Iran: high risk, high reward

The Joint Comprehensive Plan of Action (JCPOA) agreed on 14 July 2015 provides, subject to certain conditions being met, for the lifting of all UN Security Council sanctions as well as most EU and some US sanctions related to Iran’s nuclear programme.

This is due to take effect from “Implementation Day”, being the date on which the International Atomic Energy Agency (IAEA) announces that Iran has complied with its JCPOA commitments. This is expected to occur in Q1 or Q2 2016.

If sanctions are lifted, it will present an exciting opportunity for many foreign investors. An increase in export revenues of oil, gas and other hydrocarbons, together with access to frozen funds and an inflow of foreign direct investment, may enable Iran to proceed with a large pipeline of projects. These are most likely to focus on the oil and gas sectors (upstream projects as well as petrochemicals), together with social infrastructure (power, water, hospitals, railways, ports and airports) and the mining, automotive and aviation industries.

However, it is important to note that certain sanctions (including certain EU trade and financial sanctions) will remain in place after Implementation Day, the most significant being the majority of “primary” US sanctions, which impose broad prohibitions on US persons entering into transactions with Iranian persons. In practice, this may also mean that non-US third parties, including banks, may continue to adopt a cautious approach in dealing with Iran.

For those wishing to do business in Iran post lifting of sanctions, there are a number of things to consider. Firstly, it is important to be careful about discussing now any possible future transactions to take place after Implementation Day. Guidance released by the US Office of Foreign Assets Control makes it clear that non-US persons’ entry into contracts involving Iranian persons prior to Implementation Day may expose those persons to risk of “secondary” sanctions, even where these are contracts that are contingent on the implementation of sanctions relief under the JCPOA.

There is also a risk that existing sanctions could “snap-back” into place under the JCPOA (which could occur if Iran fails to comply with the IAEA obligations) or that new sanctions will be introduced (for example, by a new US government). It is therefore critical for investors to consider ways in which to protect against this risk (eg by including force majeure, illegality or sanctions-specific clauses into contracts).

Potential investors will also need to consider a number of business-related risks associated with Iran. These include a perceived increased risk of corruption, money laundering and terrorist financing, as well as the legal and reputational risk of certain business partners (including where those partners remain SDNs or EU asset freeze targets) It is therefore extremely important to conduct due diligence on proposed counterparties (and related parties) and refresh that due diligence regularly.

Investors should also consider how to protect their investments. Possible options include pursuant to (i) the Iranian Foreign Investment Promotion and Protection Act, (ii) any relevant bilateral investment treaties, and lastly (iii) the Organisation of Islamic Cooperation treaty.

Although there are a number of risks in investing in Iran, those investors that are able to properly evaluate and guard against these risks may be able to reap significant rewards.

Joanna Addison, partner, Herbert Smith Freehill. Senior associate Mark Hatfull assisted with this article.