On Saturday 16 January, just six months after the Joint Comprehensive Plan of Action (JCPOA) was agreed between Iran and the P5+1 countries, the International Atomic Energy Agency verified that Iran had taken the measures required to allow for the lifting of international sanctions.
JCPOA "Implementation Day" marks the beginning of a new chapter in relations between Iran and the international community following years of crippling sanctions imposed on Iran over its nuclear programme. Implementation of the JCPOA removes significant portions of the sanctions framework put in place by the United Nations, the European Union and the United States in exchange for on-going assurances from Iran regarding the peaceful and civilian nature of its nuclear programme; its commitments not to pursue certain weapons proliferation activities; and Iran allowing monitoring of compliance with these commitments.
The lifting of sanctions allows Iran to resume selling oil on international markets, ends restrictions on Iranian trade, insurance and shipping and, importantly, gives Iran access to the global financial system. Implementation Day also sees some £70 billion worth of frozen assets in foreign banks being returned to Iran. A substantial proportion of these amounts are said by some commentators to be ear-marked for spending and fiscal initiatives. However, the government is likely to be cautious as to how quickly it releases remaining funds into the wider economy and it will take some time for market liquidity to increase. This may be seen as an opportunity by some (including private equity institutions) who are prepared to provide such liquidity in the interim.
While much of the media focus is on Iran's oil and gas sector, the lifting of sanctions will impact all sectors of Iran's economy and should lead to a significant increase in investment in Iran's infrastructure and industry (such as the automobile industry). As a portent of things to come, Iran reportedly placed an order for 114 civilian aircraft from Airbus within hours of the announcement that the sanctions had been lifted.
As regards the petroleum sector, following Implementation Day, we expect to see major international oil companies now engaging with Iran's Ministry of Petroleum in earnest. There are a significant number of upstream investment opportunities in the country, which will be governed by a new Integrated Petroleum Contract, which the Government hopes will prove more attractive when compared to the buy-back contracts previously offered. We will be publishing a separate article examining this issue in more detail in due course.
Despite the excitement, however, there is some cause to remain cautious about Iran's re-entry into the global economy. Notably, if Iran is found to be in violation of any aspect of the deal, the JCPOA contains "snap back" provisions that would re-impose the sanctions regime. The complex, factional, nature of Iranian politics and the Iranian power structure makes the situation on the ground particularly difficult to read.
Further, while all nuclear-related sanctions have been lifted by the UN and the EU, the US is only lifting those "secondary" sanctions applicable to non-US individuals or companies (with certain exceptions such as commercial aircraft manufacturers). The US will continue, however, to impose "primary" nuclear-related sanctions prohibiting US nationals and companies from conducting business with Iran. Foreign subsidiaries of US companies will be granted some sanctions relief, but the extent of this remains unclear – if such firms do choose to engage with Iran, they will need to ensure their US-based businesses are adequately ring-fenced from any Iranian entities which remain subject to US sanctions. US statutory sanctions focused on Iran's purported support for terrorism, human rights abuses, and missile activities remain in effect. Indeed, perhaps to reinforce this message, the US imposed new sanctions on Iran over its ballistic missiles just one day after the Implementation Day.
Another obstacle to Iran's re-emergence onto the global economic scene is the approach of international financial institutions. After years of suffering severe fines for by-passing US sanctions on Iran, the banks are justifiably cautious about re-engaging with the country without clear authorisation from the US Treasury. This may mean the provisional absence of larger banks from the Iranian scene for the near-term, with investment being channelled through smaller institutions.
As such, implementation of the JCPOA by no means gives investors carte blanche for doing business with Iran. Any prospective investors will have to undertake comprehensive due diligence on their Iranian counterparts and familiarise themselves with the on-going US sanctions regime (including with regard to certain listed individuals and companies). Those re-entering the Iranian market will also need to be aware of the business environment in the country, where challenges remain in respect of bureaucratic delays, bribery and corruption, notwithstanding the lifting of sanctions.
Despite the uncertainties and challenges, JCPOA Implementation Day represents the removal of a major obstacle to the normalisation of economic ties between the people of Iran and the world. Moving forward with cautious optimism, Dentons expect to see the interest in Iran to continue growing apace. With a core Iran Team including a number of Persian-speaking lawyers and long-standing experience working with Iranian law firms, we, like many others, are fully prepared to support our clients in what should prove to be a dynamic and exciting market.
If you would like to discuss any of the issues raised above, please do not hesitate to get in touch with the author or any of your other regular contacts in the Dentons oil and gas team.
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