Saturday 16 January 2016 was an historic moment for the Middle East region, when the long-standing sanctions in place against Iran were relaxed significantly. This is being met with a buzz of anticipation by foreign investors and will create a multitude of investment opportunities in virtually all sectors.
Legal challenges remain, however, and these may cause investors to proceed with greater restraint than Iran may like.
US sanctions
Key to investor caution is the fact that the ‘primary’ sanctions applicable to US persons remain almost entirely intact. Consequently, the US sanctions will continue to create certain risks and potential complications for non-US companies doing business with Iran.
For example, the use of US dollars for Iran-related transactions will mostly continue to be prohibited. It will continue to be generally impermissible for a non-US company’s US person employees, officers or directors to be involved in Iran-related transactions.
Therefore, non-US companies will need to consider carefully any US nexus. US-based lenders, or non-US lenders that comply with the Office of Foreign Assets Control rules as a policy matter, may continue to demand appropriate representations, warranties or ringfencing protections when lending to non-US companies that conduct business with Iran.
The challenge of snapback
Ensuring adequate protection against the risk that sanctions may ‘snap back’ into place will also be important for anyone looking to invest.
Companies may try to protect themselves in a number of ways. For example, they could include specific clauses in their contracts such as warranties, exit and termination rights and other
remedies.
“Legal challenges may cause investors to proceed with greater restraint than Iran may like”
However, it seems likely that investors will receive pushback from government entities in this respect. At the Tehran Petroleum Conference last November it was clear that the National Iranian Oil Company will not permit snapback risk to be included as a force majeure event.
Plus, it is expected that Iranian ministries and other government entities will be similarly reluctant to allow such protections.
Helpfully, the EU’s information note states any reintroduction of sanctions would not retroactively penalise investment made before the date of snapback, although the US has noted that contracts signed prior to a snapback are not ‘grandfathered’, so continued performance would not necessarily be allowed if snapback occurs.
Important considerations
Iran also continues to face many challenges such as corruption, money laundering, terrorist financing and compliance with international human rights standards. Failing to consider such matters could result in both legal and reputational consequences for investors.
Equally, companies will need to continue to carry out due diligence when conducting activity in Iran or transacting with Iranian persons.
In particular, the continuing sanctions designations mean that it will remain necessary for companies to check the names of their Iranian counterparties and their shareholders against the relevant lists.
Both these factors will be an important consideration for any banks looking to finance potential projects – particularly given the caution with which international banks are still approaching the market.
Lastly, investors will need to give further consideration to the statutory and contractual framework surrounding major projects.
While a new PPP law was introduced last year, further detailed regulations still need to be implemented and, owing to the many years of sanctions, there has been little development in recent times of a comprehensive contractual risk allocation for major projects with international investors. Developing a robust legal framework will be critical if both investors and banks are to be reassured.
Despite these concerns, there is no doubt that the opening up of Iran offers one of the biggest opportunities globally at the moment.
