On 14 July, the P5+1 (the UN Security Council’s five permanent members of China, France, Russia, the UK, the US, plus Germany), the European Union and Iran concluded an agreement which has radical consequences for the realignment of relations between western countries and Iran.
This international agreement, the Joint Comprehensive Plan of Action (JCPOA), provides for a step-by-step relaxation of the existing sanctions against Iranian individuals and entities.
In return, Iran agreed to take active steps to reduce its stockpile of enriched uranium as well as reduce the number of its centrifuges for at least 15 years. To monitor and verify Iran’s compliance, the International Atomic Energy Agency will have regular access to all Iranian nuclear facilities.
My view is that such lifting of sanctions, coupled with Iran’s economic potential, creates significant business opportunities for Western investors. The nuclear deal is a landmark agreement creating considerable investment opportunities, as is attested by the number of trade delegations that have visited Iran since July.
Yet, Iran’s incomplete transition to market economy and the prospect of the snap-back provisions in the JCPOA, together with significant holes in the relevant BIT framework, create an uncertain environment for investment with a number of factors that make potential investment risky.
AN INCOMPLETE TRANSITION TO MARKET ECONOMY
In 2004, changes in the Iranian constitution authorised the government to privatise large portions of state-owned enterprises such as banks and petrochemical firms.
But many of their shares were transferred to quasi-governmental bodies including state pension funds, state-run foundations and revolutionary foundations such as Iran’s Islamic Revolutionary Guard Corps (IRGC).
Shareholding structures in Iranian entities can be opaque with the result that ultimate beneficial ownership may sometimes be unclear. This incomplete transition to market economy generates difficulties.
First, dealings with the Iranian state or state-owned entities can be expected to be politically sensitive. As such, investors will need to take into account the constraints of applicable anti-corruption laws, such as the UK Bribery Act and the US Foreign Corrupt Practices Act.
Secondly, the phased relief under the JCPOA provides that some of the existing sanctions will not be removed until the second phase of relief in October 2023.
These include sanctions against the IRGC, which possess substantial shares in companies traded on Tehran’s Stock Exchange, including in the National Iranian Oil Company. Investors will therefore also need carefully to conduct due diligence to identify their true counterparties
THE RISK OF ‘SNAP-BACK’
The risk of ‘snap-back’; (or re-imposition of sanctions) is an added source of uncertainty for investors. The JCPOA’s dispute resolution process provides that UN, EU and US sanctions may be unilaterally reinstated if Iran does not comply with the terms of the JCPOA agreement.
Following the ballistic missile test carried out by Iran on 10 October (and alleged to be in breach of the UN sanctions), the snap-back scenario appears to be a realistic possibility.
It will therefore be crucial for investors to assess this potential scenario in their due diligence considerations, quite apart from making specific provision for them if it is felt appropriate to conclude a contract with the Iranian person or entity.
THE IRANIAN LEGAL AND REGULATORY FRAMEWORK
Potential investors must also have regard to the specific constraints of the Iranian legal and regulatory environment.
Iranian legal advice will be needed because among other requirements a regulatory licence may be necessary in order to do business with Iranian entities. The rules on corporate governance are unsophisticated, and this is a further cause of lack of transparency.
BILATERAL INVESTMENT TREATIES (BITS)
BITs are international agreements which afford protection to the investments made by an investor of one contracting state in the territory of the other. These typically include fair and equitable treatment and protection from expropriation.
The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to international arbitration rather than suing the host state in its own courts.
Iran has concluded BITs with many Western countries such as Austria, France, Germany, Sweden and Switzerland. However, no such BITs have been concluded between Iran and the UK or the US and so, for British and American investors, BIT protection is lacking.
Plainly in light of the JCPOA, the British government should be seeking to negotiate a BIT with Iran as a priority. Until then, the position for British investors will be uncertain.
This article by Guy Martin was first published in Investment Week on 4 December 2015