. With limited exceptions, US persons continue to be broadly prohibited from engaging in transactions or dealings with Iranian parties. While the US trade embargo remains, EU businesses may look to steal a march in securing contracts in Iran.

Where are the opportunities in infrastructure?

The Iranian infrastructure sector has the potential to be a very profitable sector for European companies. The years of sanctions have meant that Iran’s infrastructure has been degraded, and it currently sits behind countries such as Georgia, El Salvador, Kazakhstan, and Latvia in the rankings of quality infrastructure. The context, of course, is that Iran has the fourth highest proven oil reserves and the second highest natural gas reserves in the world. Something has to change.

We expect a major infrastructure investment programme in Iran in the coming years, which will provide an opportunity for European businesses to provide the necessary skills and resources for the development of Iranian infrastructure. To do so, it is likely that European companies will be required to enter into joint venture agreements with Iranian companies for many of the projects.

We predict that the main sectors for investment will be transport (in particular rail and air), power generation (in particular updating Iran’s refinery capabilities), water, agriculture, and construction.

Smart Cities in Iran?

If Iran follows the lead of other Middle Eastern states then there will be a focus on the development of Smart Cities to ensure that the infrastructure put in place is relevant for future generations. Some of the key areas of focus in Smart Cities, such as intelligent transport systems, smart building management and the integration of the Internet of Things, will be very relevant to Iran. You can read more of our market-leading insights on Smart Cities on our dedicated website here.

What is going on already?

A number of businesses have been very quick to move into Iran to pursue opportunities. It has already been reported that Alstom is seeking contracts to work on the expansion of Tehran’s metro, amongst other things, and that Bouygues and Aéroports de Paris are in talks regarding the construction of a second terminal at Tehran’s Imam Khomeini international airport. Neither the Iranian government nor EU contractors are likely to waste much time pursuing the opportunities that have been opened up on both sides.

What should businesses be doing now?

Along with checking for any remaining sanctions that might be relevant (see our article here for more detail), businesses should ensure that any contracts are safeguarded against wider sanctions being imposed (or re-imposed).

Businesses should also consider how they may best take advantage of investor protection under bilateral or multilateral treaties, and how to ensure that they are best protected in the event of a dispute. With the rush to take advantage of these new opportunities, businesses need to ensure they are protected as far as possible against the significant risks that remain.