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German Legal Expertise in the Middle East since 1981

Iran Sanctions Update: January 2014

Guiding Principle

On November 24, 2013, Iran and the United States, along with Russia, China, France, and the UK, announced a six-month interim deal that temporarily curbs Iran’s nuclear program in exchange for limited sanction relief. The aim of the deal is to give the international players time to pursue a more comprehensive agreement. The deal will come into force on January 20, 2014.

1. Introduction

The presidency of Mr. Rouhani in June 2013, opened the door to diplomatic discussions between the West and Iran. Following the recent diplomatic development, on November 24, 2013 in Geneva, the five members of the UN Security Council – United States, United Kingdom, France, China, and Russia, plus Germany (“P5+1”), negotiated an Interim Agreement with Iran and agreed on a Joint Plan of Action (“JPA”) to lift some of the existing sanctions against Iran in exchange halting to certain uranium enrichment activities and agreeing to be monitored by the International Atomic Energy Agency (“IAEA”) from Iran’s side.

2. The Interim Agreement

The JPA envisages a two-step process. The first step, with a time limit of six months renewable by mutual consent, will see both Iran and the P5+1 countries undertake various voluntary measures. The second step, still to be negotiated, is aimed at a longer-term solution, which envisages the lifting of United Nations (“UN”), multilateral and national nuclear-related sanctions in exchange for a comprehensive solution to the international community’s concerns with Iran’s nuclear program. The initial six-month step encompasses three points to address Iran’s nuclear program:

  • Halting and rolling back some elements of Iran’s nuclear program, including the enrichment of uranium beyond five percent and diluting or converting twenty percent uranium stockpile into oxide and freezing further advances in the construction of the Arak reactor.
  • Building up additional transparency and intrusive monitoring of Iran’s nuclear program by IAEA, including review of surveillance camera footage, access to facilities, and improved information access.
  • Establishment of verification mechanisms by the IAEA and a Joint Commission to be established by the P5+1 and Iran.

In December 2013, Iran took the first steps to fulfill its side of the bargain, permitting a team of U.N. atomic experts to inspect a plant that produces heavy-water for a plutonium reactor. In return for Iran’s actions, the measures to be taken by the P5+1 may include the following:

  • Suspension of U.S. and EU efforts to further reduce Iran’s crude oil sales and to enable Iran’s current oil customers (China, India, Turkey, Japan, South Korea and Taiwan) to purchase their current average amounts of crude oil in currencies other than USD, including suspension of U.S. and EU sanctions on associated services for these oil sales. In general, the EU and U.S. will not permit imports of Iranian crude into the EU or US, but may reduce efforts to block sales to third countries. USD 4.2 billion from these sales will be authorized for transfer in installments as Iran fulfills its commitments under the Interim Agreement. Other assets will continue to be maintained in blocked accounts.
  • Suspension of U.S. and EU sanctions on: (1) Iran’s petrochemical exports and associated services and (2) gold and precious metals and associated services. It is reported that an amount of USD 1 billion could be repatriated from petrochemical sales.
  • Suspension of U.S. sanctions on Iran’s auto industry and associated services. The EU have not implemented sanctions specifically targeting the Iranian car industry, EU prohibited dealings with designated entities or individuals or the export of certain goods. Experts estimate that revenues of up to USD 500 million in extra production and sales could be generated by the Iranian car industry due to the lifting of the ban on imports of car parts.
  • Licensing of the supply and installation in Iran of spare parts for safety of flight for Iranian civil aviation and associated services. Licensing of safety related inspections and repairs in Iran and associated services. This would apply to Iran Air and other Iranian airlines not subject to specific sanctions.
  • Agreeing not to impose any new nuclear-related UN Security Council sanctions and any new EU or US nuclear-related sanctions during the term of the Interim Agreement.
  • Establishment of financial channels through specified foreign banks and non-designated Iranian banks using Iran’s oil revenues held abroad to facilitate humanitarian trade involving food and agricultural products, medicine, medical devices and medical expenses incurred abroad. These funds may also be used to pay Iran’s U.N. obligations and direct tuition payments to universities and colleges for Iranian students studying abroad.
  • Increasing the EU authorization thresholds for transactions for non-sanctioned trade to an agreed amount.

The JPA defines “sanctions on associated services” in relevant part as “any service, such as insurance, transportation, or financial, subject to the underlying U.S. or EU sanctions applicable, insofar as each service is related to the underlying sanction and required to facilitate the desired transactions.”

The Interim Agreement will come into force on January 20, 2014. According to U.S. estimates, the overall sanctions relief provided to Iran under the interim deal is worth about USD 7 billion. Of this amount, USD 4.2 billion is in the form of access to currently blocked Iranian revenues held abroad. Iran will not have access to the final installment of the USD 4.2 billion until the last day of the six-month period. Iran would receive the USD 4.2 billion blocked overseas in the following installments:

  • February 01, 2014: USD 550 million (NOTE: Feb. 1 is a Saturday, so this payment may need to happen on Feb. 3).
  • March 01, 2014: USD 450 million (payment for half of dilution).
  • March 07, 2014: USD 550 million.
  • April 10, 2014: USD 550 million.
  • April 15, 2014: USD 450 million (payment for completion of dilution).
  • May 14, 2014: USD 550 million.
  • June 17, 2014: USD 550 million.
  • July 20, 2014: USD 550 million (NOTE: July 20 is a Sunday, so this payment may need to happen on July 21).

On January 20, 2014, European Union governments will also implement all EU sanctions relief for Iran covered by interim deal- including lifting a ban on insuring its oil. Therefore, the EU will suspend for six months a ban on insuring and transporting Iranian oil, as well as a trade ban affecting the country’s petrochemicals, gold and other precious metals.

3. What is to be done businesswise? 

As a result of the Interim Agreement, U.S. and European companies are left to wonder whether the Interim Agreement will permit greater access to the Iranian market and eliminate export and transaction licensing in 2014.

The short answer is that immediate change, if any, will be limited. The Interim Agreement is only intended to last six months until a more complete agreement can be reached. In addition, the Interim Agreement must be implemented by each country’s local laws, which has not occurred to date.

The vast majority of United States-based Iranian sanctions (including those implemented under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 and the Iran Threat Reduction and Syria Human Rights Act of 2012) will continue to exist and be enforced, with relief limited only to the above-mentioned items. U.S. companies are strongly advised to comply with the existing U.S. sanctions programs and refrain from engaging in transactions with Iran or Iranian parties until a final agreement, if any, is reached.

In order to ease the EU sanctions on Iran, the EU must adopt a Decision under the Common Foreign and Security Policy and amend Regulation 267/2012. A meeting between the EU foreign ministers has been scheduled in the following weeks to discuss the details. Similar to the U.S., it is assumed that the relaxation of the sanctions will be done in a limited, targeted and reversible manner. It has been indicated that the EU intends to raise threshold amount for payments to and from Iran that do not require prior authorization, which will ease legitimate dealings with Iran.

Companies subject to U.S. and EU sanctions, who may be interested in pursuing opportunities in Iran for activities that may be permissible under the proposed suspension measures, should proceed cautiously and with contingency plans to swiftly curtail these activities in the event that this diplomatic track stumbles or fails.

In spite of the diplomatic progress and the above Interim Agreement, many members of U.S. Congress have pressed for tighter Iran sanctions. In addition, in December 2013, the Office of Foreign Assets Control (“OFAC”) added a number of new entities to the Specially Designated Nationals (“SDN”) List that were accused of providing or facilitating the provision of goods and services to Iran. In response, Iranian lawmakers reportedly drafted a bill that would require their government to increase uranium enrichment if new sanctions were imposed.

Despite of U.S. Congress’s and Iranian apposition’ efforts, it seems in the New Year 2014, the P5+1 and Iran were on the verge of reaching a more comprehensive agreement. In case Iran sanctions developments continue, it is more likely possible that someday Iran reopen its economy to the international community.

According to the Wall Street Journal, Iran may consider entering into production sharing agreements with foreign companies for resources in the Caspian Sea, which is reported to have “possible reserves” of 10 billion barrels of crude oil. Such actions, as well as recent meetings between the Iranian Oil Minister and European energy companies such as Eni, Shell, Vitol and OMV, demonstrate efforts by Iran to re-engage with foreign oil companies once sanctions are ultimately lifted.

January, 2014 Zahra Tahsili
Meyer-Reumann & Partners, Tehran Office
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