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US withdrawal from JCPOA - considerations for business

US withdrawal from JCPOA - considerations for business

The prospects for international trade with Iran are again in serious doubt, after President Trump announced on 8 May 2018 that the US would withdraw from the Joint Comprehensive Plan of Action (JCPOA), and reimpose nuclear-related sanctions on the country.

Despite Trump’s decision, we believe there is reason to hope that the deal will continue to exist in some form, even if the US action will limit its implementation. Trump’s move has been condemned by all other original parties to the deal: the UK, France, Germany, China, Russia, the EU, and Iran itself. They have expressed concern about new US sanctions. The remaining signatories have also voiced a desire to try to uphold the JCPOA without US involvement, pointing to the deal’s fundamentally multilateral nature and its endorsement by UN Security Council Resolution 2231.

These same countries have also reiterated their wish to maintain economic relations with Iran. These ties have strengthened since international nuclear-related sanctions were lifted back in January 2016. Federica Mogherini, the EU’s high representative for foreign affairs, pointedly expressed the EU’s determination to ‘protect its economic investments’ in the country.

Outside of the US, the political will to salvage the JCPOA is therefore clear. It is much less evident whether this can be sustained in practice, especially on the business front. The US Office of Foreign Assets Control (OFAC) has laid out 90-day and 180-day ‘wind-down’ periods, to be enforced by the Departments of State and Treasury for activities involving Iran that have taken place under JCPOA sanctions relief. Full details can be found here.

The 90-day wind-down period – which ends on 6 August 2018 – mainly covers sanctions on the Iranian government’s acquisition of US dollar banknotes, Iranian sovereign debt, Iran’s automotive sector and the country’s trade in metals such as aluminium and steel. The 180-day period includes sanctions on Iran’s energy sector, its port operators and shipping sectors, its oil industry, insurance underwriting, and transactions by foreign financial institutions with Iranian counterparts, including the Central Bank of Iran (CBI).

All the US nuclear-related sanctions that were suspended under the JCPOA will again enter into full effect at the end of the 180-day period (from 4 November 2018). At the same time, the US will resume express efforts to reduce Iran’s crude oil sales, notwithstanding OFAC’s stated undertaking to evaluate third party countries’ requests for exemptions at the close of the 180 days. Unsurprisingly, following Trump’s announcement, Brent crude oil prices have already hit a three-and-a-half year high. OFAC has also revoked the Statement of Licensing Policy on the export or re-export to Iran of commercial passenger aircraft and related parts and services: US Treasury Secretary, Steven Mnuchin, has specified that this will include cancelling the existing licences held by Boeing and Airbus.

OFAC’s guidance makes clear that many of the sanctions to be reimposed target companies from third-party countries that continue to trade with Iran. Richard Grenell, the new US ambassador to Germany, made the point even more explicitly on Twitter, writing that ‘German companies doing business in Iran should wind down operations immediately’. Grenell’s comments prompted an outcry locally for his ‘impertinence’ in giving ‘orders’ to German businesses, in the words of Luxembourg’s foreign minister, Jean Asselborn. This sentiment was echoed by the leader of Germany’s Social Democratic Party and a number of businesspeople.

In an 8 May background briefing on Trump’s decision, Department of State officials refused to speculate as to whether companies holding export licences for Iran could seek exemptions from the sanctions on a case-by-case basis. Equally they declined to reject the option ahead of discussions with their European partners. In light of US punitive action against European entities for sanctions violations prior to the JCPOA – and Trump’s insistence now on sanctions reimposition – we consider it unlikely that Europe stands much chance of negotiating any such waivers. The full briefing can be found here.

For his part, President Hassan Rouhani has said that Iran will continue to abide by the JCPOA as long as it is in the country’s ‘[economic] interests’. To this end, he has instructed the Iranian Ministry of Foreign Affairs to hold talks with the remaining parties to the deal over ‘the next few weeks’. Nonetheless, Rouhani raised the possibility of Iran’s withdrawal from the JCPOA, and the resumption of ‘industrial-scale [uranium] enrichment’, if his administration feels that the nation’s interests ‘are not being preserved’ by the end of these talks.  

Supreme Leader Ayatollah Ali Khamenei, who is the ultimate arbiter of Iran’s foreign policy, issued a typically defiant condemnation of the US move. He indicated, however, that he would support Rouhani’s efforts to stand by the deal if – but only if – his administration could secure ‘an absolute and reliable guarantee’ from European states that they would stand by their obligations.

Khamenei’s words are a strong indication of the Iranian establishment’s desire to avoid a total collapse of the deal, as long as it can do so without appearing to bow to Western pressure for curbs on the country’s regional activities and ballistic missile tests (which the UK, France and Germany have pushed for in recent months). As further evidence of this, Iranian state television and radio stations, which are controlled by pro-Khamenei conservatives, chose to highlight European leaders’ statements on upholding the agreement.

Recent reforms to Iran’s banking system to limit capital flight suggest that the country’s leaders were making efforts to prepare for the US re-implementing sanctions. Specifically, from 10 April onwards, the CBI’s governor Valiollah Seif announced new, far-reaching controls on the flow of foreign currency into, out of, and within the country. These have implications for Iranians at home as well as all international trade. Since 14 April, CBI regulations have required all Iranian importers to obtain foreign currency directly from an Iranian bank, and in most cases only after the bank has approved shipping documentation. All subsequent payments for imports must also pass through the Iranian banking system.

At the same time, the CBI banned foreign exchange offices from trading freely in foreign currencies, although the subsequent arrests of large numbers of traders indicate that this has continued. Instead, the CBI imposed a fixed exchange rate of 42,000 Iranian rials to the US dollar (IRR/USD), replacing the two existing rates: the lower bank rate, and the high market rate used by the foreign exchange offices. Iranians studying or travelling abroad, as well as those inside the country, have been hit by new limits on the individual possession of foreign currency. Separately, Seif announced in mid-April 2018 that the Iranian government and state-owned entities would be reporting foreign currency amounts in euros, rather than dollars. That seemed to be another measure to reduce reliance on the US currency.

Rouhani’s reaction to Trump’s statement and the CBI reforms indicate that the Iranian government’s main priority is using both international and domestic channels to tackle the country’s economic difficulties. After all, the US decision and the anxiety that preceded it are not the only obstacles to face Iran’s economy. The country is also plagued by ongoing domestic and structural problems, among them high unemployment, inflation and a limited private sector. Together these have led the rial to lose half of its value since the summer of 2017. The same economic difficulties also provoked protests at the start of 2018 by Iranians across the country, who have seen few tangible benefits under Rouhani’s presidency to date. Unsurprisingly, the government is keen to demonstrate to the Iranian public that it is making efforts to address their plight.

Looking to seize on Iran’s economic struggles, conservative policymakers in the US who supported the JCPOA exit are encouraged in taking a position that regime change in Iran is a possibility. By re-enacting sanctions to cripple the Iranian economy, they believe that more serious popular protests can be provoked and that Iranians will take to the streets in order to overthrow the Islamic system of government.

While there is no doubt that ordinary Iranians will vocally resent any further worsening in their economic situation, the position of US policymakers fails to appreciate the political unity among Iranians that arises when the source of their grievance is clearly beyond the country’s borders: in the words of Iranian newspaper Javan, ‘Iran will stand united and strong’. At the same time, Iran has long strived for domestic self-reliance and a ‘resistance economy’ in the face of international sanctions, a policy that has historically served to strengthen IRGC business networks. In the long term - if the remaining parties to the JCPOA fail to find a way to uphold the agreement - the country’s conservative elements will be emboldened to undermine Rouhani’s comparatively moderate government.

Risk Advisory's Business Intelligence MENA team has over 20 years' experience helping clients conduct due diligence and strategic investigations, across industries.


Published: 11th May 2018