Alaco

12.05.2016 | Alaco Guide to Sanctions: Big changes in long-standing embargos

The lifting of the international nuclear-related sanctions against Iran, the expansion of economic restrictions targeting North Korea and the easing of American sanctions on Cuba, are some of the main developments in the latest quarterly update of Alaco’s Guide to Sanctions.

The guide offers a comprehensive, easy-to-use overview of all the sanctions programmes operated by the EU, the US, the UN and Switzerland, including detail of the types and scope of sanctions, implementation timelines and references and links to underlying official documentation.

Iran: residual concerns

While most UN sanctions against Iran have been removed following the JCPOA agreement and Iran's commitment to scale back its nuclear programme, there is some concern among investors that if a Republican is elected president in the upcoming US elections, the new administration might seek to roll back the sanctions deal or renege on it altogether. 

A further source of uncertainty is the remaining US sanctions programme, linked to Tehran’s sponsorship of terrorism and its ballistic missile programme, which includes a wide-ranging trade embargo. While these sanctions only apply to American companies and citizens, they include strict prohibitions on the processing of Iran-related transactions in the US. This is problematic for banks dealing in US dollars.

European banks with significant US exposure may be reluctant to enter the Iranian market out of concerns that American sanctions will apply to them. Given the risks involved, Chinese and Russian banks are likely to engage first, followed by smaller European banks with a higher risk appetite. They will test the US sanctions regime, clarify to whom it applies, and establish precedents.

North Korea: Chinese enforcement key

The economic noose around North Korea has been tightened in response to a nuclear test and long-range rocket launch carried out in recent months. New restrictions involve a toughening of UN sanctions – including mandatory inspections of all of Pyonyang’s imports and a ban on its exports of coal, iron and iron ore – and a further tightening of the US trade embargo.

The impact of the reinforced sanctions regime will depend on China’s willingness to comply, as it is North Korea’s principal trading partner. Beijing officials have pledged support for the harsher UN measures, but they have reportedly been lenient in enforcing them, in particular those concerning the export of coal.

China says it will continue to trade with North Korea as long as the revenue it generates is intended for “people’s well-being”. That is an apparent reference to a UN humanitarian exemption, whereby coal and iron exports are permitted on condition they are not used to develop prohibited weapons.

Moreover, there are some concerns that Beijing’s support for sanctions may ebb, as has been the case in the past. China initially backed the toughening of the UN embargo against North Korea in 2013, following a nuclear weapons test, but then relaxed restrictions.

Cuba: little by little

The easing of US sanctions against Cuba in advance of President Obama’s historic visit to the island – the first by a sitting US president in nearly 90 years – will help bolster Cuba’s economic prospects.

As well as making it easier for Americans to visit the island and Cuban citizens to draw salaries in America, the move includes provisions allowing the use of US dollars in financial transactions with Cuba. It follows an earlier agreement to restore commercial flights between the two countries.

Congress will ultimately decide whether to lift the embargo, but President Obama is hoping his regulatory concessions, the most significant since he began his rapprochement with Havana in December 2014, will prompt Cuba to make economic and political reforms that will strengthen the case for the repeal of American sanctions.

To date the President’s strategy has delivered few reforms and even fewer American investments. Most of the deals secured so far have been confined to the hospitality sector, while bids for contracts in the telecommunications sector have met with resistance from the local authorities, in part due to Washington’s past efforts to use digital tools to undermine the regime.

To find out more about our guide to sanctions, or to enquire about subscribing to future editions, please contact James Birkett (jbirkett@alaco.com).