After years of isolation from the global ﬁnancial market, economic sanctions against Iran were ﬁnally lifted on January 16, 2016, marking the beginning of a new era in Iranian history. Sanne Wass looks at how Iran is progressing one year on.

2016 was an eventful year for Iran. It was a year of countless memorandums of understandings, statements of intent and handshakes, as business delegations ﬂocked from all over the globe to the Middle Eastern country, looking to tap into what has been dubbed the largest market opportunity since the fall of the USSR. As of January 16, 2016, Implementation Day of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal, Iran was, on paper at least, reunited with the international ﬁnancial system.

But 2016 was also the year when reality began to set in. If the first six months were characterised by optimism and overbooked hotels in Tehran, the next six were defined by bureaucracy and overtime for sanctions lawyers and compliance departments. Hopes were gradually replaced with frustration and the realisation that opening the Iranian market would be a slow and tedious process.

For the average Iranian business, it is still difﬁcult to spot the vast positive changes that the sanctions relief was expected to bring to the country. “All the local people said that when the sanctions were lifted everything would be okay,” says Kazim Islam, export manager at Chauffagekar, an Iranian boiler and heating system manufacturer. “But we haven’t seen any effect on business.”

When GTR ﬁrst spoke to Chauffagekar in Tehran 14 months ago, the company was preparing for production and export growth as a result of the nuclear deal. One year on, they are struggling to reach their targets. “In Iran almost all exporters are facing a big problem for commercial transactions. Still, we are having problems receiving money from European customers directly to Iranian accounts or even in Dubai,” Islam says.

Some 6,000km away, in London, the corporate interest for Iran has boomed over the past year. But, there too, banking hurdles have proven one of the most challenging obstacles to turning the country’s many memorandums of understandings into actual deals.

“It’s very difﬁcult to get ﬁnance, but also it’s very difﬁcult ﬁnding a bank to assist in simply moving money in and out of Iran,” says Matt Townsend, international sanctions and trade partner at Allen & Overy law ﬁrm in London. “That is probably the biggest complaint that the corporates have. Even if they are doing it on their own balance sheets, just getting money in and out is still problematic.”

In Germany, one of Iran’s biggest trade partners before the sanctions, companies have been actively negotiating agreements with the Iranians since Implementation Day.

Edna Schöne, head of German government business at the country’s export credit agency Euler Hermes, describes the interest from German ﬁrms to enter the Iranian market as “overwhelming” since it re-opened its export cover for the country in June 2016.

As of December, Euler Hermes had covered 14 smaller, short-term LC-covered transactions, totalling a volume of approximately €337mn.

“We have had LC business with Bank Melli, Tejarat Bank, Bank of Industry and Mine and the Middle East Bank on the Iranian side,” Schöne says. “The Iranian side is being very co-operative, and we see that a lot of effort is being done, aiming at increasing transparency on their banks and their regulatory frameworks.”

She says Euler Hermes is currently reviewing 22 transactions and has issued around 81 letters of interest, covering a two-digit billion amount.

However, despite the huge corporate interest and a big effort from the German government to boost trade with Iran, no major deals have been ﬁnalised yet. “We need the banks to start extending credits,” Schöne says.

Banks are lagging behind

The reluctance of banks to re-engage in Iranian business remains one of the biggest obstacles that companies face when ﬁnalising deals in the country.

According to Iran’s central bank, 614 correspondent relations have been established with 230 foreign peer banks since Implementation Day. But so far, only small and medium regional banks have dipped their toes in the Iranian market, and very few are willing to publicise it.

“The banking sector is a relatively slow mover, I think we have to admit,” Juliette Lascoux, head of bank and regional management at Swedish bank SEB, told the audience at the GTR Nordic Region Trade & Export Finance Conference in November.

“There is no functioning correspondent banking. The few banks that are opening to Iran are doing things for their own clients, because that is the only way to have full control with due diligence, and they would not carry out each other’s transactions. The Iranians have set up banks in Europe and those are the banks which are doing real correspondent banking,” she said.

Meanwhile, the big international banks, whose support is crucial for large companies, have refrained from dealing with any Iran business at all. The most signiﬁcant barrier is the remaining US sanctions. Having seen other banks being subjected to billion-dollar penalties for alleged sanctions breeches in the past, the international banks are, naturally, worried of falling foul of US sanctions that are still in force.

“For many, if not most, of the major global investment banks, Iran remains off limits,” says Townsend, who advises companies and ﬁnancial institutions on the Iranian sanctions. “Many of the banks have internal policies which prohibit any activity in connection with Iran, including lending money to borrowers who are active in Iran. It’s going to take a while for that position to soften.”

He adds that it is almost impossible to use proceeds of a general corporate facility for any Iranian business, as lenders impose tight restrictions on how they can be spent. “It’s pretty standard that the facility agreement will prevent sums being used in connection with Iran,” he says.

There is just too much demand on Iran from corporates, and given the compliance-intensive nature of Iranian deals, the banks will not be able to cope with the potential trafﬁc. Mojgan Faratin, Trade Perspective Business Consulting.

Elsewhere, other sources tell GTR that some international banks are looking more seriously into re-establishing ties with Iran. But due to the high cost and effort of fulﬁlling compliance requirements, there is still a long way to go to a general opening to Iranian businesses.

“To ensure that they do not expose themselves to regulatory breaches and ﬁnes, there is increased documentation and information requirements which is very labour-intensive and time-consuming for all parties involved,” says Mojgan Faratin, an ex-banker who worked in trade ﬁnance for 25 years and started Trade Perspective Business Consulting last year to assist banks and companies looking to enter the Iranian market.

She says she knows of some international banks that have started to carry out Iranian facilities, but they are reserved for the banks’ “own select top clients” and are not widely publicised. “There is just too much demand on Iran from corporates, and given the compliance-intensive nature of Iranian deals, the banks will not be able to cope with the potential trafﬁc,” she says.

Finding alternative routes

Nevertheless, 2016 saw a range of positive steps towards reintegrating Iran into the international market. In February, a number of Iranian banks were reconnected to the global transaction network Swift, allowing them to resume cross-border transactions with foreign banks. Export credit agencies in many countries, including in Germany, Italy, France and the UK, have reactivated their cover policy towards Iran, whilst the Export Guarantee Fund of Iran (EGFI) has been busy settling or restructuring its debt around the world.

Although Iranian ofﬁcials have repeatedly complained that the nuclear deal isn’t yielding the expected trade and trade ﬁnance results, some progress is happening. According to Eurostat, the EU’s statistical ofﬁce, EU trade with Iran amounted to €9.11bn in the ﬁrst nine months of 2016, a 63% rise year on year.

Regardless of banking hurdles, companies continue to strike deals with their Iranian counterparts. In September, Boeing and Airbus received the US Treasury’s approval of aircraft sales to Iran. German industrial group Siemens, French oil giant Total and British telecom ﬁrm Vodafone are among other big Western companies pursuing contracts in the country.

Iranian businesses, many of which conducted trade under the sanctions regime, continue to use alternative routes for facilitating payments, as they have previously done. The Iranian manufacturer Chauffagekar, for example, receives payments from its international customers via a bank account in Dubai. “Part of the amount is used to buy some components and raw materials from foreign suppliers,” Islam says.

For ﬁrms outside of Iran, the real trouble appears when seeking to repatriate revenue generated within Iran, explains Christopher Thomson, managing associate at Dentons, who has advised a range of clients on Iran. Consequently, these companies have been increasingly forced to think outside the box to process payments where banking ties are absent.

“I have seen a European manufacturer with operations in Iran getting paid in rials and then selling its revenue stream at a bit of a discount to a company that was willing to take those rials to buy commodities in Iran, which it would then export to markets in the Gulf. So the manufacturer was able to repatriate its revenues and the exporter was effectively able to get a favourable exchange rate,” Thomson says.

“I suspect it is a common way of doing it,” he continues. “I think there may be an increased need for alternative solutions, because more companies are considering trading in Iran, and therefore there may be more companies looking to repatriate rial revenue streams.”

Townsend at Allen & Overy has similarly seen ﬁrms ﬁnding alternative ways to facilitate business in Iran, either by funding it on balance sheet, or using bartering arrangements to carry out payments. “That’s ﬁne in terms of the sales of goods and commodities in particular,” he says. “It’s much harder for major infrastructure or petrochemicals projects which typically may need project ﬁnance.”

Trust issues

While the whole world’s attention is now on the international banks, the question remains what it will take for them to make their leap onto the Iranian bandwagon.

To allay concerns about sanctions, US secretary of state John Kerry has spent months trying to encourage non-US banks and companies to engage in Iranian business, and the US Ofﬁce of Foreign Assets Control (OFAC) has issued a number of guidelines.

“Maybe on paper [the guidance] looks pretty signiﬁcant, but in reality it’s not comprehensive enough,” says Lascoux at SEB. “We have our internal lawyers studying them all the time, but it is not 100% clear. And it leaves a lot of room for interpretation, for judgement, for your own policies and own standards, and that creates operative problems.”

Maybe on paper the guidance looks pretty signiﬁcant, but in reality it’s not comprehensive enough. Juliette Lascoux

According to Nigel Kushner, a UK-based sanctions lawyer at W Legal, one major concern when dealing with Iran is of being penalised for unwittingly doing business with entities controlled by the Revolutionary Guards Corps, Iran’s powerful military force, which remains under both US and EU sanctions, and which has gained extensive economic and political power in Iran over the past few years.

“The problem is that the Iranian Revolutionary Guards have their ﬁngers in lots of pies in Iran, and it’s very difﬁcult to get robust information about it,” says Kushner, who is also director at the British-Iranian Chamber of Commerce. “To give you an example, there are seven major ports in Iran, some of them are alleged to be owned or controlled by the Revolutionary Guards. No one really knows, and apart from Bandar Abbas port, if you were to ask OFAC about it, they would stay silent and sit on the fence. The recent guidance is a great step forward but they haven’t clariﬁed everything.”

Better US guidance isn’t the only thing that banks are waiting for. Another obstacle has to do with weaknesses in the Iranian ﬁnancial system itself.

Despite easing some restrictions against the country, the international anti-money laundering standards body Financial Action Task Force (FATF) still blacklists Iran for having signiﬁcant deﬁciencies in the ﬁeld of money laundering and terrorism ﬁnancing. Many Iranian banks have much work to do to improve their compliance structures and meet international regulatory standards in order to build the necessary conﬁdence that foreign banks need.

“Iranian banks have been isolated from the international banking community for a number of years, during which there have been quite signiﬁcant developments within the regulatory area,” says Lascoux at SEB. “Based on a few meetings that we have had with Iranian banks, this is an issue which they bring up all the time. In this area the European banks could help Iranian banks meet the standard. That’s a concrete thing I see Europe has to offer.”

The Iranian government has already taken a range of steps to get Iran off the FATF blacklist, including the implementation of an anti-terror ﬁnancing law, which could be a crucial move towards expanding banking ties in the future. “Keep an eye on the ﬁnancial regulatory changes that may come through in Iran over the next 12 months,” says Townsend. “These may go some way to settling nerves.”

Trump: A new wildcard

Trump’s election as US president brings another unknown factor to the equation.

On the campaign trail, Trump had called the JCPOA agreement all things from “disastrous” to “the worst deal ever negotiated”, and he has vowed to renegotiate it.

Some experts believe there is signiﬁcant political risk attached to the election of Trump; others say there is good reason to think he won’t tear up the deal, pointing to the fact that Iran has complied with the agreement over its ﬁrst year and that it is of strategic importance to the US in other parts of the world.

Nevertheless, it is unlikely that large international banks will take comfort in his statements. Most likely, any effort to revive Iranian links will be put on pause, at least until Trump gives a clearer indication of his future plans for engagement with the country.

Irrespectively, the corporate interest for Iran continues to grow. “Regardless of the US development we still have a sustainable pipeline of transactions with small and medium enterprises,” says Schöne at Euler Hermes. “And I think that will continue the way it started since we reopened our cover possibilities. That is independent from what is happening in the US.”

Schöne is convinced that 2017 will see the ﬁrst big Iranian transactions being ﬁnalised. “In terms of long-term ﬁnancing there is a group of banks that is currently actively working on projects, and I know that they are very intensively trying to solve all the issues they have. The government and ourselves are doing our best to support them,” she says.

The election of Trump has, of course, introduced a wild card. Matt Townsend, Allen & Overy

Townsend at Allen & Overy is more sceptical, at least when it comes to the engagement of international banks. “I don’t expect to see a signiﬁcant shift amongst the big banks over Iran,” he says.

“I would expect slow but steady progress towards people gaining a better understanding of the Iranian market and getting more comfortable with doing business in Iran. I think the corporate clamour to trade with Iran, at least from businesses outside the US, will continue. The election of Trump has, of course, introduced a wild card,” he says.

One thing is certain, with or without Trump, the road towards full ﬁnancial ﬂow was bound to be bumpy. But many, especially in Iran, were taken by surprise over how long and slow the journey would be.

“In the ﬁrst half of the year, immediately after the JCPOA deal was signed, there were inﬂated expectations about what was going to be possible in the short term,” Townsend says. “Now there is a much greater realism that it’s not going to be a quick process to have inward investment into Iran. Iranians looking for inward investment are going to have to be patient.”

Back in Iran, the export manager at Chauffagekar is looking forward to the day the many issues are solved. And when that day comes, the company is ready to expand its business. “I am optimistic,” Islam ends.

GTR approached a number of international banks as well as Airbus and Boeing for this article, but none wished to comment on their engagement with Iran.

Timeline of events: Iranian sanctions relief

July 14, 2015: The Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, is reached in Vienna between Iran, the P5+1 and the EU.

January 16, 2016: On Implementation Day, the nuclear sanctions against Iran are ofﬁcially lifted. The US primary sanctions, which prohibit US ﬁrms and persons from conducting commercial transactions with Iran, remain in place, with some exceptions.

UK Export Finance (UKEF) reintroduces its cover of British exports to Iran.

January 25-28, 2016: Iranian President Hassan Rouhani signs €40bn-worth of trade deals while on a four-day visit to Italy and France. The biggest deals are a €22bn order for 118 commercial passenger planes from Airbus, a €5.7bn contract with Italian metals industry ﬁrm Danieli and a €3.5bn agreement for Italian oil and gas contractor Saipem.

During Rouhani’s visit, the Central Bank of Iran reaches agreements with France’s export credit agency (ECA) Coface and Italy’s Sace to settle Iran’s debt, enabling the ECAs to reactivate their cover to Iran.

February 17, 2016: Swift conﬁrms it has reconnected a number of Iranian banks to its system.

March 2, 2016: German industrial group Siemens signs its ﬁrst contract with Iranian group MAPNA to deliver two F-class gas turbines and generators.

April 12, 2016: Italy’s state ﬁnancing agency Gruppo Cassa Depositi e Prestiti and Sace extend nearly US$5bn worth of credit lines and guarantees for Italian exports to Iran.

May 2016: Iran’s ECA, the Export Guarantee Fund of Iran (EGFI), signs MoUs with ECAs in India, Sweden and Austria.

June 8, 2016: The US Treasury Department’s Ofﬁce of Foreign Assets Control (OFAC) makes the ﬁrst update to its guidance for dealing with Iran, intended to reassure European and other non-US banks wary of handling Iranian business.

June 20, 2016: German ECA Euler Hermes opens up coverage for exports to Iran, following Iran’s repayment of €500mn of debt.

June 24, 2016: The Financial Action Task Force (FATF), an intergovernmental body to combat money laundering and terror ﬁnancing, decides to keep Iran on its blacklist of high-risk countries, but suspends some restrictions on Tehran for a year.

September 21, 2016: OFAC gives approval for Airbus and Boeing to sell aircraft to Iran.

September 30, 2016: French carmaker Renault signs joint venture agreement with Iranian investment fund IDRO, which will include a new manufacturing plant with a capacity to produce 150,000 vehicles a year. The location has not yet been disclosed.

October 2, 2016: OFAC issues the second update to its guidelines, clarifying that non-US banks can do dollar transactions with Iran, provided that they do not pass through a US ﬁnancial institution.

October 5, 2016: French automotive manufacturer PSA Group ﬁnalises a joint venture agreement with Iran’s biggest carmaker SAIPA to produce and sell Citroën vehicles in Iran.

October 18, 2016: Vodafone enters into a partnership agreement with Iranian internet ﬁrm HiWeb to help modernise Iran’s network and IT infrastructure.

November 8, 2016: French oil giant Total signs a foundation agreement with the National Iranian Oil Company (NIOC) to help develop a large natural-gas ﬁeld, marking the ﬁrst western energy commitment in Iran.

November 9, 2016: Donald Trump, who in his campaign has vowed to renegotiate the Iran deal, wins the US presidential election.

December 1, 2016: US Congress passes a bill renewing Iranian sanctions for 10 years. The move has angered Iranian ofﬁcials, but the US says it does not violate the nuclear agreement.

December 11, 2016: Iran’s national airline IranAir closes a deal with Boeing to purchase 80 airplanes at a total cost of US$16.6bn.

South Korea’s Hyundai Heavy Industries wins a US$700mn order to build 10 ships for state-owned shipping company Islamic Republic of Iran Shipping Lines. Delivery will begin in the second quarter of 2018.

December 13, 2016: Iranian President Rouhani orders the development of nuclear-powered ships in reaction to the US extension of sanctions on December 1, which he says violates the nuclear deal.

May 17, 2017: The Iranian presidential election is due to be held. President Rouhani, who is running for re-election, has been criticised for his failure to improve the Iranian economy after the sanctions were lifted. This could give rise to the country’s hardliners, who are opposed to the nuclear deal and better relations to the West.