Temporary Easing of Sanctions on Iran to Go Into Effect Jan. 20, 2014

HIGHLIGHTS:

• The accord reached between Iran and the P5+1 provides limited sanctions relief for Iran in exchange for a halt to its nuclear development program. It is intended to provide an interim compromise to give negotiators an opportunity to conclude a more permanent agreement.
• Outside of Iran, the broadest impact will likely be for non-U.S. companies involved directly or indirectly in shipping oil, petrochemicals and auto parts, as the relief reopens major areas of trade with Iran.

The accord reached between Iran and the five permanent members of the United Nations Security Council (the United States, China, Russia, Great Britain and France) and Germany (the P5+1) in November 2013, becomes effective Jan. 20, 2014, for a six-month interim period. The accord provides limited sanctions relief for Iran in exchange for a halt to Iran's nuclear development program. While some of the details regarding the specific scope of sanctions relief are not yet public, this alert provides initial information about the scope and impact of these measures.

Negotiations Centered Around IAEA Inspection and Oversight

On Nov. 24, 2013, the P5+1 reached an interim accord with Iran called the Joint Plan of Action. This accord is intended to provide an interim compromise to give negotiators an opportunity to conclude a more permanent agreement. For the past two months, the parties have been negotiating over the technical details with a particular focus on the inspection and oversight of Iran's nuclear facilities by the International Atomic Energy Agency (IAEA). On Jan.12, both sides signaled that these details were ironed out, thus enabling the accord to take effect on the agreed date of Jan. 20, 2014.

Under the accord, Iran will (i) cease enriching uranium beyond 5 percent; (ii) begin diluting or converting to oxide existing weapons-grade fuel; (iii) cease installing new centrifuges; and (iv) accept enhanced monitoring of its nuclear facilities by the IAEA.  

Summary of Limited Sanctions Relief

The P5+1 member states and the European Union (EU) will take several steps to provide temporary and limited sanctions relief for certain sections of Iran's struggling economy. The major relaxations include:

• suspending U.S. and EU sanctions on Iran's petrochemical exports as well as "Associated Services," which are the insurance, transportation and finance services of third parties necessary to carry out the transactions
• suspending U.S. and EU sanctions on Iran's trade in gold and other precious metals and on Associated Services
• suspending U.S. sanctions on Iran's automobile industry (e.g., suspending sanctions on the importation of goods to Iran for use in the production of cars, trucks, motorcycles and other vehicles)
• increasing the EU prior authorization thresholds for transactions in non-sanctioned trade
• easing U.S. sanctions on Iran's civil aviation sector, including Iran Air, by allowing the expediting of the licensing process for the supply of spare parts to Iran, and for safety-related inspections and repairs in Iran
• establishing a financial channel to facilitate humanitarian trade using Iran's oil revenues held abroad  
• allowing Iran to repatriate approximately $4.2 billion in revenue from oil exports, currently frozen in foreign accounts, on a monthly schedule over the next six months (i.e., approximately $700 million per month)
• waiving requirements for further reductions in oil imports from Iran from those countries currently importing oil from Iran under waiver (i.e., China, India, South Korea, Taiwan and Turkey), and expressly authorizing Associated Services for these exports

Internal Politics May Derail the Process

On the Iranian side, it is unclear whether the government of Iran will live up to its commitments to open its facilities to inspections. Further, while the goal of these negotiations has been focused on preventing Iran from developing nuclear weapons, the U.S. remains very concerned about the flow of weapons and support from Iran to terrorist groups, such as Hezbollah in Syria and Lebanon.

In Washington, D.C., notwithstanding express threats of a presidential veto, the U.S. Congress may move forward with new sanctions legislation. In particular, 58 senators have signed on as co-sponsors of the Nuclear Weapons Free Iran Act of 2013 introduced in December 2013. This act would impose additional sanctions on Iran and almost certainly derail the current rapprochement.

Tips for Compliance

While the details of relaxations are not yet published, companies contemplating or being asked to participate in transactions falling within the relaxation should consider:

• These are interim measures that expire July 19, 2014, unless reauthorized. Therefore, any contract should be of limited duration and have express provisions protecting a company in the event sanctions are re-imposed.
• Given the tentative nature of these relaxations, do not expect that all banks and counterparties will change their policies, which in some cases generally prohibit dealings with Iran.
• Companies that are publicly traded in U.S. financial markets will continue to have reporting obligations relating to business transactions with Iran, even where such conduct does not breach sanctions.

Impact of Iran Sanctions Relief

Outside of Iran, the broadest impact will likely be for non-U.S. companies involved directly or indirectly in shipping oil, petrochemicals and auto parts, as the relief reopens major areas of trade with Iran. Further, implementing orders should clarify which Associated Services are allowed, giving some comfort to non-U.S. marine carriers, insurers and banks that may be asked to participate in such transactions. In contrast, other than relaxations relating to civil aviation parts and repairs, there is little change for U.S. companies and their foreign subsidiaries.

The U.S. has had positive results in using the measured relaxation of sanctions as an effective policy tool in Libya and Burma. Hence, the concept that these limited measures with Iran could serve as the basis for a more comprehensive and permanent accord has some recent precedent. Further, while there is a risk this process will be derailed by internal politics within the U.S. or Iran, failure of this process likely means not only new crippling sanctions on Iran, but also the real possibility of military action against Iran.