World  Business and Economic Analysis 

Iran’s latest MoUs: shipping, power and export finance
 by Melodie Michel

The Iranian government has been busy restoring trade and investment relationships since the lifting of nuclear-related sanctions on January 16, 2016. Here is a round-up of the latest economic agreements signed by the country:

Shipping: Oman and Switzerland come on board

Swiss-based shipping company MSC has signed an MoU with the Iran Ports and Maritime Organisation (IPMO) to increase port calls at Bandar Abbas, Chabahar and Bandar Imam. The agreement also involves MSC vessels, which returned to Iran in January after six years, carrying shipments to Iran from international ports, and effectively opens up Iranian investment opportunities to Swiss shipping firms. It was agreed during a three-day visit by Swiss President Johann Schneider-Ammann at the end of February.

Still in the shipping sector, Oman’s Port of Salalah has signed an MoU with Iran’s Shahid Rajaee and Chabahar Ports, to develop and promote an all-water route between the three ports, representing a roundtrip of 2,152 nautical miles. This will ultimately support increased trade and investment between the two countries.

Power: Far-reaching deal with Siemens, collaboration with Ukraine

On March 2, Siemens signed a number of agreements with the Iranian MAPNA Group in order to modernise the country’s energy infrastructure. The MoUs include a licence agreement under which MAPNA will acquire technological know-how to manufacture Siemens F-class gas turbines in Iran. According to Siemens, the parties will co-operate to deliver more than 20 gas turbines and associated generators over the next decade.

As a first project under the licence agreement, the companies signed a contract for the Bandar Abbas power plant, for which Siemens will deliver two F class gas turbines and generators.

The two companies also signed an MoU to jointly develop the roadmap for the extension and optimisation of the overall Iranian power and electrification system, including power generation, transmission and distribution topics, but also providing solutions including EPC (engineering, procurement and construction) as well as financing options.

A Ukrainian delegation arrived in Tehran on Monday (March 7), and had reportedly signed a number of agreements with the Iranian government, including one aiming to resume bilateral energy co-operation. This will help increase the efficiency of Iranian power plants and high-voltage transmission lines.

The two countries are also said to have signed an MoU for the expansion of economic co-operation in the fields of agriculture, metals, mining and aviation.

Export finance: Germany and UK work towards reopening

Iran’s export credit agency (ECA), the Export Guarantee Fund of Iran (EGFI), and its counterpart, UK Export Finance (UKEF) signed an MoU on March 5 to enhance trade and economic co-operation between the two countries.

Under the MoU, the two ECAs will work together to identify opportunities for trade in capital goods, equipment and services. The agreement also allows the parties to co-finance and co-guarantee financing for projects or contracts in third countries involving British and Iranian exports.

Iranian media have also reported that Iran had agreed to clear its US$560mn of cover debt with Germany’s ECA, Hermes, by September, before Germany resumes providing guarantees for German exports to the country.

These latest agreements follow the ones signed at the end of January with France’s Coface and Italy’s Sace on outstanding payments owed by Iranian debtors due to the sanctions that largely blocked money transfers. They are expected to pave the way for the reopening of ECAs’ guarantee lines and a return to business as usual in Iran.

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Australia’s exports to the Islamic Republic of Iran were, at one time, valued at over AUD 1 billion and covered a range of industrial and consumer goods and services. After years of nuclear based sanctions, Australia’s total trade and investment with Iran is valued at less than AUD 300 million and is limited to wheat and related products. In the last two months the United Nations and Australia have eased many of the sanctions against Iran, which will open new trade and investment opportunities for Australian businesses looking to Iran as a potential market.

In January the UN announced that it would remove the nuclear sanctions against Iran and the Australian Government immediately followed by suspending or removing most of its autonomous sanctions against Iran and Iranian businesses. The lifting of these sanctions is welcome news to Australian businesses interested in gaining access to Iran’s 80 million consumers and anticipated infrastructure and energy projects. However, businesses from across Europe, North America and Asia are equally eager to access the Iranian marketplace. Australian businesses need to understand the commercial and legal frameworks in Iran, and the Australian Government needs to facilitate and protect Australian trade and investment with Iran.

In this Investment Update, Moulis Legal Partner Christopher Hewitt and Associate Alistair Bridges look at the impact on Australian businesses of lifting Iran’s nuclear sanctions and how the Australian Government can provide critical protection to Australians doing business in Iran through investor state dispute settlement.

Turning a page on nuclear sanctions

Since 2008 Australia has enforced a combination of UN and independent sanctions restricting trade and investment with Iran, including prohibitions on trading most goods, establishing companies and many financial transactions. In January 2016 the Australian Government announced that it will amend the Charter of the United Nations (Sanctions-Iran) Regulations1 to remove nuclear based financial and business sanctions previously imposed by the UN. The Government also suspended sections of the Autonomous Sanctions Regulations2 to remove the vast majority of the existing restrictions on trade and investment between Australia and Iran. These changes were necessary steps to reopening commercial relations between Iran and Australia.

Then on 27 February the Australian Government amended the Money Laundering and Counter-Terrorism Financing (Iran Countermeasures) Regulations3 to remove the obligation that financial institutions obtain a permit for transactions with Iran exceeding AUD 20,000. This legislative change is critical because it will facilitate necessary small and medium business transactions between the two countries. This change means that Australian banks can begin providing and accepting transactions, electronic transfers and negotiable instruments between Australian and Iranian businesses. Importantly, in order for Australian banks to undertake these transactions and transfers they must first establish enhanced customer due diligence processes between Australia and Iran, which may result in some delays before Australian banks are ready to undertake all types of financial transactions with Iran.

Under the changes the following prohibitions on trade and investment have been removed:

    imports into Australia of crude oil, petroleum, petrochemical, natural gas and precious metals from Iran;
    exports to Iran of a range of goods, including transport and storage containers for oil and gas, equipment and technology for oil, gas and petrochemicals, precious metals, Iranian bank notes and some naval and shipping technologies;
    two-way trade in technical services, certain financial services and export services;
    investment by Australians into Iranian companies in the oil, gas and petrochemical sectors;
    investment by Iranians into Australian companies in the oil, gas and financial services sectors.

Importantly, the law changes will remove most restrictions on the establishment of representative offices, subsidiaries and correspondent banking relationships with financial institutions. This is a critical commercial change that will allow Australian businesses to establish corporate entities and offices in Iran in order to gain access to the Iranian market and new commercial opportunities.

That said, it is important to understand that the regulatory burden facing entities wishing to do business with, or in, Iran is merely mitigated, not lifted completely. Although some of the sanctions have been suspended (albeit, perhaps only temporarily), Australia will continue to impose restrictions on a number of activities, including the sale and export of arms and related goods to Iran, and will maintain its list of designated parties subject to asset freezing orders, albeit in a reduced form. Violating a sanction law is a strict liability offence. Accordingly, any Australian entity intending to do business with, or in, Iran will need to ensure that its activities do not breach Australia’s remaining operative Iranian-targeted sanctions.

New opportunities for Australian businesses

The Australian Minister for Foreign Affairs has stated that the:

    Easing of these sanctions will ensure that Australian business is not disadvantaged in pursuing opportunities in Iran.4

While this statement is accurate, the commercial reality is that a large number of businesses from countries across the globe are now targeting Iran as a marketplace that is eager for major infrastructure investment, world-class services and an influx of goods. The Australian Government needs to do more for Australian businesses than simply get out of the way of investment.

After many years of sanctions, it is unsurprising that Australia does not currently have a formal trade and investment treaty with Iran. In 2015, the Australian Minister for Foreign Affairs visited Iran to discuss future opportunities for bilateral trade and investment between Australia and Iran, specifically in the services, mining and technology sectors. During that visit, the Minister intimated an openness to future bilateral trade and investment relations.  Australia now has an opportunity to act on those good intentions and provide Australian businesses investing in Iran with substantive protections.

Despite its commercial isolation for many years Iran has relatively sophisticated foreign investment regulations that provide foreign businesses and investors with some investment protection. In 2002 Iran introduced The Foreign Investment Promotion and Protection Act (known as the “FIPPA”), which is a progressive, modern foreign investment law that provides legal protection for investment in Iran.

The FIPPA states that:

    Foreign investments … will have the same rights, protections and facilities available to local investments.5

Critically, under the FIPPA, foreign investment in Iran is protected from illegal and unfair treatment by the state:

    Foreign investments shall not be subject to expropriation or nationalisation, unless for public interests, by means of legal process, in a non-discriminatory manner, and against payment of appropriate compensation on the basis of the real value of the investment immediately before the expropriation.6

These protections are significant and demonstrate Iran’s eagerness to encourage and facilitate foreign investment. However, these protections are only valuable if they can be enforced and if foreign businesses are confident that they have a fair and impartial mechanism for enforcing these rights. Under the FIPPA if a foreign business has its investment expropriated or does not receive equivalent protection as a local business then it can enforce its rights in the Iranian courts. Only businesses from countries that have agreed to investor state dispute settlement with Iran have access to independent arbitration. This does not include Australia.

International dispute resolution professionals have long recognised the inherent conflict in a country’s national courts hearing claims against the national government by a foreign investor. Investment disputes against a national government require assessment of government policy and actions. For example, under the FIPPA an investment dispute may require an assessment of what constitutes the ‘public interest’ or ‘appropriate compensation’. These assessments are best undertaken by an independent arbiter whose decision is final, binding and enforceable.

For this reason, the Australian Government has agreed to investor state arbitration provisions in various free trade agreements and bilateral investment treaties with other countries. Australians currently have access to investor state arbitration in 27 countries and that number will increase shortly.7  Investor state arbitration provides foreign investors with recourse to an independent arbiter to hear claims against a national government. As it currently stands, Australian businesses investing into Iran have no such protection and would be forced to take an investment dispute through Iran’s own courts.

Starting a new chapter: an Australia/Iran bilateral investment treaty

Australia has 27 bilateral investment treaties, free trade agreements and investment promotion and protection agreements with various countries. Australia is also currently negotiating a number of new agreements, including the proposed free trade agreement with the Gulf Cooperation Council that includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Iran currently has 52 bilateral investment treaties, which provide individuals and businesses from those countries with greater access, protection and enforcement rights than is provided under the FIPPA. Countries with a formal bilateral investment treaty with Iran include the financial powers of Germany, China, and France, and other smaller countries like Zimbabwe, North Korea and Bangladesh.

Clearly, Australia would not be breaking new ground by establishing formal commercial relations with Iran and entering into a bilateral investment treaty. In fact, Australia needs to promptly take steps to engage with Iran to ensure that Australian businesses are not left behind as American, British and European businesses move swiftly to take advantage of new opportunities in Iran.

A review of the Iran Germany Bilateral Investment Treaty from 2004 (“the German Treaty”) shows that Iran is open and willing to enter into a treaty that grants real protection to foreign businesses and investors. Under the German Treaty, German businesses and investors are granted national treatment and most favoured nation status in Iran. The German Treaty also provides for the facilitation of money transfers relating to investment and protects the international transfer of business profits. Critically, the German Treaty also provides that any dispute between Iran and a German investor will be settled by international arbitration and that any award will be enforceable at law. This provides Germans doing business in Iran with real and enforceable protection against unfair treatment, expropriation and discrimination. It is therefore unsurprising that following the lift of the UN sanctions a German law firm was one of the first foreign businesses to establish offices in Tehran.8

By negotiating and agreeing a bilateral investment treaty with Iran, the Australian Government could provide Australian businesses with the significant added protection of independent arbitration of investment disputes. Australian businesses could have level footing with businesses from Germany, and other countries, by obtaining similar protections as are provided in the German Treaty.9  We were reminded this last week of the importance of sovereign risk protection for foreign investors as Zimbabwe announced that it would expropriate and nationalise foreign investment in its diamond mines. In the context of the past volatility of Iran, and the potential sovereign risk to investment, the added protection of independent investor state arbitration would be of substantive value to Australians doing business in Iran.

Iran is open for business, and Australians should be looking to take advantage of the opportunities for investment and trade in goods and services. Despite the recent changes Australian businesses still need to take great care when undertaking trade and investment with Iran and ensure they have all possible legal and contractual protection and the Australian Government should look to add to that protection in the near future so Australians are not left behind.

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Iran is poised to build new oil refineries and petrochemical plants, now that it has been freed from international sanctions. Experts warn that investing in the Middle Eastern country is still risky, in part due to sectarian tensions with neighbors such as Saudi Arabia. Yet companies are leery of another risk, too -- missing out on huge opportunities.

Yoshihiro Shigehisa

     JGC, Japan's leading plant builder, is one company looking at ways to capitalize on this potentially lucrative market. The Nikkei spoke with Yoshihiro Shigehisa, JGC group's chairman emeritus, about the business outlook in Iran.

Q: What are your expectations for post-sanctions Iran?

A: This is an opportunity to tap a big, promising market. Iran has one of the largest populations in the Middle East, with nearly 80 million people. It has said it will raise its crude oil output in two stages, by 1 million barrels a day. We pulled our employees out of the country because of the sanctions, but we plan to station one or two in Tehran by spring. We expect growing demand for plants, and we hope to strike some deals by the end of this year.

     There are opportunities for other Japanese businesses, not just ours. Due to the sanctions, the government has limited funds for new projects. For large endeavors, Tehran will seek to secure loans or work out other financial arrangements with its partners.

Q: Are you interested in other fields of business in Iran, besides the resource sector?

A: We want to invest in ways that will help the country to develop. Nothing has been decided yet, but we may consider investing in hospitals and agriculture, along with power plants.

Q: Earlier this year, Saudi Arabia cut diplomatic ties with Iran. Are you worried about the deepening religious conflict?

A: My sense is that the bilateral relationship will not deteriorate further. Falling crude oil prices are hitting both economies. They should be aware that this is not the time for them to confront each other.

     But it is also true that we should be cautious when making deals with Iran, to avoid compromising our relationship with Saudi Arabia. I recently visited a Saudi customer I have known for years. Although this customer might not welcome us doing business with Iran, the impression I got was that they would accept it. 

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