A hot issue to be watched closely

The rehabilitation of the Iranian economy has begun: new opportunities for German and American companies
By Dr. Hanns Christoph Siebold and Dr. Mark C. Hilgard

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Background

On July 14, 2015, the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States), the European Union and Iran reached a Joint Comprehensive Plan of Action (JCPOA) to ensure that Iran’s nuclear program will be solely used for peaceful purposes. The JCPOA took effect on October 18, 2015, at which point participants in the agreement began taking the steps necessary to implement their JCPOA commitments.

On January 16, 2016, the International Atomic Energy Agency (IAEA) verified that Iran had implemented the key nuclear-related measures described in the JCPOA, and the US Secretary of State confirmed the IAEA’s verification. As a result of Iran verifiably meeting its nuclear commitments, the United States lifted its nuclear-related secondary sanctions on Iran as described in the JCPOA. This step signified Implementation Day of the JCPOA and thus the start to the rehabilitation of the Iranian economy.

Setting up business in Iran

The sanctions had affected the export and import of goods and associated ­services in the finance, banking, insurance, energy, petrochemical, shipping, shipbuilding and automotive sectors as well as the trade in gold and other precious metals. In addition to the lifting of these nuclear-related secondary sanctions, the United States removed more than 400 individuals and entities from the List of Specially Designated Nationals and Blocked Persons (SDN List) issued by the US-Department of the Treasury’s Office of Foreign Assets Control (OFAC) as well as from the Foreign Sanctions Evaders List (FSE List) and the Non-SDN Iran Sanctions Act List (NS-ISA List). Starting on Implementation Day, non-US persons have no longer been subject to sanctions for conducting transactions with any of the removed entities.

Companies wanting to set up business in Iran do, however, need to be aware that the lifting of sanctions only affects non-US persons. Since the US domestic trade embargo on Iran remains in place, US persons – including US companies – are still broadly prohibited from engaging in transactions or dealings with Iran and its government. Apart from certain exceptions, such as the export of airplanes solely for civil use as well as the import of specific Iranian products, most restrictions on persons under US jurisdiction remain in place.

As a result, any business project with Iran needs to be carefully checked for possible applicability of US law as well as for adherence to German law. Especially when it comes to concrete contract negotiations with Iranian partners, German companies and persons need to be aware of the snapback mechanism in the JCPOA, which foresees reinstatement of all lifted secondary sanctions should Iran violate its nuclear-program-related commitments.

In connection with Implementation Day, the OFAC issued several documents, including “Guidance Relating to the Lifting of Certain Sanctions,” and answers to frequently asked questions. These provide essential information for companies seeking to establish business relations in Iran.

German business relations with Iran

Implementation Day marks an important date in the history of business relations with Iran, from both US and German perspectives. As a result of the nuclear deal, German exports to Iran are expected to quadruple within the next few years. It will, however, be a tough market for German companies as they face competition from Chinese, Korean, Middle Eastern and other rivals that filled the void left by Western companies prevented from trading under US-led sanctions against Iran.

But whether industry heavyweights or one of the thousands of smaller, family-owned firms, German companies are now eager to reclaim their once-dominant role in exports to Iran. Even today, products and services “Made in Germany” enjoy a good reputation among Iranian customers.

Historical facts and figures reflect this dominant role and outline the changing shape of bilateral trade relations between Germany and Iran over recent years. Beginning with an export sum of about €1.9 billion in 2001, volume continuously increased in the years following. After topping out at €4.4 billion in 2005, German exports to Iran slumped to a low of €1.8 billion by 2013. Apparently anticipating the easing of sanctions, exports jumped 30 percent last year. These were driven by sales of machinery, agricultural products and pharmaceuticals.

The strong demand for modernization in almost every branch of the Iranian economy suggests great market potential for German companies operating in various business areas. Planned modernization of the oil industry offers German machinery and equipment producers in particular substantial market opportunities, with Iranian Minister of Petroleum Bijan ­Namdar Zangeneh mentioning multimillion-euro projects for the modernization process.

Outlook

Some business leaders forecast German exports to Iran could leap to more than €10 billion “in the medium term” – a significant jump from the €2.4 billion last year that takes into consideration the automotive, chemical, healthcare and renewable-energy industries as other likely beneficiaries.

Immediately following conclusion of the JCPOA in July 2015, German Minister for Economic Affairs and Energy Sigmar Gabriel travelled to Tehran as a first step in paving the way for German companies. Having been criticized for this trip at an earlier point, Gabriel defended the pursuit of economic rapprochement. According to Gabriel, the guiding principle should be “contacts instead of conflicts.” With Iran having met its nuclear commitments, there was no need to continue avoiding formerly restricted business relations.

German companies are happy about the end to economic and financial sanctions against Iran, an important trading partner in the past. Expectation for new market opportunities and a targeted return on former export volumes have created an optimistic mood among German business leaders.

This progress proved reason enough for AmCham Germany’s Corporate and Business Law Committee to ask top US officials to provide insight into the present situation: Andrew Keller, Deputy Assistant Secretary for Counter Threat Finance and Sanctions at the US Department of State, Bureau of Economic and Business Affairs, for example, delivered an address titled “Update on US Sanctions with Special Focus on Iran” at a well-attended committee meeting in early February. Our committee plans to closely watch developments regarding the lifting of sanctions and continue providing firsthand information on this hot issue.

hanns.christoph.siebold@morganstanley.com

mhilgard@mayerbrown.com

www.amcham.de/public-affairs/public-affairs-overview/law/