Alaco

02.11.2016 | US sanctions hold up investment in Iran

Many western investors are keen to enter the Iranian market following the removal of nuclear-related sanctions, but fear breaking residual American measures.

Since the lifting of international sanctions against Iran earlier this year, foreign companies have been beating a path to the Islamic Republic, eager to explore opportunities in one of the world’s largest untapped emerging markets.  Thousands of provisional agreements are reported to have been signed, yet few major deals have been completed.  The lag has prompted Tehran officials to complain that Iran is not benefiting from the economic dividend it anticipated in return for scaling down its nuclear capability.

Arguably the main obstacles to foreign investment are remaining American sanctions linked to Iran’s alleged sponsorship of terrorism and ballistic missiles programme. While the measures only apply to American companies and citizens, non-US investors are concerned they may fall foul of them in two areas: breaching a ban on dollar transactions processed by US financial institutions; and inadvertently trading with firms affiliated to sanctioned individuals.

The Obama administration, which hoped the lifting of nuclear-related sanctions would result in meaningful engagement with Iran, has repeatedly sought to reassure foreign banks and companies that it does not want remaining American measures to deter them from doing business in Iran.

In May, US Secretary of States John Kerry met with representatives of major European banks to drive home the message.  But he was not able to provide sufficient assurances, judging from statements issued by some of the attendees after the meeting.  Standard Chartered said it would not undertake any new transactions “involving Iran or any party in Iran”, while Deutsche Bank said its policy was “to generally restrict business connected to Iran”.  Even if the risk is remote, the size of historic financial penalties levied by US regulators on banks violating sanctions – like the $9 billion fine levied on BNP Paribas in 2014 – proves an effective deterrent. 

In an apparent effort to assuage mounting Iranian frustration over the slow pace of western investment, in September the US approved export licences for Boeing and Airbus to sell planes to Iran, one of the most high-profile deals since the lifting of international sanctions.  The licence approvals were in line with a US exception to the nuclear deal facilitating the sale of civil aircraft to Iran – even by American companies – although it is unclear how the deal will be executed or financed. 

Uncertainty over the scope of US sanctions prompted the US Treasury last month to provide new guidelines for foreign companies and banks doing business with Iran.  The update noted that some previously prohibited US dollar transactions are now allowed, as long as they do not enter the US financial system.  It also removed what has been seen as a blanket ban on foreign transaction with Iranian firms controlled by individuals subject to US measures.  Treasury officials insist that the latest guidelines do not represent additional sanctions relief, but some commentators have begged to differ.

However it is being spun, Washington is hoping that the new guidance will improve investment prospects, and in doing so bolster support for Iran’s reformist president Hassan Rouhani, who played a key role in helping to bring about the nuclear deal and is critical to its maintenance.  He has come under pressure from conservatives who argue that the US and its allies have reneged on the agreement because economic benefits that many Iranians expected have not materialised.  With presidential elections scheduled for May, Rouhani is in a race to secure as much foreign investment as he can muster.

Rouhani’s immediate concern is that the next US president does not make his task any harder than it already is.  The Republican nominee Donald Trump, along with many other US conservatives, has long argued that the nuclear deal made too many concessions to a regime that continues to foment instability across the Middle East.

Trump has said that if he is elected to the White House, he would not scrap the accord. That may salve some investors’ fears about the re-imposition of international sanctions. But given his misgivings about Iran, he is unlikely to offer any help to businesses looking to do business there. Whether he or Democratic nominee Hilary Clinton triumphs, the current sanctions regime leaves plenty of room for reinterpretation by a new administration.