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Post-sanctions Iran: Has the performance matched the promises?

Post-sanctions Iran: Has the performance matched the promises?
Published 7 Oct 2016   Follow @DEsfandiary

Last week, Australia became the latest country to send a trade delegation to the newest land of economic opportunity: Iran.

With the lifting of most sanctions and a largely untapped market of more than 77 million people, foreign businesses eyed Iran with anticipation. But major obstacles to doing business remain. Not all sanctions have been lifted and Iran's opaque internal market and lack of regulation prevented the rush back into the country that some anticipated.

On implementation day of the landmark 2015 Joint Comprehensive Plan of Action (JCPOA), a number of multilateral and unilateral sanctions on Iran were lifted, including all EU measures in a number of sectors like banking and finance, insurance and shipping. Suddenly Iran became a potential gold-mine: an untapped and diversified market, the second largest economy in the Middle East, a young and educated population, and a country with the fourth-biggest oil reserves and the second-biggest gas reserves in the world.

With these changes came great foreign interest. Sixteen trade delegations visited Iran in the first three months after implementation day last year and the number of visiting trade delegations increased by 237% over one year. Between January and mid-March 2016, Iran struck an estimated $50 billion in deals with firms from Italy, Japan, South Korea, Russia, and Germany.

But turning them into deliverable contracts has been difficult. [fold]

Firstly, while the EU lifted all nuclear-related sanctions on Iran, some unilateral US measures remained and others the US only 'committed not to exercise', rather than fully lift. US non-nuclear related sanctions, as well as the trade embargo and some secondary sanctions, remained. What's more, serious divisions exist within the US government over the extent to which suspended sanctions can be enforced. So not only was the landscape no different for US businesses interested in accessing the Iranian market, but foreign companies found themselves in a grey zone where they were also liable to face hefty fines if, for example, US persons who they employed did Iran business, or dollars were used in transactions with Iran.

Secondly, processing payments to Iran is still complicated. US Treasury has made it clear that no payments to Iran can be made in dollars, or go through the US or the US banking system. That means foreign financial institutions must separate their foreign and US subsidiaries if they wish to do business with Iran, something the big banks can't do. So businesses are forced to use third-tier small banks, some of which are still wary of going anywhere near the Iranian market.

Finally, general lack of transparency in the Iranian economy is a significant problem that is unrelated to remaining sanctions. The Revolutionary Guard is prevalent throughout the Iranian economy and Iran remains on the Financial Action Task Force (FATF)'s blacklist for its rampant corruption and lack of respect of international financial legal standards.

As a result, the reputational, financial, political and compliance risks of doing business with Iran remain despite the lifting of sanctions. This makes international businesses, in particular European financial institutions, wary of entering the Iranian market, no matter how much arm-twisting by Secretary Kerry or European foreign ministers. The landscape will remain uncertain for the foreseeable future. The only change will be the willingness of foreign businesses to shoulder the risks and navigate the opaque Iranian scene better.

While some European firms had second thoughts about establishing a presence in Iran, including the French cosmetics retail outfit Sephora, others turned MOUs into signed contracts. Following a visit to Iran by the economy minister, Germany announced a number of deals between small-to-medium sized German companies and their Iranian counterparts, as well as a contract by Siemens to upgrade the Iranian railway network. In the tourism sector, companies like France's Accor, Spain's Meliá and Germany's Steigenberger Hotel Group have also signed agreements to set up shop in Iran.

But most major foreign firms continue to approach the US Treasury's Office of Foreign Assets Control (OFAC) to be granted licenses to operate in Iran, especially if they're exposed to the US market in any way. In September, Boeing and Airbus announced that they were granted licenses to provide aircraft and parts worth an estimated $25 billion each. But getting payments processed for such contracts is still problematic.

As a result, visits to Iran continue. After all, it's hard to look past such an attractive market. But it will take a while for foreign firms and financial institutions to get their heads around remaining regulations and how to overcome their exposure to compliance risk. In fact, applications for OFAC licenses have reportedly significantly increased since the nuclear deal, demonstrating that the interest is there, but so is the fear of doing business in Iran.

Photo by Flickr user Adam Jones.

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