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The news that a Joint Comprehensive Plan of Action (JCPOA) framework agreement had been secured between the five permanent members of the United Nations’ Security Council (China, France, Russia, the UK, and the US) together with Germany (the so-called P5+1) and Iran was almost universally welcomed when it emerged on 2 April. Both the Joint Statement by EU High Representative Federica Mogherini and Iranian Foreign Minister Javad Zarif and the US State Department’s factsheet revealed agreed details addressing enrichment, inspection, and transparency of the Iranian nuclear programme.
The statements also revealed that Iran will receive US, EU, and UN sanctions relief ‘if it verifiably abides by its commitments.’ But can the P5+1 deliver on the sanctions relief they are holding out? Or will the banking sector, heavily fined in recent years for breaching the Iranian sanctions regime remain risk-averse, thus restricting opportunity for economic growth, calling into question the concessions granted by the Iranian leadership under the JCPOA?
The history of sanctions against Iran is lengthy. The US has imposed restrictions on activities with Iran in various forms since 1979 following the seizure of the US Embassy in Tehran. In 2006, the UN passed UN Security Council Resolutions 1696 and 1737, the latter imposing the first round of a series of nuclear programme-related sanctions that increasingly isolated Iran from international trade and financial markets. This process culminated in 2012 with the US-enacted Iran Threat Reduction and Syria Human Rights Act that enforced wide ranging sanctions on activities related to Iran’s energy and financial sectors, the imposition of an EU oil embargo, and the disconnecting of Iranian banks from SWIFT, the lynch pin electronic messaging system that facilitates global money flows.
The cumulative effect of these measures has been drastic. Newly elected President Hassan Rouhani entered office in June 2013 facing economic calamity. To reverse the downward economic spiral, sanctions, which had severely constricted Iran’s economy, needed to be urgently eased. By May 2013, Iran’s oil exports had fallen to just 700,000 barrels per day compared with 2.2 million in 2011, costing the country $4-8 billion in lost revenue per month. According to the World Bank, unemployment was estimated to be as high as 20% with Iran’s youthful population particularly badly affected; inflation ran as high as 45% year-on-year; and GDP contracted 5.8% in 2012/13.
Against this backdrop, in November 2013, the P5+1 and Iran signed a Joint Plan of Action (JPOA) which ‘reached a set of initial understandings’ with regards to Iran’s nuclear programme, the first meaningful limits Iran had accepted. In return, the P5+1 provided ‘limited, temporary, targeted, and reversible sanctions relief to Iran.’ The initial six months’ of relief was extended in July and November 2014.
The easing of sanctions has undoubtedly delivered some economic relief to the Iranian economy. Since the JPOA was signed, the rate of GDP contraction in Iran has slowed to 1.7% for 2013/14 and is forecast to grow at 1.5% in 2014/15 and oil exports have risen to 1.2 million barrels per day. But despite the provision of some sanctions relief, the programme ‘is structured so that the overwhelming majority of the sanctions regime, including the key oil, banking, and financial sanctions architecture, remains in place.’ Furthermore, the recently-signed JCPOA underlines that US sanctions will ‘snap-back…in the event of significant non-performance’ by Iran.
Once Bitten, Twice Shy
The efforts to find some form of agreement to restrict Iran’s ability to develop nuclear weapons should be welcomed, yet an equally considerable challenge looms. How will those nations that have been pressing Iran to do a deal ensure they can deliver the agreed sanctions relief? The challenge facing President Obama has been underlined by letters sent both to him and President Rouhani of Iran. Even if the positive progress signalled by the signing of the JCPOA in Lausanne continues and the tangle of sanctions imposed by the United States, United Nations, and European Union is slowly unpicked, the Iranian leadership, and more importantly the Iranian people, will want to see real, near-term economic improvements.
And herein lies the rub. Iran should be a promising business opportunity. It has a young population of 80 million, significant hydro-carbon resources that attract international companies for extraction, technical support services, and shipping (which requires insurance), and manifold opportunities for capital investment in its rundown economy. Thus key to the wished-for economic revival is the reintegration of Iran into the global economy, a reintegration that will rely heavily on global, private sector banks as it is reconnected to the international trade and finance community.
Yet this is a community that has suffered considerable financial pain as a result of Iranian sanctions-related fines handed down in recent years by lawmakers. The roll call of names is growing: BNP Paribas, Schlumberger, Commerzbank, and Standard Chartered have all faced penalties.
If Iran’s economic fortunes do not steadily improve, the concessions granted by its leadership under the JCPOA will inevitably be called into question. Thus whilst the two sides already dispute the precise nature and mechanism of sanctions relief, of far more ultimate relevance to the future of relations will be the willingness of these risk-averse financial institutions to re-engage with, and facilitate investment in, an economy that has cost them many billions in fines and where, for the foreseeable future, investment and engagement will be fraught with risk as sanctions related to terrorism and human rights abuses will remain in place.