Credible sanctions relief will be a crucial factor in convincing Iran to sign a nuclear accord, according to a new report by the Center for a New American Security. Elizabeth Rosenberg argues that overcoming private sector concerns about the durability of a deal will be more difficult than the legal work of removing sanctions. Uncertainty “stems from decades of illicit Iranian activities and isolation from international trade and financial transactions, and has resulted in an extremely cautious culture of compliance with Iran sanctions among private companies,” according to Rosenberg. The report warns that foreign investors will not immediately flood Iran the day after a deal. If banks and businesses, however, are too slow to begin transacting with their Iranian counterparts, Tehran “will see little incentive to implement its end of the bargain.” The following are excerpts from the report.
July 14, 2014
Relief in Practice: The Role of the Private Sector
After years of Iran’s isolation and record of illicit activities, companies and banks are wary of the Iranian brand. They want to avoid bad business bets and the massive civil and criminal penalties that the United States has imposed on companies for violating sanctions. Notwithstanding these concerns, there is considerable investor enthusiasm for new business opportunities in Iran. The challenges to achieving these opportunities, however, will be a major speed bump on the path to expanding economic ties between Iran and the international financial system. They will also be a major impediment to the provision of credible sanctions relief to Iran. Though the P5+1 may create avenues for sanctions relief as part of a nuclear deal with Iran, the P5+1 cannot direct the manner in which the private sector deals with Iran or the speed at which that will occur.
International banks represent the most cautious commercial sector when it comes to dealing with Iran. They are extremely careful about the legal and reputational risks that go along with sanctions evasion. Banks have paid a very high price for violating sanctions, both in financial penalties and in reputational damage. In June, the French bank BNP was fined $9 billion by U.S. regulators and ordered to temporarily halt U.S. dollar clearing. This followed a $1.9 billion penalty for HSBC in 2012 and penalties on Standard Chartered Bank, the Royal Bank of Scotland and others. Overcoming the reticence of international banks to do business with Iran will require the P5+1 to issue clear regulatory guidance about which multilateral sanctions are lifted, and extensive signals about political support for a deal.
Additionally, U.S. officials will need to conduct major outreach efforts to foreign banks and their regulators to explain the terms of a final deal and how U.S. sanctions on foreign entities will function under such an agreement. These steps, while technical, are essential to bolstering the credibility of sanctions relief offered to Iran under a nuclear agreement and the durability of a deal.
Laying the Groundwork for Future Business
Iran is working hard to entice European companies to invest in Iran, and possibly U.S. companies as well, given their access to sophisticated technology and project management experience. Iran recently cancelled an oilfield development contract with China National Petroleum Corporation due to poor performance, a move that will free up energy sector opportunities for preferable European service providers. Iran needs substantial international energy company investments to stem high rates of production depletion, increase low rates of oilfield recovery and to significantly expand natural gas production for the export market.
Navigating Sanctions Relief Under a Final Nuclear Deal
Navigating Iran sanctions under a potential final deal will be more, not less, complicated than it is at present. Sanctions prohibitions will change and incrementally lessen over the period of deal implementation. Penalties for violations, however, will not. The business environment in Iran is challenging, corrupt in certain sectors and unfamiliar to most potential international investors. Several economic sectors, including the ports, construction and energy sectors, are dominated by entities with extensive experience in illicit activity. This includes proliferation transactions as well as money laundering or support for terrorism. These factors will increase the burden and cost of due diligence on foreign investors to ensure that they do not inadvertently partner with sanctioned entities or engage in activities prohibited by sanctions. This will slow investment in Iran and increase the cost of doing business there, two factors that will directly undermine the credibility of sanctions relief to Iran.
As the P5+1 and Iran enter the final stage of negotiations over Iran’s nuclear program, they will wrestle with the most challenging issues such as the components and pace of calibrated multilateral sanctions relief under a potential deal. Successful diplomacy with Iran requires a coordinated approach from the international community and major outreach to the private sector to offer sanctions relief on paper and in practice. Congress must also play a supportive, leadership role in implementing and overseeing a potential nuclear deal. These efforts will be critical to maintaining the P5+1’s collective economic leverage over Iran and to keep it moving towards successful, long-term implementation of a nuclear deal.
Sanctions on Iran will be in place for a very long time to come, even in a best-case outcome of the nuclear talks. Taking the necessary steps under a potential deal to delineate sanctions relief from continued restrictive measures for the international private sector and national regulatory authorities is crucial to enhance the durability of a deal. It is also fundamental to clarifying and preserving the architecture of financial sanctions if negotiations fail and a buildup of sanctions is needed. Defense of national security necessitates rigorous efforts to adapt sanctions to support diplomatic aims. This has never been truer than the present moment, as the international community faces the potential for a final nuclear agreement with Iran.
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Elizabeth Rosenberg is a Senior Fellow and Director of the Energy, Environment and Security Program at CNAS. She was a panelist at USIP’s event on what the United States might cede on sanctions for a deal. Click here for a video and rundown of the main points.