The way forward for Tehran

07 April 2015

The Lausanne agreement has left investors eagerly awaiting the lifting of sanctions

Crowds took to the streets of Tehran to celebrate after Iran’s negotiators reached a landmark nuclear agreement in Switzerland that could see international sanctions against the Islamic Republic’s ailing economy lifted.

Iran’s Foreign Minister Mohammed Javad Zarif was greeted by cheering supporters when he returned from Lausanne on 3 April, the morning after agreeing the outline of a final deal with the P5+1 group of world powers.

Many Iranians hope this is the first step towards their country re-engaging with the world, following several rounds of sanctions backed by the UN, EU and US, which have left the domestic banking and energy industries isolated.

Final deal

Although the agreement, signed after eight days of gruelling talks, is a positive step for Iran, much of the hard work is left to be done by negotiators to seal the outlined 15-year Joint Comprehensive Plan of Action.

Tehran and Washington, in post-Lausanne messages to their domestic populations, appear to disagree on when and how sanctions against the Islamic Republic would be lifted.

Zarif told reporters on his return that US and EU sanctions would be lifted following a final agreement in June and could not be reimposed.

However, the US State Department released a fact sheet on the talks saying sanctions would only be removed “after the International Atomic Energy Agency (IAEA) has verified that Iran has taken all of its key nuclear-related steps”.

Zarif dismissed the fact sheet as “spin”, but all parties in the Lausanne discussion have an incentive to try and sell the deal to their respective constituencies.

The agreement places strict limits on Iran’s nuclear development programme, including reducing the amount of centrifuges installed to 6,104, from the current 19,000.

Iran also agreed to significantly reduce its stockpile of low-enriched uranium – the vital feedstock that would be needed to enrich further to produce bomb-making material. These measures, along with others monitored by the IAEA, are thought to increase the Islamic Republic’s ‘break-out time’ – the amount of time it would take to rush to produce a weapon – to a year, from a previous estimate of 1-2 months. The amount of access afforded the Vienna-based agency will enable it to immediately alert the UN if Tehran attempts to produce a warhead.

Parameters agreed in Lausanne for joint comprehensive plan of action 
AgreementsBefore accordAfter accord
First generation centrifuges installed 18,4726,104
Advanced centrifuges installed1,0080
Break-out time for weapon1-2 months1 year
R&D of new centrifuge technologyUnconstrainedConstrained
Stockpile of low-enriched uranium15,770 pounds (lbs)660lbs
Stockpile of medium enriched uranium (close to bomb-grade)430lbs0lbs
Arak reactorUnder construction to produce 1-2 bombs-worth of plutonium a yearCore dismantled; reactor reconfigured
Previous research on nuclear weaponsNo cooperationIran to address IAEA concerns
Unknown nuclear sitesNo mechanismIAEA access to suspicious nuclear facilities anywhere
Inspection regimeNot implementedStrictest IAEA protocols implemented
R&D=Research and development; IAEA=International Atomic Energy Agency. Sources: Harvard University Belfer Centre; Barclays 

Failure by Iran to comply with the IAEA inspections could result in a “snap-back” of the sanctions regime into place, according to Washington. “The architecture of US nuclear-related sanctions on Iran will be retained for much of the duration of the deal and allow for snap-back of sanctions in the event of significant non-performance,” the US State Department’s version of the agreement stated.

The US State Department made no reference to the termination or lifting of sanctions, talking only of “relief” and sanctions being “suspended” – very different language to that used by Iran.

Apart from the differences in each side’s understanding of the sanctions removal, there are several more obstacles to overcome before reaching the final agreement by the end of June.

Potential opposition

Domestic political opponents in both Tehran and Washington could try and put the brakes on negotiations before a permanent deal is reached.

Perhaps the biggest risk of derailing the talks comes from the US Congress, which is now controlled by Obama’s opponents in the Republican Party. Obama needs the unified support of the Democrats to prevent Congress passing veto-proof legislation to prevent the deal from going ahead.

A final deal under the agreed outline is also strongly opposed by Israel, a key US ally in the region, and talks will be cautiously observed by Saudi Arabia and other Arab countries under Washington’s influence.

Saudi Arabia’s cabinet welcomed the framework agreement, saying it hoped a binding accord would free the Middle East of weapons of mass destruction, including nuclear arms.

The interim deal signed between Iran and the P5+1 powers in November 2013 sparked renewed interest from companies looking to re-enter Iran and grab early opportunities.

There were several trade delegations from European firms forming early business ties in Tehran with the hope of being the first to win contracts in a post-sanctions Iran.

“What happened in Lausanne is unlikely to change this scene that much as we still do not know how fast the sanctions are going to be lifted,” says Amir Kordvani, a Dubai-based associate at UK law firm Clyde & Co. “There is now a strong sentiment and expectation that there will be a deal in June, but we still do not know whether the sanctions will be lifted at once or whether there will be a staged lifting of sanctions, and what sectors will be subject to any immediate sanctions relief.

“But the positive step that was taken will encourage companies to start thinking about Iran, or if they have already started to think about Iran, take more serious steps with their market entry strategy. We think this is the right time for firms to do their market research, start to identify and shortlist potential partners, and obtain advice on their establishment options.”

Tehran-based investment firm Turquoise Partners has seen interest in foreign investment grow since the more moderate Hassan Rouhani took over as president in 2013 and, especially, following the interim nuclear deal signed in Geneva that same year. The consultancy has hosted more than 90 overseas delegations in the past two years.

“This is a process and no one is expecting sanctions to be completely lifted overnight; the important factor is that things go ahead positively by both sides,” says Sanam Mahoozi, public relations and publications manager at Turquoise Partners.

The company’s exchange-traded fund (ETF) tracking the Tehran Stock Exchange rose by 12 per cent on 4 April, the first day of trading following the nuclear agreement.

“There is huge interest in Iran at the moment and we believe there will be a very visible change in investor sentiment,” says Mahoozi. “Investors are already thinking of ways to invest in Iran and get a piece of this action, so to speak.

“Again, this goes back to the question of sanctions and their removal pace. We will likely see investment from Asian and European countries first before seeing any bankable interest from the US.”

Sectors likely to see investment if the legal barriers are unravelled included the country’s outdated oil and gas sector, the automotive industry and the markets for fast-moving consumer goods.

Oil markets did not react strongly to news from Lausanne despite the prospect of a final agreement having major implications for additional crude entering the market.

The Brent crude price closed down 3.6 per cent to $55 a barrel on 2 April after the talks ended – not as severe a drop as many analysts had forecast.

Iran’s Oil Ministry has said it would be able to ramp up exports towards pre-2012 levels quickly after restrictions are lifted.

Analysts at UK bank Barclays estimate that Iran could boost sales by 200,000-300,000 barrels a day (b/d) before the 30 June deadline and add an additional 500,000 b/d of production by the first quarter of 2016.

The Islamic Republic’s crude sales are estimated to have dropped to just over 1 million b/d from 2.5 million b/d in 2011, before the EU and US sanctions on crude exports were imposed.

Iran’s return

In the longer term, the country should be able to increase its oil and gas capacity, aided by overseas investment and technology brought in by international oil companies (IOCs).

The prospective return of Iran to the status of one of Opec’s largest oil exporters will create further downward pressure on prices in a market that is currently already oversupplied.

Iran has the world’s largest proven reserves of gas and has the potential to be a significant gas exporter to Asia and Europe. The country had ambitious plans to start liquefied natural gas exports from the giant offshore South Pars gas field shared with Qatar.

However, sanctions against IOCs and overseas oil services groups operating in Iran have meant the government has not been able to acquire the technology to complete the facilities on its Gulf coast.

Iran could potentially be the largest market in the region for oil and gas investment without the political instability that has hampered hydrocarbons development in neighbouring Iraq.

The breakthrough in Lausanne gives Tehran a chance to fulfil its potential as a giant in the global oil and gas sector and a major economic force in the region. The result of talks on a comprehensive agreement in June is set to be the defining moment in the country’s recent history.

Talks: The ‘key parameters’ of a deal aimed at preventing Tehran from building a nuclear bomb have been agreed upon

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