This July, Iran signed an agreement with the US and five other world powers to allay fears over the scale and military potential of its nuclear program. In return, the US has agreed to provide Iran substantial relief from US sanctions.
To better understand the form sanctions relief will take, and the risks and obstacles investors may still face, IranWire spoke to Erich Ferrari of Ferrari & Associates, a Washington, D.C.-based firm specializing in U.S. economic sanctions under the jurisdiction of the US Treasury’s Office of Foreign Assets Control.
What sanctions relief has Iran gained from the US so far, and what is it likely to gain in the near future?
So far Iran has gained the relief that was afforded under the November 2013 Joint Plan of Action, the interim nuclear agreement. They have obtained the waiver of “secondary” sanctions over key transactions. There are “primary” and “secondary” sanctions. Secondary sanctions target foreign persons' conduct, while primary sanctions constitute the US trade embargo, which prohibits US persons -- meaning citizens, green card holders, and US companies – from dealing with entities in Iran.
Under the Joint Plan of Action, Iran obtained the waiver of some secondary sanctions, including those involving the trade in petrochemical products. They also obtained an expanded licensing policy that allows them to import aircraft parts and services to maintain Iran's civil and commercial aircraft. And, they received secondary sanctions relief that allows them to repatriate funds that had been restricted in foreign financial institutions' accounts, funds that Iran had gained by selling oil to the countries in which those financial institutions were located.
What Iran has gained under this year’s nuclear deal, as part of the July 2015 Joint Comprehensive Plan of Action -- or what they will gain on what we call “implementation day,” which most people predict will be sometime in spring of 2016 - is more of the same. They are going to get a waiver of a lot of secondary sanctions, mainly sanctions targeting their energy sector, their dealings in precious metals, their trade in gold, their financial institutions and transactions, and so on.
Iran is also going to obtain authorisation to purchase or lease whole commercial aircraft from the US, not just parts and services. The US is also going to allow Persian carpets and Persian food to be sold to the US. There is going to be licensing for US-owned or controlled foreign companies to deal with Iran despite restrictions in the primary trade embargo. So for example, if you have a foreign subsidiary of a US company, they could get authorisation to deal with Iran, even though the US parent company will not be able to deal with Iran directly. To put it in more simplistic terms, it's a rollback to 2010.
Which sanctions are likely to remain, long-term?
The primary trade embargo, which is the prohibition on US persons dealing in goods, technology, services or transactions with Iran, importing from Iran, or investing in Iran, is going to stay in place.
Also, any secondary sanctions that target the conduct of foreign parties dealing with certain designated parties in Iran, will remain. There will still be a lot of designated parties in Iran, such as companies and individuals blacklisted by the United States for things other than proliferation concerns, such as human rights abuses, alleged participation in terrorist finance, and things of that nature.
As some sanctions are removed, what will prospects look like for Americans and other foreigners wishing to invest in Iran?
US persons won’t be able to invest in Iran without a license from the Treasury Department. I don't think those licenses are necessarily going to be forthcoming. There may be expansions of the ability to export to Iran certain types of products, for example IT products that qualify under the general authorisation that already exists. But as far as pure investment by US persons, that's still not going to be allowed.
Foreign persons, on the other hand, will be able to invest in Iran. For most dealings there are not going to be secondary sanctions. So US persons are at a decided disadvantage to their foreign counterparts.
What areas of Iran’s economy are going to be most attractive to foreign companies?
Anything in the energy sector, in particular, is going to be very attractive. And there is obviously going to be greater access for Iran's banks to the international financial system, so there will be opportunities in financial services. There are also going to be opportunities in the automotive industry because Iran has a fairly significant, sizeable automotive industry. Those are the big three.
From the US perspective, the only real uptick we'll see is probably the aviation industry, as there will be opportunities to sell or lease aircraft to Iran.
What risks and obstacles will foreign investors face while doing business in Iran?
There are still a lot of concerns about beneficial ownership issues in Iran, meaning the question of who the person you are transacting with, or the company you are transacting with, is ultimately owned or controlled by. There is a belief that a lot of Iranian companies are state-owned, or are owned by the Islamic Revolutionary Guard Corps, which kind of serves as a front for those companies. It will be necessary to carry out enhanced due diligence to ensure that whoever you're dealing with is not owned or controlled by a party you are not allowed to deal with [such as the Revolutionary Guards].
You are also going to have some concerns from a financing perspective about whether or not there is going to be foreign capital available in Iran to engage in some of these transactions and to make payments, although that is probably a lesser issue.
So what could happen if a company ends up doing business knowingly or unknowingly with the Revolutionary Guards?
They could face potential designation by one of the secondary sanctions authorities that will remain. If they were designated, they would be “blocked.” What blocking means is that US persons wouldn't be able to engage in any economic activity, or any activity whatsoever, with the blocked entity, and any assets that that blocked entity had under US jurisdiction, for example US bank accounts, they would lose access to until such time as their designation is removed.
Does the Iranian government have a realistic view of how foreign investment is going to play out in Iran, and what it is going to get from it?
What I've learned about the Iranians, in particular the government, is that they’re very savvy. Sometimes the rhetoric doesn't exactly match up with their real expectations. I think that would be the same in any country but behind closed doors they probably have a very realistic expectation. They probably negotiated what they wanted to get out of the deal, and know what they are going to get.
In what ways are we likely to see the lives of Iranians change as a result of sanctions relief and foreign investment?
They will improve, but I think improvement will be slow at first. A lot of people are going to be dipping their tail in the water, so to speak, as far as the Iran market. There is a lot of excitement, but there is also still a lot of concern. As Iran becomes more integrated in the international financial system, as they gain increased access to their oil revenues, as they engage in more export, I think they will have more foreign capital available to them. This will cause the Rial to become stronger, and that will in turn allow Iran to import more consumer goods, more food, more medicine and medical devices.
There is going to be a significant impact on the Iranian people. I would just say it is probably going to take months or years for it to be realised, and to start showing up on the streets.