Sanctions eased but Japan Inc. treads warily in return to Iran

by

Staff Writer

Optimism prevailed when United Nations sanctions against Iran were lifted in mid-January. Since the historic nuclear deal was reached last July between Iran and six global powers, companies, including those in Japan, had been vying for economic opportunities in a Middle Eastern market rich in natural resources.

But Japanese firms are still taking a wait-and-see approach because U.S. restrictions remain against financing businesses in Iran.

The nuclear deal laid the groundwork for global investment in the economically challenged country. It gives Tehran access to its frozen assets, and the country can now engage in oil and gas sales, which would bring foreign capital.

International financial institutions can resume their operations since the United States lifted the sanctions imposed on non-U.S. banks doing business with Iran.

Global investment is likely to also gain momentum at a time when Iranian President Hassan Rouhani is projected to strengthen his political power base following elections last month for the Iranian Parliament and the Assembly of Experts, a clerical body that appoints the supreme leader.

Rouhani, who came to power in 2013, wants to jump-start Iran’s devastated economy by seeking more foreign investment.

“Rouhani’s government is interested in how smoothly foreign companies will actually enter the Iranian market,” said Sachi Sakanashi, a senior researcher at The Institute of Energy Economics, Japan. “At issue is the speed. If the speed of investment is too slow, President Rouhani could lose his support base.”

Chinese President Xi Jinping became the first world leader to visit Iran after the historic nuclear deal was completed, in a bid to deepen China’s footprint in the Iranian oil and natural gas sector. The Japanese government was quick to follow.

Soon after Tokyo lifted its sanctions, Japan signed a bilateral investment pact in early February. Tokyo also announced a business facilitation mechanism under which the Iranian government would guarantee $10 billion in investment projects financed by the Japan Bank for International Cooperation (JBIC) and insured by Nippon Export and Investment Insurance.

Japanese companies welcomed the move as the government’s backing would make it easier for them to re-enter the Iranian market and launch big projects.

Holding a large stake in Iran’s Azadegan oil field, Japan had been on good terms with Iran until sanctions were imposed by the United Nations in 2006.

The U.S., on the other hand, severed diplomatic relations with Iran in 1980. The U.S. sanctions on Iran in 2010 led Japan to substantially cut its stake in Azadegan and sever economic ties with the country.

Since the historic nuclear deal was reached, however, a group of Japanese companies made a trip to Iran last November to attend an Iranian government investment seminar. Eying a market of 78 million people, the Japan External Trade Organization (JETRO) also organized three trips to Tehran for Japanese companies. Five investment seminars that JETRO has hosted since the nuclear deal was agreed were fully booked.

Yet few Japanese companies have signed official business deals. Risks and uncertainties remain for big-ticket projects, especially when banks have not officially resumed business to facilitate such projects. Even though Washington lifted sanctions on non-U.S. banks, experts say banks will still face challenges in financing big projects unless the U.S. lifts sanctions entirely.

“Most of the banks are adopting a very cautious approach, even though they are under, we are all told, some pressure from the (Japanese) government to move the process on,” said Jonathan Silver, head of the law firm Clyde & Co’s operations in the Middle East and North Africa. Silver gave a talk at the Iran infrastructure seminar at JETRO and met with Japanese companies in Tokyo last week.

For one, companies still face U.S. sanctions if any American citizen or green card holder is involved in deals with Iran. The U.S. still prohibits Americans and American companies from engaging in business with Tehran.

Since the U.S. government keeps other sanctions on Iran’s human rights policies and support for terrorism, companies face due diligence that requires them to determine if anyone they deal with in Iran is listed as “Specially Designated Nationals” under the U.S. Treasury Department’s Office of Foreign Assets Control.

The U.S. sanctions also cover any company that is owned 50 percent or more by a blocked person or entity, even if the company itself is not on the SDN list.

Especially difficult is the case for the Islamic Revolutionary Guard Corps, as the branch of Iran’s armed forces is on the list and has interests throughout the Iranian economy.

Lawyers say due diligence can prevent companies from being penalized, but the process may be extremely difficult because Iranian public records cannot be trusted.

“In many respects, it (Iran) is in a different position from the rest of the world, particularly in relation to compliance and governance. That sort of culture does not exist in Iran,” said Silver.

The stakes are also high when a company does do business with Iran.

BNP Paribas, France’s largest bank, was fined almost $9 billion by the U.S. government after it admitted it concealed banned transactions from 2004 to 2012 involving Sudan, Iran and Cuba.

“In fact, you might say (the nuclear deal) is a nightmare for most banks because with anticipated upticks in trades, there is much more money moving through the system that might somehow be connected with Iran,” said Patrick Murphy, a Dubai-based partner at Clyde & Co. who was also at the JETRO seminar in Tokyo. “That’s why there is very, very slow movement for banks.”

Some Japanese banks have offices in Iran, but if they do not resume regular operations, it would be difficult for JBIC to start projects. A JBIC spokesman said that in order for JBIC to finance a project, commercial banks have to participate.

“We can start considering each project only when a remittances system is established,” the spokesman said.

There is also the possibility that sanctions could be re-imposed if Iran violates the agreement. Yet experts say the chances of a breach are fairly slim as Iran has invested a lot of political capital in the nuclear deal and it has no desire to jeopardize the benefits it can gain from future trade.

This year’s U.S. presidential election also poses potential risks for investments in Iran. The Republican front-runner, Donald Trump, slammed the nuclear deal. Democratic front-runner Hillary Clinton supported the deal, but she called for new sanctions after a defiant Iran carried out a missile test last week.

Experts said the next U.S. president could re-impose sanctions that could cause problems for companies doing business in Iran.

“Everybody is looking at Iran, but everybody is cautious,” said Richard Thompson, editorial director at the Middle East Economic Digest.