March 18, 2019

March 18, 2019

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Prospects for Doing Business With Iran

Here we can identify five international and diplomatic signposts on which Western companies interested in doing business with Iran may wish to focus.  These signposts will shed light on the prospects for a binding agreement and the likelihood that near-term business opportunities may materialize.  

1. Does Iran indicate by its negotiating stance and conduct that it is seriously interested in moving from the Framework to a binding international agreement?

The Framework signals a willingness on the part of Iran to enter into commitments that are more detailed and potentially enforceable than many experts had expected.  In my view, Iran’s acceptance of the Framework indicates that Supreme Leader Khamenei and other top leaders have decided that sanctions relief is necessary for them to meet their economic and political goals, and that the leadership is willing to accept serious limitations on its nuclear program in order to obtain sanctions relief.  Will that decision hold during the months ahead?

Iran is a notoriously difficult negotiator and, as all sides have noted, nothing is agreed until everything is agreed.  The road to the Framework was very rocky, and I have no reason to expect that the road to a binding agreement will be problem-free.  Nevertheless, Iran’s initial response to the announcement of the Framework and the relative absence of public dissent within Iran provide an encouraging indication that the leadership’s resolve to move forward is solid.  It will be helpful if Supreme Leader Khamenei speaks out in favor of pressing ahead to the completion of an agreement.  Iran should be careful not to negotiate in a manner that appears it is backing away from understandings already reached.  For businesses interested in future commercial opportunities in Iran, the Iranian negotiating stance is one important signpost.

2. Does the International Atomic Energy Agency (IAEA) credibly state that it is confident of its ability to monitor a final agreement and promptly detect any possible violations of it?

Closely following the statements of a specialized agency of the United Nations is not typically a central part of a business’ due diligence.   This situation is very different.  The credibility of a final agreement will rest in large part on whether the West can be confident that the agreement will be implemented faithfully and that, if it is not, violations will be detected promptly.

The IAEA has established a track record of calling out publicly past instances of Iranian non-compliance and non-cooperation.  Only a few months ago, IAEA chief Amano expressed public concern about Iran’s unwillingness to address IAEA question about Iran’s efforts to develop a nuclear weapons delivery system.

After the Framework was announced, Amano praised elements of the agreement, including Iran’s readiness to accept the IAEA’s “additional protocol,” which permits intrusive inspections.  Amano’s credibility, and that of the IAEA, will depend on whether the provisions of the final agreement give the IAEA the freedom of maneuver to carry out its watch dog role.  Another important signpost will be the details of the monitoring and oversight provisions and the reactions of the IAEA to them.  Expressions of doubt, or even silence, from the IAEA would be a troubling sign.

3. Do the United States and Europe stay aligned on a diplomatic strategy for concluding an agreement and the unwinding of sanctions?

I have been enormously impressed with the degree of alignment Europe and the United States have maintained on diplomatic and sanctions policy with respect to Iran.  I believe there is a strong political commitment in Europe and the United States to investing considerable energy and political capital in order to sustain that alignment.  They will need it.

The history and structure of Iran-related sanctions in the United States is rather different from the history and structure of such sanctions in Europe.  Moreover, there is great complexity in the arrangements that will be necessary to coordinate the winding down of sanctions in a final agreement: (a) will sanctions be suspended or terminated?; (b) will sanctions be unwound at once or in phases?; (c) how will the “snap-back” provisions for reinstituting sanctions in case of a violation work in practice?

Europe and the United States each agree that consistent multilateral sanctions are more effective than disparate or unilateral sanctions.  The alignment of US and European sanctions policy is what has brought Iran to the negotiating table.  It will be a challenge, however, for the United States and Europe to stay aligned on the details of winding down sanctions.  Another important signpost will be indications as to whether the United States and Europe manage to maintain their alignment until and after a final agreement is reached.

4. Are tensions in Middle East hot spots where Iran’s is playing a disruptive role–Iraq, Yemen, Syria and Lebanon to name a few–subsiding, increasing or staying about the same?

Formally, of course, Iran’s conduct in respect to these regional hotspots is completely separate from the Framework understanding.  At the same time, critic of the Framework and important Arab governments, notably Saudi Arabia, are deeply concerned about Iran’s conduct.  The Saudis and others believe that Iran’s status as a threshold nuclear weapons state emboldens its regional political behavior.  They are privately dubious about the Framework, but have avoided public criticism of it even as they draw attention to Iran’s disruptive conduct in Yemen.

One more signpost will be the extent to which the U.S. Administration takes steps to assuage these concerns, for example by strengthening its security commitments to Arab states and is taking strong action to resist Iranian influence in regional hotspots.  I have no reason to believe that Iran has made any explicit commitment, but Iran has to know that it will be far more difficult for the Administration to win approval for a final agreement if Iran is seen as the culprit that has caused a significant setback to the interests of the West and important Arab governments.

5. Is Iran demonstrably preparing for a more thorough economic normalization?

It is not a simple matter for a country that has been significantly isolated from the global economy, and completely isolated from the US economy, to rejoin.  In recent years, a number of countries–including China, Vietnam and the formerly Communist states of Central Europe–have successfully made this journey but it has taken considerable time and a great deal of commitment.

It will be relatively easy for Iran to resume and expand shipments of crude oil and refine products if sanctions are eased.  But there will be limited opportunities for Western firms if that is the beginning and the end of the story.

If Iran is thoughtful and has more ambitious economic objectives, it will realize that fundamental reforms in its domestic laws and institutions will be required to capture the gains potentially available from sanctions relief.  To take one simple example, in today’s low price environment for hydrocarbons, it is likely that Iranian authorities and the National Iranian Oil Company will need to conduct a more liberalized foreign investment policy if Iran hopes to compete with other potential destinations for investments in oil and gas exploration and production.  Dramatic reforms also will be necessary in most other sectors of the economy, which has largely been isolated from global developments.  For that reason, another important signpost for companies interested in doing business in Iran will be whether Iran begins to demonstrate strong interest in making significant domestic reforms that could accentuate the benefits of the unwinding of sanctions.

© 2019 Covington & Burling LLP

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About this Author

Alan Larson, Regulatory and public policy lawyer, Covington
Senior Advisor

Alan Larson provides clients with strategic advice, counseling and representation at the intersection of international business and public policy. A Ph.D. economist, decorated diplomat and non-lawyer, Mr. Larson advises clients on high stakes international challenges. His trouble shooting takes him to all parts of the world. His practice encompasses international investment and acquisitions; sanctions and trade compliance; international energy transactions, international aviation and international trade. He has helped win approval of the U.S. Committee on Foreign...

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