Western powers are actively negotiating a nuclear agreement with Iran, with the aim of lifting decades-old trade and financial sanctions. But how likely is a deal to be struck, and what impact would it have on trade? Melodie Michel reports.
With the June 2015 deadline just around the corner, negotiations between Iran and the P5+1 (the US, Russia, China, the UK, France and Germany) are in full swing. Just as this supplement went to press, Iran’s foreign minister gave an interview to US TV channel NBC News saying a nuclear deal was “very, very close”, and that negotiators were willing to work around the clock to finalise the details.
Indeed, time is ticking: while theoretically it would be possible to extend the sanctions relief agreement again should negotiations continue past July – after all, it has already been extended twice, in July and November 2014 – the real cut-off point will be around November this year, when the US 2016 presidential election campaign is set to start.
“No presidential candidate is going to endorse the removal of sanctions during the election campaign,” says Tony Nash, global vice-president at Delta Economics.
“The clock is really ticking, at least to get some sort of incremental sanctions removal process moving, and to demonstrate good faith on both sides.”
The negotiations, led by US secretary of state John Kerry, already took a blow in November last year, when US congressional elections saw a majority victory for the Republican Party. The new House of Representatives was quick to express its desire to impose more sanctions on Iran despite the ongoing talks, leading President Barack Obama to threaten to use his presidential veto.
Clif Burns, a Bryan Cave attorney specialising in export control and economic sanctions, tells GTR: “My fear is that Congress will not be able to resist intervention. This is one of the areas where they can push, and get Democrats on board, which would make measures veto-proof. Nothing has ever been lost by imposing sanctions, and there’s a fair amount of open anti-Muslim sentiment in the US, which is going to play into it.”
In fact, shortly after our interview with Burns, 49 Senate Republicans sent a letter to Iranian leaders warning them that any deal could be easily be overturned by Congress, and that even if it did go through, it would not be maintained should a Republican president take office in 2017.
The move was strongly criticised by President Obama, European officials and Iran’s supreme leader Ayatollah Ali Khamenei, who said the letter showed “the collapse of political ethics” in the US.
On the Iranian side, President Hassan Rouhani – a former nuclear negotiator – is under popular pressure to take his nation out of isolation and curb the exponential price inflation observed in recent years (19.6% on average over the past 10 years). However, he is following the all-or-nothing approach displayed by Ayatollah Khamenei: for Iran to accept a deal, it has to include the immediate removal of all sanctions, something deemed unlikely by most analysts, who believe the west would prefer a step-by-step process.
Nash explains: “I think the lifting of the sanctions will be an incremental process, not a one-time removal. The political environment both in the US and Iran means they’re pretty wary of each other from a government perspective. From a corporate perspective, there are people on both sides who would like to do business. But from a government perspective, I don’t see that progressing very quickly. Will we see a big bang sanctions removal agreement in July? It’s unlikely.”
But despite doubts and criticism, including Israel’s very public distrust of the negotiations, both parties seem confident that an agreement will be reached. So what would such a settlement change on a global scale? Not much, it would appear.
Iran has been working hard at improving relationships with its eastern neighbours. The country’s top five importers, China, India, Turkey, Korea and Japan have all received attention from the Iranian government in the form of visits and preferential trade agreement talks. The Islamic Republic is also increasing trade links with Brazil, Pakistan, Oman and Russia – its now fellow sanctioned nation.
This redirection was of course partly prompted by the sanctions, but also follows global demand trends, therefore trade flows would largely be unaffected by a lifting of the sanctions.
Nash explains: “It’s just not economically feasible for Europe to get Iranian LNG, compared to pipe gas from Russia, despite the political inconvenience in Europe’s relationship with Russia.
“Gas exports would continue to go to Asia. You may get some oil exports to Europe, but again, if you look at where the energy supply chain is going, it’s largely going to Asia. China, Korea, Southeast Asia and India have a lot of energy needs, and these are all countries that continue to have good trade relations with Iran. That precedent is a big condition for them to continue these activities.”
Oil could more likely find its way to Europe, but at a time of historic oversupply, the west doesn’t exactly need to tap into Iran’s crude reserves.
One of the biggest impact of the sanctions was felt in the financial community, as western institutions were suddenly forbidden from funding trade from or towards Iran – barring a few sectorial exceptions.
No one got through the net: BNP Paribas had to pay fines amounting to US$9bn for financing trade with sanctioned countries, but a comparatively tiny organisation like Deutsche Forfait also suffered last year when all its assets were frozen by the US Office of Foreign Asset Control (OFAC) until it proved that it wasn’t doing any illegal business with Iran.
As a result, most financial institutions in Europe and the US have stopped looking at Iran, and it would take a lot of reassurance from government officials to get them to consider Iranian business again.
Simon Ring, global head of financial markets at Pole Star, which recently launched the PurpleTRAC tool to screen ships for current and past exposure to risk and automate sanctions compliance in commodity trade, tells GTR: “At the moment we don’t have any clients that wish to trade or do any business with Iran. Most of the people we speak to would have to be extremely clear that the deal was completely comprehensive before venturing back to do business in that area.”
His colleague, chief business development officer Julian Longson, adds: “The industry is so starved by the events of the last few years and some of the fines that have been imposed by US financial regulators that it would be very brave for a financial institution to go into Iranian business without a signed guarantee from a law firm or the US regulators themselves.”
But elsewhere in the world, banks are more excited about the prospect of renewed business with the ostracised country. In an April 2014 interview with Abu Dhabi newspaper The National, National Bank of Fujairah (NBF) chief executive Vince Cook said the bank would benefit a lot if sanctions were eased: “There is a lot of business which goes through unofficial channels somewhere in the region which would easily return back to the UAE should it be allowed to. And being a significant trade finance player, we would benefit from that.”
In Asia, local banks never really stopped financing Iranian trade, as Nash points out: “The majority of sanctions are from Europe and the US, while the UN embargo is not as financial services-heavy. The overwhelming majority of trade is from Asia and so it’s being financed through Asian banks, which are abiding by the UN sanctions regime but not the US and Europe regimes.”
Trade between Asia and Iran hasn’t faltered, and while creativity prevailed under the sanctions with the use of barter deals and gas-for-gold systems – a sanctions loophole that was later addressed in the Iran Freedom and Counter-Proliferation Act (IFCA) 2012, which covered the provision of precious metals – there is no doubt that relaxing the financial regulations surrounding the country would lead to more trade and commodity finance from Asian financial institutions.
What’s at stake?
Despite all the noise surrounding negotiations, it seems like lifting western sanctions would not lead to a massive shift in trade and financing flows with Iran. So why are both parties so keen to reach an agreement?
The main reason on the Iranian side is a need for investment. “What Iran needs desperately is industrial investment. Its industrial production fell 13% between Q3 2012 and Q3 2013, and the country needs foreign investment to re-invest in that. Yes it’s about oil fields and attracting technology, but they also want to develop as a country. They use all the gas they extract, so they can’t rely on gas exports to grow their income. They really have to get the technology and machinery needed to reindustrialise their economy,” says Nash.
A lot of this investment could – and does – come from China, Iran’s top partner for machinery imports, but Nash believes Iran is looking to expand its investor base so as not to rely solely on the Asian superpower.
With their history of doing business with Iran, Germany and France could potentially add to the portfolio if the sanctions were lifted, but “not in a major way”, he says. “Asian competitors would be there first, but also, the Iranians remember who their friends were through the sanctions. They want to make sure that they’re working with partners that will be there in good and bad times.”
But what is driving the US to push for a deal?
The fact that more executive orders sanctioning Iran were approved under President Obama than any other president before him begs the question: why now?
Some believe oil economics are at stake. “The thought on Iranian oil is that they were supplying so much of it that if we cut it off, we wouldn’t just be hurting the Iranians, we would be increasing the price of oil,” Burns says about the initial round of sanctions.
Given that negotiations started when crude oil averaged US$100 a barrel, and that it has since dropped to US$60 after a record US$40 low, questions could arise on the future of the nuclear deal.
“Frankly from [the US] point of view, oil economics may push us in the other directions now that the Saudis are flooding the market as a result of US shale and natural gas extraction. This is an area where the US was not going to interfere, but now that the oil price is low there may be governmental pressure to push them back up because of the impact on company revenue,” Burns adds.
The link between the negotiations and the oil market became clear in March 2015 when, shortly after an alarmist address to Congress by Israel’s prime minister on the danger of the deal, President Obama suggested the freezing of all nuclear activity in Iran for 10 years as a condition for the deal – a move that, when opposed by Iran, gave an instantaneous boost to oil prices.