Iran - an Opportunity, but not without Risk

Middle East
Sanctions were first imposed by the US in 1979, supplemented by various additional layers of restrictions by the EU and UN through the 1990s and 2000s. On 16 January 2016 EU sanctions against Iran were eased under the terms of the Joint Comprehensive Plan of Action (JCPOA) agreed by the E3 + 3 (UK, France Germany, US, Russia and China) and Iran last July. This date is formally known as “Implementation Day” and is the date on which the International Atomic Energy Authority confirmed to the UN Security Council that Iran had complied with the programme set out in the JCPOA. Details of those sanctions which have been lifted, and those which remain in place, are set out below.

Implementation Day has been long awaited by interested parties across the globe, particularly European and Asian investors. Iran boasts a young, highly educated and sophisticated population of some 80 million people. Rarely does such a large and diversified economy such as Iran’s “open up” overnight.

Opportunities and risks

Given the unprecedented nature of this development, predicting how business in Iran will develop over the coming months and years is not easy. However, it is reasonable to expect the following:
  • Inbound investments: Given how long sanctions have been in place for, many areas of the Iranian economy would benefit greatly from investment and renovation. International investors (other than US businesses still restricted under US-based sanctions) will now be permitted to invest those areas. The key sectors expected to see most activity are oil & gas, telecoms, hotels & leisure and the banking/financial services, although consumer products/FMCG and infrastructure are also expected to see movement. Investment in these areas promises huge first-mover advantages.
  • Opening international oil markets: An EU embargo and other sanctions have significantly reduced Iranian oil production, with crude oil output averaging around 2.8m b/d per day in 2015 from around 3.7m b/d in 2011. Iran is now seeking the extensive investment it needs to boost production levels, relative to both present and pre-sanctions levels. Over $100bn of foreign investment is being sought in order to achieve a production target of 5m b/d per day within the next 5 years. There is also global interest in Iran’s gas fields. Foreign investment into liquefaction technology in Iran could make Iran’s plans for LNG export a reality. With the world’s second largest proven reserves of natural gas and the fourth largest of crude oil, the size of this opportunity is unprecedented.
  • Release of “frozen” assets: when sanctions were first imposed, many assets including real estate and substantial balances held in bank accounts in the US, UK and elsewhere were frozen. Easing of sanctions will therefore release billions of dollars of frozen assets into the international economy. To the extent that this capital is sovereign-linked, we can expect that Iran will seek to invest their economy in much the same way as other Middle Eastern economies through investing in non-hydrocarbon assets abroad, with initial focus expected to be on revenue-generating real estate investments.

However, while Implementation Day presents substantial opportunities for those seeking first-mover advantages, it is also a step into the unknown. The Iranian economy has generally not been open for international investment for such a long time, and so naturally its legal regime has not needed to develop the legal protections that are commonly required to attract international investment. Key issues will include matters such as ownership of assets and real estate, protection of intellectual property and the ability to repatriate capital, the rule of law and freedom of contract, as well as key commercial matters such as the flexibility and stability of the local banking infrastructure, availability and reliability of common lines of business insurance etc.

In the event that Iran violates its undertakings in the JCPOA, the EU has reserved the right to re-impose sanctions on Iran – the so called “snapback” provisions. In such a scenario, investments into Iran could end up being frozen again until sanctions are eased in the future. The risk of this happening will play on the minds of investors, who will naturally want to guard against that wherever possible, and will be keen to structure their investments in Iran to mitigate their exposure to such a scenario.

Choice of law and jurisdiction

Regarding the choice of law governing key contracts for investment into Iran, we would expect that most international investors would revert to English law (as is the case for investments across most other Middle Eastern states). We would also expect that most international investors would choose to make investments via special purpose vehicles, to add an additional layer of protection as well as flexibility, and to the extent possible, shelter those investments from any exposure to US investors further up their corporate group to avoid the risk of breaching the US sanctions which remain in place.

As for jurisdiction for disputes, most international investors will naturally prefer a neutral territory outside of Iran. Given that Iran is a signatory to the New York Convention, it would be reasonable to expect most key contracts to specify arbitration as their preferred forum, with the seat either being in London, Singapore or the DIFC, Dubai. How arbitral awards are enforced in Iran will be keenly monitored by the international community.

Details of sanctions relief

The key provision of EU sanctions relief that come into effect on Implementation Day are as follows:

  • 34 individuals and 298 entities are no longer subject to an asset freeze and de-listed as “designated persons/entities”;
  • The restrictions on financial transfers to and from non-listed Iranian entities have ended. The requirement to seek prior authorisation for, or notify HM Treasury of, transfers of funds sent to or received from Iran, is therefore no longer applicable; 
  • Banking activities (such as the establishment of new correspondent banking relationships with Iranian Banks and the opening of branches, subsidiaries or representative office of Iranian Banks) in EU states are permitted;
  • The provision of insurance and reinsurance to non-listed entities Iranian entities is permitted;
  • The supply of specialised financial messaging services is permitted for non-listed Iranian financial institutions;
  • Transactions in public or public-guaranteed bonds with Iranian non-listed entities are permitted;
  • Imports, purchases, swaps and transport of crude oil and petroleum products from Iran are permitted;
  • Exports (by EU persons) of oil, gas and petrochemical equipment or technology, provision of related technical assistance including training to any Iranian person, in or outside Iran, or for use in Iran are permitted;
  • Investment in Iranian sectors of oil, gas, and petrochemicals is permitted.
  • Sale, supply transfer or export of naval equipment and technology for ship building, maintenance or refit to Iran or to any Iranian person engaged in the sector is permitted; 
  • Design construction – or participation in the design and construction – of cargo vessels and oil tankers for Iran or Iranian persons and the provision of vessels for the transport or storage of oil and petrochemical products to Iranian persons entities or bodies is permitted;
  • Cargo flights operated by Iranian carriers or originating from Iran have access to EU Members States airport;
  • Cargos to and from Iran of previously prohibited items will no longer be subject to inspection seizure and disposal by EU Member States.

On 18 October 2015 (Adoption Day) the EU published the legislation required for lifting these restrictions on Implementation Day and these Regulations have now come into effect (Regulation 2015/1861 and Regulation 2015/1862).

It should be noted that sanctions have not been completely lifted in relation to Iran and a number of restrictive measures remain in place against persons/entities and in relation to particular sectors. It is important that EU persons/entities are familiar with the continuing restrictions:

  • The EU Arms embargo and missile technology sanctions and restrictions will remain in place until Transition Day (18 October 2023), as well as continuing restrictive measures on certain individuals. This includes a ban on the export to Iran of military goods on the UK Military List and goods on Annex III of Council Regulation (EU) 267/2012, the import of Iranian military goods, investments in enterprises engaged in manufacture of military goods and technical assistance, brokering and financial assistance related to these restrictions; 
  • Sanctions imposed by the EU in view of the human rights situation in Iran, support for terrorism and other grounds under the ongoing Iranian sanctions regime or any other EU sanctions regime will remain in place against designated persons and entities;
  • The sale of goods that could be used for internal repression under Annex III of Council Regulation 264/2012 continues to be prohibited;
  • Nuclear-related goods and technology as specified on the Nuclear Suppliers Group (NSG) Trigger List and NSG Dual-Use List (listed in Annex I of Council Regulation (EU) 267/2012) will be subject to prior authorisation from the relevant EU Member State before transfer. The UK must seek approval from the UN Security Council before granting a licence for these items;
  • Exports of other nuclear-related goods and technology (listed in Annex II of Council Regulation (EU) 267/2012) will be subject to prior authorisation;
  • Exports of certain graphite and raw or semi-finished metals will be subject to prior authorisation; 
  • Exports of Enterprise Resource Planning software, including updates, will be subject to prior authorisation;
  • Exports of equipment used for monitoring or interception of internet or telephone communications on Annex IV of Regulation 264/2012 and the provision of such services to the Iranian government or public bodies will be subject to prior authorisation;
  • The provision of technical assistance, brokering services or financial assistance in respect of any goods that would require a prior authorisation will also require a licence before they can be provided.

It is important to note that whilst the US has implemented its commitments under the JCPOA, the US is not providing the same level of sanctions relief with US companies broadly prohibited from engaging in transactions involving Iran.

International investors should continue to consider in particular, if proposed dealings are with a designated person or entity, whether a certain trade product or material is restricted, and how and to whom payments will be made. International investors will also want to consider whether their proposed activity is subject to US sanctions as a result of a commercial arrangement having a nexus with a US person or company. It therefore remains important to ensure appropriate due diligence measures are undertaken before engaging in any activity in Iran.