Barak Seener Barak Commercial Risks | The Trump Administration’s withdrawal on May 8, 2018, from the uncertainty accompanying the fate of Market the Iranian Entering Risks Commercial Entering the Joint Comprehensive Plan of Action (JCPOA) will cost the Iranian economy a heavy price. It has the Iranian Market created wariness on the part of foreign investors, especially European investors, and prevented the Iranian market from significantly reaping the fruits of the deal. Prior to the withdrawal from the JCPOA, there were numerous preparations by foreign businesses and investors to enter the Iranian market, but only a marginal number of deals and investments materialized. Following the American withdrawal, major European companies began to move their business away from Iran and cut their trade with it. Even though the European Union is determined to stick to the deal, it will be very difficult for the EU to convince companies to prefer the Iranian market over the American market, once secondary sanctions are resumed. Russian and Chinese companies may try to fill the gap but may encounter difficulties. Why Sanctions Make Investment Although India has declared that it will abide only in the Islamic Republic of Iran by UN sanctions, it appears that Indian companies will hesitate to ignore the American threat. a High‑Risk Proposition Barak Seener Jerusalem Center for Public Affairs Commercial Risks Entering the Iranian Market Why sanctions make investment in the Islamic Republic of Iran a high-risk proposition Barak Seener Jerusalem Center for Public Affairs Read this publication online: http://jcpa.org/commercial-risks-entering-the-iranian-market/ © 2018 Jerusalem Center for Public Affairs 13 Tel Hai St., Jerusalem, 9210717 Israel Email: [email protected] Tel: 972-2-561-9281 | Fax: 972-2-561-9112 Jerusalem Center Websites: www.jcpa.org (English) | www.jcpa.org.il (Hebrew) www.jcpa-lecape.org (French) | www.jer-zentrum.org (German) www.dailyalert.org The Jerusalem Center for Public Affairs is a non-partisan, not-for-profit organization. ISBN: 978-965-218-143-5 Contents Executive Summary 7 Chapter 1 Sanctions 11 The Trump Administration’s Approach to the JCPOA 14 Impact of Lifting Sanctions on the IRGC 17 Arbitrary and Contradictory Applications of Sanctions 23 Sanctions and Iran 24 Opening Up the Iranian Economy 26 Foreign Policy Tensions with U.S. State Laws 29 Caught Between the United States and the European Union 30 The Organic Nature of Illicit Activities 35 Overlooking Ballistic Missile Program 37 Ambiguous Sanctions, Unknown Future Applications 41 Civil Aviation 44 Sanctions: Iran Accessing the International Financial System 48 IRGC Illicit Finances 50 Accessing the U.S. Financial System 54 Iranian Banks Preventing Global Financial System Reintegration 56 Sanctions against the Revolutionary Guard: Infrastructural, Economic, and Regulatory Hurdles for Businesses to Overcome 58 Iranian Development of Infrastructure and Industry 62 Lack of Transparency 63 Legal Framework for Investors 65 Chapter 2 The Gulf of the Future 67 The Bush-Obama UAE Legacy 70 China’s “One Belt One Road Initiative” (OBOR) 73 Country-by-Country Review of Tensions between Economic and Security Needs 75 Chapter 3 Energy Intelligence: Sanction Ease, Initial Reduced Oil Prices, and Their Effects on the Iranian Market 83 Iran’s Economic Diversification 86 Oil Storage Division 87 Sunni-Shiite Oil War 88 Iran’s Allocation of Funds and Oil Production 89 Oil Infrastructure 91 Accessing Iran’s Energy Market 92 Asia and Iran 95 Insurance 97 International Petroleum Contracts (IPC) – Barrier to Entry 98 IRGC Influence in the Energy Sector 101 Iran Accessing Energy Revenues and Circumventing Sanctions 104 Oil Investments in Iran 105 Gas Investments 106 Energy Driving Foreign Policy 107 Export Route Diversification 109 Iran’s Petro-Chemical Industry 110 Investment 111 Ownership 112 Infrastructure 112 Conclusion Access to Advanced Technology and Financial Resources Key to Growth 115 About the Author 117 Notes 119 Appreciations Barak Seener would like to thank Matthew Hedges, Anna Lewin, Steven Stern, Brig.-Gen. (Ret.) Yossi Kupperwasser, Lenny Ben David, and Leah Tedrow for their enormous assistance that enabled this publication to come to fruition. Executive Summary The Trump Administration’s withdrawal on May 8, 2018, from the uncertainty accompanying the fate of the Joint Comprehensive Plan of Action (JCPOA) will cost the Iranian economy a heavy price. It has created wariness on the part of foreign investors, especially European investors, and prevented the Iranian market from significantly reaping the fruits of the deal. Prior to the withdrawal from the JCPOA, there were numerous preparations by foreign businesses and investors to enter the Iranian market, but only a marginal number of deals and investments materialized. Following the American withdrawal, major European companies began to move their business away from Iran and cut their trade with it. Even though the European Union is determined to stick to the deal, it will be very difficult for the EU to convince companies to prefer the Iranian market over the American market, once secondary sanctions are resumed. Russian and Chinese companies may try to fill the gap but may encounter difficulties. Although India has declared that it will abide only by UN sanctions, it appears that Indian companies will hesitate to ignore the American threat. The Trump administration has created a “wind-down period” of at least 90 days for companies to minimize their damages and exit the Iranian market until sanctions are reimposed. The first batch of sanctions will be put back in place on August 6, 2018. These will include, among others, sanctions on the acquisition of U.S. dollar banknotes by Iran’s government; 7 Barak Seener | Commercial Risks Entering the Iranian Market sanctions on Iran’s trade in gold and other precious metals; sanctions on direct or indirect sale, supply, or transfer of aluminum, steel, coal, and graphite to Iran; and sanctions on Iran’s automotive sector. There will also be a renewal of sanctions limiting the importation of rugs from Iran into the United States. The second set of sanctions will be reinstated by November 4, 2018. These include, among others, sanctions on Iran’s shipping sector; sanctions on Iran’s petroleum exports; sanctions on the Central Bank of Iran, and broader sanctions on Iran’s energy sector. Sanctions on Iranian individuals that were lifted after the Iran deal will also be reinstated by November, and possibly earlier. Since the JCPOA was implemented, non-nuclear sanctions have only increased and have been combined with financial restrictions, especially imposed by the United States and the Financial Action Task Force (FATF), preventing Iran from accessing the U.S. dollar. The inherent structural deficiencies of the centralized Iranian economy, which the Iranian Revolutionary Guards Corps (IRGC) has a stranglehold over, prevented Iran’s rapid economic development that was anticipated following the agreement. This is despite Iran having better access to funds and the growth of its oil exports and revenues. These reasons, along with Iran’s priority to fund its foreign adventures, have led foreign investors to consider the Iranian market increasingly unattractive. The hope that the JCPOA would strengthen pragmatists within the regime and help them to promote reforms and improve the regime record on human rights failed to materialize. Similarly, the expectation that the JCPOA would lead to more moderate Iranian regional behavior was not met. In fact, the only real benefactors from the availability of new monetary resources coupled with the legitimacy granted by the deal to Iran to play a much greater role in the Middle East – mainly in Syria were the IRGC and especially their foreign activities arm – the Al-Quds Force. This gap between expectations and reality is one of the major reasons for the wave of demonstrations and unrest that has emerged recently in Iran 8 Chapter 3: Executive Summary and led to the dramatic devaluation of the Iranian currency, the rial. Prior to President Trump’s withdrawal from the JCPOA, Iran’s economy was struggling with high unemployment – estimated at around 30 percent or higher among young people – and a debt-burdened banking system that may be close to insolvency. The Iranian rial has plunged against the U.S. dollar in recent months. The currency has lost more than 22 percent of its value over the past year, making imports more expensive. Naturally, the United Since the JCPOA States’ reimposition of sanctions will make was implemented, Iran’s economic predicament more severe. non‑nuclear sanctions have only increased So investing in Iran was not an attractive and have been option even when the JCPOA was in combined with financial place, but as President Trump moves restrictions, especially forward against Iran, the U.S. secondary imposed by the United sanctions are going to make business with States and the Financial Iran unreasonable, and further exacerbate Action Task Force (FATF), Iran’s economic difficulties. This may lead preventing Iran from to greater frustration and dissatisfaction accessing the U.S. dollar. among ordinary Iranians, cause more domestic unrest, and constrict Iran’s ability to spread its influence in the Middle East. This paper offers unique insights and surveys the risks and opportunities for foreign investors considering whether to enter the Iranian market. 9 Chapter 1 Sanctions The Joint Comprehensive Plan of Action (JCPOA) declaratively was presented as a competent tool to prevent Iran from acquiring nuclear weapons by imposing a series of limitations on its nuclear activities in exchange for lifting nuclear-related sanctions while maintaining sanctions for terrorism, human rights abuses, and proliferation activities. Yet this plan paved the way for Iran to become a nuclear power. The JCPOA rolled back sanctions against the Iranian petroleum, petrochemical, oil, and natural gas sectors, and sought to restore financial ties to certain Iranian banks (including the Central Bank of Iran).