Iran remains in the cold as JCPOA deal stalls

The nuclear deal struck between Iran and the P5+1 bloc is struggling to live up to its initial hype as foreign banks and businesses are still hesitant to do business with Tehran.

Despite the bullish announcements that followed the agreement, a long-awaited foreign investment wave to upgrade the country’s infrastructure, oil and gas industry and economy has yet to materialise. Foreign banks in particular have remained hesitant when it comes to doing business with Iran, and even more so since US president Donald Trump questioned the future of the deal. 

With less trade and investment than originally expected, the economic benefits of the deal for Iran have not met original expectations so far, feeding into the popular malcontent of the Iranian population, which materialised in the widespread protests that erupted across the country in December.  

Feeling the chill from domestic and US criticism, the Iranian government is now striking back. “As far as Iran is concerned, the Joint Comprehensive Plan of Action [JCPOA] is not a successful story because Iran is not benefiting from the lifting of sanctions in full,” said Abbas Araqchi, Iran's deputy foreign minister, in a speech in London in February. “We are fully complying, we want the full benefit.”

FDI blow

Iran has struggled to attract any investment in recent years as international sanctions made it almost impossible for foreigners to openly invest and trade with the country. Things changed in January 2016 when the UN and the EU lifted sanctions after Iran and the so-called P5+1 group of the US, the UK, China, France, Germany and Russia signed the JCPOA. This established that all nuclear material in Iran must be used for peaceful purposes. 

Within hours of sanctions being lifted, Hassan Rouhani, Iran’s president, told the country's parliament: “The government’s main policy after the nuclear deal is to attract foreign investment, expand non-oil exports and make optimum use of foreign exchange reserves.” The government’s sixth development plan (covering 2017 to 2021) estimated new FDI deals worth about $50bn.

European and Asian companies initially scrambled to announce investment in the biggest market in the Middle East, with the world’s largest proven reserves of natural gas and the fourth largest reserves of oil, according to 2017 figures from BP. Major corporations such as Total, Peugeot and Boeing hit the headlines for their fresh deals with Tehran, but the initial post-JCPOA investment buzz cooled off rapidly, with investors struggling to deliver on initial agreements.

“One of the big challenges around dealing with sanctions, or the potential of changes in sanctions, is whether a company investing in Iran can actually get money back out of Iran if its legal position changes,” says Henry Smith, head of political risk consulting for the Middle East and north Africa region at consultancy Control Risks.

“Another major factor, which has had the biggest determinant on companies’ response, is the size and scale of their US footprint. There is a fear, which I believe is a bit overstated, that if a company goes in and does business in Iran, it can jeopardise its business in the US, particularly if they are working with clients of the US government – a concern that is probably most pronounced for companies working in heavy industries and energy,” he adds.

Bank absence

Foreign investment into Iran has been particularly hampered by a lack of foreign banks actively engaging with the country and therefore providing investors with the needed finance for their projects in the country. Major European and Asian banks remain wary of the poor compliance standards of Iranian counterparts, and they fear breaching US unilateral sanctions, which have not been lifted, even after the JCPOA deal, or at least compromising their US operations.

“The connectivity [between Iranian and foreign banks] is back, but not at full capacity,” says Bijan Khajehpour, founding partner at Vienna-based consultancy Atieh International. “The problem is that if an international company wants to invest in Iran, it would like to have its bank to work with it, but first-tier banks still steer clear of Iran and none of the bigger projects can be financed by smaller banks.”

Initially shored up by the post-JCPOA hype, the Iranian economy is now coming to terms with the current, renewed uncertainty. The World Bank expects annual GDP growth to slow to a respective 3.6% and 4% in fiscal years 2017 and 2018, down from 13.4% in 2016. Meanwhile, the rial depreciated to about 50,000 to the US dollar in the free market in March 2018, up from 35,000 only six months earlier.

Geopolitical jigsaw

The JCPOA has been a target of Mr Trump's since day one of his presidency, and even prompted him to call it the “worst deal ever negotiated”. US officials continue to request that companies stop doing business with entities blacklisted by the White House “as a matter of international security and moral conscience”, as stated by then national security advisor Herbert Raymond McMaster in Munich in February.  

The White House has now given the P5+1 group until mid-May to amend the JCPAO, under the threat that no improvement will be met with the withdrawal of the US from the deal. Iran is also threatening to withdraw. “We cannot remain in a deal where there is no benefit for us, that is a fact,” said Mr Araqchi in London.

The other parties in the P5+1 are thus being left to broker a new, delicate agreement between the two foes, and are already taking steps to ease tensions, at least on a bilateral level, by putting their weight behind major projects under development.

“A general assumption has emerged that government entities have to shoulder more of the risk and provide some form of insurance and guarantee if some of the big infrastructure projects in Iran want to come off the ground. The big projects that have gone beyond a memorandum of understanding really worked because there has been a big government entity outside Iran involved in it,” says Mr Smith, who mentions the $1bn Total deal, where the French oil company committed to developing the South Pars gas field, with Chinese state peer CNPC having the option to take over Total’s stake if the company pulls out.

In credit

On a broader level, China, South Korea, Austria, Denmark, Italy, France and Russia issued state credit lines worth a total of $31.7bn in the seven months to February 2018 to support projects in Iran.  

“On the one hand, these countries have been lobbied by their local business community [to open business channels with Iran], on the other hand they want to improve ties with Iran so that the country has enough incentives not to withdraw from the deal,” says Mr Khajehpour.

At the same time, major international organisations are giving credit to the Iranian government for the reform commitment it has shown in the economic sphere in the past few years.

The Financial Action Task Force, an inter-governmental body fighting money laundering, terrorist financing and other related threats to the international financial system, suspended Iran from its blacklist containing high-risk jurisdictions for money laundering and terrorist financing in June 2016, and renewed the suspension in November 2017 and February 2018, although it still advises “enhanced” due diligence to business relationships and transactions with Iranian companies.

The OECD has upgraded Iran twice in its country rating system in the past two years – the OECD’s ratings are a major benchmark for the pricing of trade credit insurance solutions. Today, Iran’s OECD rating stands at five on a scale from one to seven (with one being the least risky and seven the most risky), on a par with countries such as Brazil ad Jordan.

Yet the integration of Iran in the global market economy will not fully materialise until Washington and Tehran iron out their differences, and it appears there is a long way to go before that will happen.