Iran's next challenge

29 July 2015

The removal of sanctions will open up Iran to foreign investment, but there are still hurdles to cross

The historic deal agreed between Tehran and the P5+1 group of world powers in Vienna on 14 July has set in motion the process of removing all major economic sanctions against Iran in return for the Islamic Republic opening up its nuclear power programme to international scrutiny.

Although some sanctions, such as restrictions on ballistic missiles and asset freezes on certain individuals, will remain in place, the removal of UN, US and EU-imposed economic barriers will allow international companies to re-enter Iran and invest across its economic sectors.

Global companies have been buzzing around Tehran since the signing of an interim agreement in Geneva in November 2013, looking to invest in Iran if sanctions are eventually removed.

This activity is accelerating dramatically as businesses conclude the sanctions era is already effectively over. But there are still potential pitfalls in store before this landmark is reached.

UN resolution

The UN announced on 20 July that the 15-nation Security Council unanimously adopted resolution 2231, which sets out “a rigorous monitoring mechanism and

timetable for implementation, while paving the way for the lifting of UN sanctions against that country”.

The terms of the deal in Vienna - officially called the Joint Comprehensive Plan of Action (JCPOA) - cannot be implemented for 90 days after the adoption of the UN resolution. Based on this, the agreement is likely to come into effect in late October.

Following the adoption of the UN resolution on 20 July, the US Congress has 60 days to review the terms of the agreement and vote on whether or not to approve it. If Congress disapproves the deal, US President Barack Obama has said he will overrule Congress.

“I am confident that this deal will meet the national security needs of the US and our allies, so I will veto any legislation that prevents the successful implementation of this deal,” Obama said in a statement after the Vienna announcement.

Obama’s critics, largely within the Republican Party - would then have to override the veto with a two-thirds majority vote within both houses. Analysts in Washington see this as unlikely, as it would require significant support from Democrat Party representatives and senators, who largely support Obama.

Before the main US and EU sanctions are removed the UN’s nuclear watchdog, the International Atomic Energy Agency (IAEA), has to submit a report to green-light Iran’s compliance with its efforts to investigate the country’s past nuclear activities.

After this report is submitted and approved, the US and EU will suspend the majority of economic sanctions against Iran. Based on the deadlines for the various approvals, this date is expected to be early in 2016.

“Despite the JCPOA deal, Iran will remain under sanctions until IAEA verification of Iran’s compliance with its nuclear obligations has been made and the necessary legislation passed in the relevant jurisdictions,” says Patrick Murphy, a Dubai-based partner of law firm Clyde & Co. “Even after the necessary legislation has been passed, there will be residual sanctions that apply to Iran - notably to US persons.”

Sarosh Zaiwalla, Iran sanctions expert and senior partner at London law firm Zaiwalla & Co, says sanctions can be removed quickly after approval from the UN.

“Once the UN Security Council passes a resolution the sanctions can be removed very quickly, if the countries want to, and the individual countries can remove it through their legal processes. The EU Council meets regularly and it can be done pretty fast,” Zaiwalla tells MEED.

Zaiwalla says countries have an incentive to remove the sanctions domestically as quickly as possible to give their business communities an advantage operating in Iran.

“In France, Germany and the UK, the business houses are very hungry to get into Iran as fast as possible. From my personal experience [in visiting Tehran recently], deals between international companies and Iran can be done very quickly,” he adds.

Complex environment

Clyde & Co highlighted that while the re-emergence of Iran is an exciting opportunity for companies, the business environment can also be challenging and complex.

The law firm warned potential investors to identify and comply with any sanctions obligations that are still applicable to them after the Vienna legislation has been enacted.

“As the next step, investors will need to make an assessment as to how any of the recent developments in the local Iranian legal and regulatory environment would affect their business in Iran,” says Murphy.

“Another important issue to consider is whether pre-sanctions relationships are still valid. Investors should carefully consider the terms of pre-sanctions contracts to determine whether those contacts have expired or been duly terminated,” adds Murphy.

One of the major concessions by Iranian negotiators in Vienna appeared to be the “snap back” clause on the removal of sanctions. Under the agreement, sanctions can be reinstated within 65 days if Iran is judged to have violated the terms of the deal, which would likely be related to the access of IAEA inspectors to its facilities. This provides an element of risk for companies with investments in Iran should a snap back come into force.

“The snap back is a commercial risk that every company has to take, [but] I think the snap back, after such a long discussion, is not going to be a reality,” says Zaiwalla.

Analysts at UK-based bank Barclays are not as bullish as Zaiwalla on the speed of investment after sanctions are lifted.

“There is a long road of sanctions relief steps, compliance, and verification ahead, but the geopolitical, economic, and energy market significance of an Iran that has re-entered the global financial system should not be understated,” said Barclays in a research note.

“With the possibility of a re-imposition of sanctions, legal complications with investing, risks of association with still-sanctioned entities, and problems with implementing monetary transfers, initial foreign investment is likely to be slow going,” the bank said on the potential for international oil companies re-entering Iran.

Barclays also warned that sanctions against key entities in Iran’s energy industry - such as affiliates of the Iranian Republican Guard Corps - due to terrorism links “could make initial work in the Iranian energy sector challenging”.

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