Post-sanctions risks & opportunities for international companies in Iran

To:

Al-Monitor Pro Members

From:

Dr. Bijan Khajehpour

Managing Partner, Eurasian Nexus Partners, Vienna, Austria

Date:

Sept. 9, 2022

Bottom Line:

Even after a restoration of the JCPOA and a lifting of sanctions, Iran will remain a high-risk, high-reward market for Western enterprises. Though risks emanating from sanctions will be mitigated, other challenges will remain. A risk-management strategy will be a must for interested companies.

Background Facts:
  • Iran and the other signatories of the Joint Comprehensive Plan of Action (JCPOA) could agree on and sign a deal that will pave the way for a restoration of the JCPOA within the next few months.
  • One geopolitical factor, i.e. the new dynamic in the global energy market as a result of sanctions on Russia, has compelled Europe to look for alternative sources of energy to reduce its dependence on Russia. Iran could offer a medium-term prospect of providing energy to Europe. As such, once sanctions are lifted, international (especially European) energy companies would be interested in investing in and developing Iranian oil and gas projects. Such investments would allow companies to secure medium- to long-term supplies of Iranian oil, gas or petroleum products.
  • If a deal is signed, Tehran would also be interested in attracting European technology to a number of sectors, especially upstream oil and gas, petroleum products, gas-based industries including petrochemicals, renewable energies, telecom, automotive industry etc.
  • Based on past experience, Tehran is likely to invite international companies to participate in various tenders to lead projects to materialize the country’s vast potential in the energy sector as well as various industries.
  • However, Tehran’s main concern will be the potential re-introduction of US sanctions under a future Republican president, hence disrupting the implementation of the targeted projects. This happened to the major gas project that Iran signed with the French energy giant Total in 2016, which was abandoned in 2018 due to US sanctions. Therefore, Iran will look for project constellations that are less vulnerable to future US pressure.
  • This explains why Tehran has added a demand in the nuclear negotiations that Washington should grant a two-and-a-half-year winding-down period, in case of a renewed US withdrawal from the deal. This means that companies investing in Iran after the lifting of sanctions would be exempt from reinstated penalties for the mentioned period, should Washington decide to re-introduce its measures in the future. This Iranian request is clearly designed to protect those international firms that decide to enter its projects.
  • Evidently, the restoration of JCPOA will reduce the sanctions risk for international companies. However, many political, legal, operational and security risks will remain that international investors will have to take into account. Most of these risks are manageable, and international entities operate in other jurisdictions with similar risks, but it is important to appreciate and manage them accordingly.
  • One key challenge in Iran, which can also be seen as a tool to manage risks, is the prevalence of informal and ambiguous power relations. Navigating this ambiguity hand in hand with managing the mentioned risks will require a comprehensive strategy, including selection of domestic and international partners, engagement of stakeholders, etc.
Alternative Scenarios:

Scenario 1: Iran invites Western companies to bid for major investment projects

Once sanctions are lifted, Iran is likely to introduce a number of projects that will be open to international investors. Tehran will offer commercial incentives and also protect the investment through the legal mechanism called Foreign Investment Promotion and Protections Act (FIPPA). However, it will insist that the foreign company has to select an Iranian partner. The partnership with a local contractor may turn out to be challenging, both on an operational level and also on a legal level, as any partnership with entities that continue to be on sanctions lists (such as IRGC-affiliated entities), will bring about the risk of US or even EU sanctions. Therefore, many Western companies may shy away from this constellation, though a number of such partnerships have proven to be successful.

Scenario 2: Iran encourages triangle scenarios to reduce vulnerability

In order to minimize the risk of the project ending due to the withdrawal of the Western party, Tehran may look at consortia including a Western, an Iranian and a third-party (e.g. Chinese) entity. This structure will be designed so that only a manageable amount of technology and project management skills are assigned to the Western contractor. In other words, the expectation from the Western partner will be to fill some of the technological gap in the project, without becoming the leading implementer of the project. In this scenario, the vulnerability of the project will be reduced, but a number of other risks will emerge for the Western company, especially an interculturally challenging partnership with two entities plus all the mentioned risks prevalent in the Iranian market. Furthermore, the upside of this scenario (i.e. medium- to long-term energy supplies) will be limited.

Scenario 3: Iran will focus on trade transactions with Western enterprises

A third thinkable scenario would be that Tehran foregoes the potential of Western investments in the country and focuses on securing technology by acquiring Western equipment needed in projects. This would translate into projects either being led by Iranian or by Asian or Russian contractors, with Iran demanding that the equipment should be Western-made. From the perspective of Western companies, trading with Iran would be less risky, but such transactions would not generate any medium- to long-term opportunity to secure energy supplies from Iran.

Conclusion - Most Likely Scenario:

It is likely that all three above scenarios emerge in Iranian projects after the lifting of sanctions. Which scenario will be used more extensively will depend on the willingness of Western companies to participate.

A potential lifting of the sanctions will certainly make the risk profile of Iran more manageable, but international investors should analyze and be aware of the downsides and upsides of their potential involvement in the market. Geopolitical realities will shift the dynamic risk-reward balance in the market and require new strategic deliberations at every turn.

Contributor Background:

Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - eunepa.com - a Vienna-based international consulting firm. He also sits on the board of the Europe Middle East Research Group. He is considered an expert on geopolitics of energy and the Iranian economy and energy sector.  

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