Buyer beware: realities of trading with Iran
Iain Stewart-Linnhe offers his opinion about the oil and gas sector in the post-sanctions era and the lessons companies must learn from the financial sector
On the face of it, the re-introduction of Iran, with over 10% of the global oil and gas market, offering premium grade supply must be a good thing. But the current status of Iran in the global marketplace post the Iran Nuclear Deal (JCPOA) has been largely overlooked, not least in terms of the non-nuclear sanctions on Iran that largely remain in place, which should continue to cause not-inconsiderable anxiety for any potential (re-)entrants into the Iranian market.
Of course, oil and gas is one area where some level of leniency has been afforded Iran in order for it to begin to re-establish itself in the global market, albeit gradually. Clearly, inter-governmental agreements and specific industry deals that avoid the most obvious sanctionable activities and major global sanctions enforcers are the most likely “safe haven” avenues for oil and gas-related investment in Iran.
Given what we have witnessed in the financial services sector, with major fines levied on major European banks for US sanctions breaches of the order of billions of dollars, Iran is hardly a market without latent risk. Particularly as there is no recognised sanctions database in Iran that market (re-)entrants (or their advisors) can refer to when doing fundamental due diligence at the outset of negotiations to any deal. On the positive front, no foreign market entrant will be looking to engage in commercial activity that would be linked to sanctionable, illicit activities.
But this would be to underplay significantly the prevalence of sanctioned Iranian entities such as the IRGC in almost every area of Iranian commercial activity – which threatens to cause major sanctions penalty implications for companies down the line who find themselves inadvertently caught up in deals linked to covert front companies representing sanctioned Iranian entities or individuals.
The major difficulty lies in the transactional side of any commercial activity in Iran. Clearly, US dollar transactions cannot be countenanced given the continuing US restrictions on Iran. The Financial Action Task Force (FATF), the global body and standard setter which counters terrorist financing and money laundering, has expressed grave concerns over Iran and North Korea as presenting a major threat where financial transactions are involved. And, let’s face it, any deal will involve a financial transaction of some sort.
There has been much coverage of the opportunity of the gradual re-opening of the Iranian market, but far too little of the major non-nuclear sanctions that remain. Proceeds of deals conducted with the Iranian market in whatever industry – in particular, one such as oil and gas, with its exponential returns even in a relatively low-priced market – will be carefully monitored by sanctions enforcers. Which means that two major areas are likely to be tested by global sanctions enforcement for the first time. Namely, non-financial activities such as oil & gas, and deals inadequately signed off by non-experts.
To date, financial services has borne the major brunt of severe sanctions breaches, with billion dollar penalties witnessed in recent years. What is marked is the prevalence of major European and non-US companies to be on the receiving end of major fines, seemingly unwilling to countenance that a non-European, non-national sanctions enforcement body is in a position to apply penalties on a cross-border, extra-territorial basis. The notion that legal parameters and censure should not extend beyond national borders – which is highly prevalent in Europe and the Middle East – is, unfortunately, quite out of touch with the post-9/11, to some extent post-Global Financial Crisis (GFC) stance that the us and its allies have adopted.
Proceeds of oil and gas deals will undoubtedly be an area of scrutiny in the months and years to come, as these will be scrutinised by global sanctions enforcers such as the US, focused on preventing sanctionable, illicit activities. It is therefore highly likely that there will be little “first-mover advantage” for firms who might have engaged prematurely in the Iranian market from July 2015. Particularly if they have taken poor advice from the many firms or advisors now flooding the market, unfamiliar with the global reach of sanctions enforcement. Many will feel that avoidance of US dollar transactions will represent an ultimate workaround to existing US sanctions. Given the fundamental thrust of US sanctions enforcement and reach, changing currencies may not always be a realistic, robust or viable workaround.
In many ways, the greatest danger lies in an over-reliance on firms and advisors who claim to have been engaged with the Iranian market on an almost continuous basis in defiance of sanctions, as many of the activities conducted during this time have been well outside of recognised legal and ethical parameters. In terms of any workable risk/reward assessment, market entrants must gauge the relative merits versus the potential dangers of doing business in an environment that has still to get up to speed in terms of fundamental business parameters. However, renewed trade relations with in Iran present an undoubted opportunity provided it is approached the right way.
Opportunities for the oil and gas industry ought to abound in a global economy desperately looking for value and growth in new markets. There will no doubt be plenty of openings in this market for commercial entities wishing to engage with the Iranian market, but there is a marked lack of expertise on the long reach of global sanctions enforcement, and a worrying dilemma facing firms dealing with a country that has effectively been isolated from the global economy for the best part of 35 years. So this market is best approached with foresight, guarded optimism and caution.