New US sanctions jeopardise Iran’s dreams of an FDI bonanza

The new round of strict US unilateral sanctions against Iran coming into force on November 4 will do away for good with Tehran’s hopes of a post-nuclear deal investment bonanza, although an alternative barter mechanism engineered by the EU still leaves a small door open to trade and investment with the country.

The White House will reintroduce secondary nuclear-related sanctions on November 4 targeting Iran’s energy sector, including petroleum-related transactions, as well as transactions by foreign financial institutions with the Central Bank of Iran. This new round of sanctions, which follows a first batch of financial and industrial sanctions imposed 90 days after the US withdrew from the Joint Comprehensive Plan of Action (JCPOA) signed in 2015, mostly aims at leaving Iran out of the global oil market by threatening retaliation in the US for any buyer of Iranian oil or, more broadly, anybody doing business with Iranian energy companies.

“Sanctions have already had very powerful impact on Iran,” says Lucie Beranova, associate analyst at risk consultancy Control Risks.

“Major foreign companies are leaving, or have already left and it looks like most, if not all of Iran’s oil customers have reduced purchases of Iranian oil, which reflects the enormous global leverage the US has, due to the attractiveness of domestic market to foreign companies. And the fact the US is alone this time means the White House will have to enforce sanctions more strongly than it did in the past to be able to deter all those trying to get around them.”

Western withdrawal

Mostly unable to process international payments, and fearing US retaliation, major Western companies have already started to withdraw from some of the most high-profile FDI projects announced in the wake of the JCPOA signing, when European investors, among others, rushed to sign deals with Tehran. France's Total, which had pledged $4.8bn to develop the South Pars gas field, pulled out in August after failing to obtain a sanction waiver from the White House. European carmakers such as Peugeot, Renault and Daimler have also put their Iranian joint ventures in ice. Total FDI in Iran still climbed to more than $5bn in 2017, from $2.1bn in 2014 before the JCPOA agreement, although the Iranian government’s ambition of attracting $50bn by 2021, a guidance issued right in the wake of the JCPOA signing, now seems out of reach.

The EU, which orchestrated the nuclear deal struck in July 2015 between Iran and the so-called P5+1 group of the US, the UK, China, France, and Russia, plus Germany, is still trying to save the deal by launching a special purpose vehicle (SPV) offering companies a barter mechanism to get around US sanctions and keep business with Iran alive. The SPV is expected to be symbolically set up on the same day the US sanctions come into effect, although it may need more time to be fully functioning. However, it may prove to be too little, too late.

“In my experience EU companies, especially those with any business interest in the US, will be reluctant to use this tool," says Ms Beranova. "First, it’s coming too late, and the EU seems to have done little progress in setting it up. Besides, companies may perceive it as too controversial because it openly challenges US sanctions. It effectively tries to sabotage them.”  

Major investors in the few sectors exempt from sanctions on humanitarian grounds, such as pharmaceutical or agribusiness, could possibly be the only ones interested in using the EU-sponsored barter mechanism. However, things may be different for SMEs that have no links with the US, according to Axel Hellman, policy fellow at the European Leadership Network.

“They will, however, need the right incentives and guarantees to enter the Iranian market. The EU blocking regulation and the SPV are important, but to really make this work for the SMEs there will need to be a broader infrastructure in place. These smaller companies do not necessarily have the resources required to analyse and strategise about complex political, financial and regulatory markets such as Iran, so the key questions is if they will find the necessary support from business councils, chambers of commerce, trade departments and other institutions,” he says.

Oil disruption

Waiting for the new round of sanctions to come into place, a number of major importers of Iranian oil, such as India and South Korea, are reportedly asking the White House for waivers, whereas China is opposing sanctions, though because many large Chinese companies have business interest in the US, there is a feeling among many market watchers that they will not want to to jeopardise this.  

The final degree of disruption of the sanctions remains to be seen, but many believe that they will have major economic implications.

“US sanctions on Iran have been already a major reason for the higher oil prices [we are seeing in the market today],” says Sergei Guriev, chief economist of the EBRD. “However, at the moment the market doesn’t fully understand what’s going to happen, which countries are going to comply with US sanctions, and which are not. If for some reasons the market will be surprised by higher oil prices, we will have to downgrade our economic forecasts for oil importers, and upgrade them for oil exporters.”

Once sanctions are reinstated on November 4, the degree of commitment of the White House to enforce them, and of Iranian trade partners to comply with them, will become clear. Only then will the consequences on both Iran and the global oil market become clear.