In our previous article published at the time of the lifting of many of the Iran sanctions in January 2016, we asked whether Iran was now open for business. One turbulent year on from Implementation Day (16 January 2016: the day on which many of the sanctions were lifted), we have seen: the signing of high-profile, billion-dollar deals between Iran and prominent companies; the extension of US sanctions for another 10 years; the alleged non-compliance by Iran of some of its obligations under the JCPOA; and the election of a President in the United States who described the JCPOA (the agreement that led to the lifting of sanctions) as “one of the worst deals the US has ever negotiated“.
So, has Iran really become open for business, and with a new administration about to take office in the US, what does the future hold for trade with Iran?
Is Iran now open for business?
Whilst the majority of EU sanctions have been lifted, in the US, the JCPOA only led to the lifting of so-called ‘secondary sanctions’. ‘Primary sanctions’ (those applying to US persons and entities), remain in place. Today, therefore, with some limited exceptions, US persons continue to be broadly prohibited from engaging in transactions with Iran or dealing with Iran or its government.
The US Office of Foreign Assets Control (OFAC) issued a ‘General Licence H’, authorising US-owned or controlled foreign entities to engage in transactions with Iran that were otherwise prohibited. Nevertheless, concerns around the risk of US persons ‘facilitating’ transactions and the continued prohibition of US persons to broker deals between the US and Iran has proved to be an obstacle to foreign subsidiaries exploiting opportunities in Iran. The continued prohibition on US dollar transactions involving Iran has also created challenges.
But what about those EU companies without a US nexus? From the UK perspective, it has been reported that there has only been a trickle of business between the two countries since Implementation Day. A reason that has been cited for this is the reluctance of European banks to facilitate payments to and from Iran even if the underlying transaction is not denominated in US dollars. The difficulty in financing has proved to be a significant obstacle to small and medium-sized companies looking to take advantage of the easing of sanctions. This obstacle remains notwithstanding reassurance expressed by Secretary of State John Kerry in May 2016 that European banks would not be penalised for doing business with Iran. The crippling fine levied on BNP Paribas of $8.9 billion in May 2015 over claims that it breached the previous sanctions regime against Iran will do little to persuade the banks (or others) to change their conservative approach. There is a perception of risk that perhaps outweighs the actual legal and regulatory risk.
Have there been any significant deals since the lifting of sanctions?
Iran has entered into some high-profile deals since the lifting of sanctions, including a $16.8 billion deal with Boeing, a $27 billion deal with Airbus and significant deals with both Total and Shell. The aviation and energy sectors were expected to be the first to jump back into the Iranian market. Aviation deals in particular are particularly well-received in Iran, which needs to upgrade its ageing airline fleet.
The fact that these deals have completed shows that it is possible to do business with Iran despite the challenges. In the case of Boeing and Airbus, licences were obtained from OFAC before the deals could go through.
So whilst we have not seen a stampede of companies re-entering the Iranian market, the deals described above show that major companies are looking to exploit opportunities even if it involves internal compliance headaches and continued robust due diligence.
What does the future hold?
The big unknown regarding Iran is, of course, what the effect will be of the incoming US administration, given that Donald Trump campaigned extensively on an anti-JCPOA ticket. Whilst it is possible that the US could unilaterally withdraw from the JCPOA, many in the US believe that the reality of the situation will override the hyperbole of the campaign. Even if the US were to withdraw, it is unlikely that the EU would automatically follow suit and re-enact sanctions against Iran. In addition, any attempt by the UN to renew its sanctions would likely be vetoed by Russia (Rosneft, Lukoil and Gazprom have all signed agreements with Tehran), thus leaving the US isolated.
It is also still possible that the ‘snap-back’ mechanism in the JCPOA, which is designed to reinstate sanctions “in the event of significant non-performance by Iran” of its nuclear commitments, may kick-in. It has been said that the Obama administration has not taken a particularly hard-line in monitoring Iran’s conduct during the last year. If the Trump campaign’s rhetoric is to be believed, the US is likely to be less generous in assessing Iran’s compliance with the JCPOA in the future, which could result in ‘snap back’.
Without clear and unequivocal reassurance from OFAC in relation to financing of Iran transactions, EU banks are unlikely to have the appetite to facilitate transactions to and from Iran. The risk of incurring the wrath of the US regulatory machine is simply too great a risk to take. The stance of the banks will therefore remain a key obstacle to small and medium-sized companies exploiting opportunities. This situation seems unlikely to be resolved when the new president takes office.
However, Iran is the largest emerging market in the world and the largest economy outside the G20. As the deals referred to above show, despite the restrictions, trade with Iran is both possible and, potentially, profitable.
For those companies that are considering taking the plunge, it is important that any agreements reached with Iranian counterparties adequately protect against ‘snap-back’, which may include the adoption of specific contractual mechanisms to wind-up a transaction such as a carefully worded force majeure clause. However, unless the rewards far outweigh the risks, European companies are likely to remain cautious regarding trade with Iran as a new era of US-Iran relations begins.