A 16 January report by the International Atomic Energy Agency (IAEA) confirmed that Iran has completed the preparatory steps agreed to under the terms of the Joint Comprehensive Plan of Action (JCPOA) signed on 14 July 2015. With the publication of this report, the JCPOA Implementation Day was declared, and a raft of UN, EU, and US nuclear-related sanctions on Iran were lifted.
However, while Implementation Day brings Iran out of isolation and signals that the country is ‘open for business,’ the investor position remains one of optimistic caution in the face of considerable risks amid great opportunity. In this factsheet, Victoria Mackay, head of our MENA practice, clarifies the complex post–Implementation Day sanctions environment for potential foreign investors.
Sanctions Relief Explained
Upon Implementation Day, the UN and EU revoked the majority of nuclear-related sanctions, while the United States only lifted nuclear-related secondary sanctions. U.S. primary sanctions, as well as UN, EU, and U.S. non-nuclear-related sanctions, remain in place. The current sanctions environment is detailed below:
- EU and UN nuclear-sanctions relief is comprehensive, while the United States has only lifted U.S. nuclear-related secondary sanctions governing the activity of non-US persons. The sanctions relief brings Iranian oil and gas back online; however, engagement with Iran in any sector, including oil and gas, remains subject to the following active sanctions.
- U.S. primary sanctions, which apply to U.S. persons, non-U.S. persons who cause U.S. persons to violate U.S. Treasury (OFAC) sanctions, and the transfer of U.S. regulated products to Iran, remain in place. OFAC, or the U.S. Treasury’s Office of Foreign Assets Control, is the body that administers and enforces U.S. economic and trade sanctions.
- U.S. goods intended to relieve human suffering (i.e., licensed medicine and agricultural products), gifts of $100 or less, and “informational materials” (i.e., films) are exempt from primary sanctions. Furthermore, U.S. persons may apply to OFAC for one of two licenses granting exemptions to primary sanctions. These licenses allow trade in commercial passenger aircraft or their related parts and service, and carpets and foodstuffs of Iranian origin. Details of these licenses, as well as a broad overview of what U.S. primary sanctions cover, can be found in the U.S. Department of State publication “Guidance Relating to the Lifting of Certain U.S. Sanctions, Pursuant to the JCPOA on Implementation Day” (16 Jan. 2016). 
- The OFAC’s and the EU’s lists of designated Iranians with whom trade is prohibited remain active. However, more than 700 Iranian parties (including 83 Iranian banks) were de-listed.
- UN, EU, and U.S. sanctions on Iran relating to terrorism, human rights violations, and the transfer of commodities related to proliferation, missiles, and arms remain intact. Indeed, on Implementation Day, the U.S. Congress imposed new ballistic-missile-related sanctions on 11 Iranian parties. Active sanctions complicate the investment environment, particularly given the widespread interests in Iranian business held by the Iran Revolutionary Guard Corps (IRGC), whose members remain subject to U.S. primary and secondary sanctions, and, in some cases, EU and UN human rights– and terrorism-related sanctions.
- The EU has introduced a number of licenses that exempt the holder from certain activities prohibited by proliferation related-sanctions. However, as with the U.S. licenses detailed above, these licenses do not authorize the holder to engage with a designated person or entity. These EU licenses cover trade in nuclear or military enterprise resource planning software; certain forms of steel, aluminium, titanium, nickel, and graphite; nuclear-related commodities or services; and electronic monitoring or interception services. Full details of these licenses can be found in “Regulations Council Regulation (EU) 2015/1861” (18 October 2015) 
Ongoing U.S. Primary Sanctions—Implications
The ongoing U.S. primary sanctions have significant implications for both U.S. and non-U.S. persons seeking to invest in Iran:
- Companies with a U.S. footprint must continue to exercise caution when considering entering the Iranian market, taking into account that the following categories have been designated ‘U.S. Persons’ by OFAC and are therefore exposed to U.S. primary sanctions: (i) any U.S. citizen; (ii) any overseas national permanently residing in the United States; (iii) any person while in the United States; (iv) any U.S.-organized company and its foreign branches; (v) any U.S. subsidiary of a foreign company; and (vi) any foreign company with a branch or other presence in the United States. Foreign subsidiaries of U.S. companies can apply to OFAC for a general license authorizing them to engage in activities allowed since secondary sanctions have been lifted. For details of this license, see the U.S. Department of State publication “Guidance Relating to the Lifting of Certain U.S. Sanctions Pursuant to the JCPOA on Implementation Day”(16 Jan. 2016). 
- Both U.S. and non-U.S. persons are prohibited from exporting U.S. goods, services, or technology to Iran apart from those exempt (i.e., foodstuffs) or licensed (i.e., commercial aircraft).
- U-turn transactions—the transfer of funds by or for Iranian-linked parties from a foreign bank through a U.S. financial institution to a second foreign bank—remain prohibited. As such, many non-U.S. banks will proceed with caution when processing Iranian transactions. Certain German and UK banks have stated that they won’t increase their Iran exposure in the short-term.
The expected timing for the lifting of U.S. primary sanctions remains unclear. We will continue to monitor a number of factors contributing to the U.S. government’s decision making on this issue, including the strength of the pro-lifting commercial lobby; the forthcoming U.S. presidential and congressional elections; and the United States’ Middle East regional strategic objectives, most notably the requirement to increase coordination with Iran in the campaign against Islamic State.
Potential for Sanctions ‘Snap-back’
Sanctions ‘snap-back’—the reimplementation of sanctions on Iran—remains a possibility in the event of Iranian noncompliance with the terms of the nuclear deal. The severity of the sanctions that are re-implemented will depend on the nature of the actions that are deemed to constitute “noncompliance.” Importantly, any UN sanctions that are reinstated as part of the ‘snap-back’ process will not apply retroactively to contracts entered into prior to the date at which sanctions are reinstated; however, once sanctions are re-implemented all companies must comply and revise their operations accordingly.
The UN can restore sanctions on Iran in as little as 65 days in the event that Iran demonstrates “significant nonperformance” in its nuclear commitments. Furthermore, both the EU and United States have rapid domestic ‘snap-back’ options since they suspended, but did not terminate, sanctions.
In the case of the EU, a qualified majority of EU Member States’ consent is required to reinstate sanctions. In the United States, the President or Secretary of State can reinstate any sanction by not renewing sanctions waivers, which must be reissued every 120 to 180 days. There is a relatively low but increased risk of a U.S. sanctions snap-back or the imposition of additional, non-nuclear-related sanctions if a Republican candidate is successful in the U.S. presidential election in November 2016—all of the Republican candidates have declared their opposition to the nuclear deal.
K2 Intelligence’s next Iran Bulletin will focus on the implications of Iran coming out of isolation for the return of Iranian oil to the market and on the political balance of power in the MENA region, in the context of the intensifying Saudi-Iran power struggle.