Arabian Gulf companies tread carefully in doing business with Iran

Arabian Gulf companies seeking to do business with Iran are treading cautiously because there are a number of pitfalls from working with Iran’s sanction-hit Islamic Revolutionary Guards Corps (IRGC) to involvement of US dollar transactions.

The easing of US, European and other western sanctions on Iran in January presents Arabian Gulf companies, particularly those in the UAE, with ample business opportunities. But the complexity of the remaining sanctions leaves a lot of hurdles.

“There are a number of new opportunities certainly for non-US companies, but we would recommend a cautious approach to understand and take heed of continuing restrictions,” says Nicholas Coward, a Washington-based lawyer at Baker & McKenzie.

The pitfalls are many, but the opportunities are huge.

The UAE’s economy alone is likely to gain US$13 billion by the easing of sanctions as bilateral trade between last year and 2018 rises, according to IMF forecasts released last year.

That is equivalent to a 1 per cent gain in real GDP growth each year over the next two years, says the IMF. Iran accounted for 12 per cent of the UAE’s non-oil exports in 2013, valued at $12bn. Most of this came in the form of re-exports traded through Dubai’s Jebel Ali Port.

But UAE and Gulf companies have to be mindful of the fact that US companies remain frozen out of dealing with Iran because of lingering US sanctions that prohibit Americans from doing business with Iran, bans US financial institutions from working with Iran and restrictions on the export of US goods to Iran.

“Iran is an attractive market opportunity and all customers have interest in developing a footprint in Iran,” says Tarek Sultan, the chief executive of Agility, the logistics company with its headquarters in Kuwait.

“We need to wait for our customers to be legally able to do business in Iran.”

Also, Gulf companies cannot engage in US dollar transactions when dealing with Iran because that means a US bank would have to get involved.

“There are still some sanctions that have not been fully lifted and if you want to do business with regards to these products you need approval from the relevant EU authorities. A good example is steel and certain other metals,” says Samir Safar-Aly, an associate with the law firm Simmons & Simmons Middle East.

“If you are a European company or if you are a subsidiary of a European company based in the GCC and are therefore subject to EU sanctions, and you want to export steel or aluminium or other industrial metals, you can do so but you can’t do so without an approval from a relevant EU authority.”

This wait-and-see attitude is prevalent among several Gulf companies, which are wary of sanctions being reimposed in case Iran violates its agreement with the West.

“If the sanctions do snap back and if a company is invested heavily in Iran, they may potentially be left with a difficult situation without adequate contractual protection mechanisms,” says Mr Safar-Aly.

One of the lingering hurdles is the flexibility of financial transactions. Four years after banks in Iran were cut off from the global financial messaging service Swift, some Iranian lenders were reconnected in February, allowing them to do cross-border transactions with foreign banks.

Many banks, though, remain hesitant about doing business with Iranian banks, given the fines that were slapped on lenders a few years ago. US regulators fined a number of foreign lenders for sanctions violations, with France’s BNP Paribas paying a $8.9bn settlement for breach of sanctions against Sudan, Cuba and Iran.

“The UAE Central Bank has been rather reticent on its formal position vis-à-vis financial transactions with Iran,” says Hamid Mojtahedi, the head of Iran Group at the law firm Al Tamimi & Company. “It is going to be critical if industries are going to engage with Iran that they have the support of their respective banks on trade finance and other such facilities.

“Until the Central Bank of the UAE makes its position clear, we are going to witness apprehension on the part of businesses to engage with Iran in a sustained and compliant manner.”

One of the biggest challenges is determining the role that the IRGC plays in the Iranian economy. It is on the United States’ special designated nationals list, which contains persons, groups and companies that are under US sanctions.

“If a Gulf company wanted to avoid the possibility of secondary sanctions they would have to avoid engaging in transactions with any entities that remain on the US special designated nationals list, and there is a similar provision for EU purposes that could have some limitation as well,” says Mr Coward.

“Any Gulf company, for example, doing business with those entities risks exposure under US law for US sanctions being put on a Gulf company that does business with them.”

Although the IRGC was formed after the 1979 to safeguard the revolution, its political power has expanded into the economy and it often controls companies and wins major contracts.

For example, Khatam Al Anbiya, an engineering company known as Ghorb, is controlled by the IRGC and is one of the country’s largest contractors in industrial and development projects.

“The IRGC happens to be connected to a number of businesses in Iran, and the practical challenges is trying to figure out what they own and what they don’t own because there isn’t a lot of public corporate ownership information,” says Mr Coward.

For example, in 2009, the government sold a 51 per cent stake in the country’s telecommunication company to Tose’e Etemad Mobin, a consortium led by the IRGC, for $7.8bn.

Corruption is also rife in Iran. It ranked 130 in the latest Transparency International’s corruption index, which includes 167 countries. In terms of ease of doing business, Iran ranks 118 out of 189, according to the World Bank’s most recent data.

“For every centre of power, there is a ‘shadow power’ in Iran, and some with large vested economic interests in maintaining the status quo,” says Mr Mojtahedi.

“Therefore, the administration of president Hassan Rouhani must gain the confidence of the international business community that Iran will offer a level playing field and the country’s legacy of nepotism and economic oligarchs will be kept in check.”

Another problem is the different sanctions still in place in the US, which imposed new sanctions on about a dozen Iranian-linked entities because of their alleged ties to Tehran’s ballistic-missile programme.

“[US authorities] allow some things on one hand as an incentive to engage in a certain behaviour and then they tinker with sanctions on the other end to restrict certain things to dis-incentivise certain behaviour,” says Mr Coward.

“But from a company standpoint, a company needs to translate all of these rules into black and white processes or procedures internally to ensure their legal compliance.”

Until the picture is black and white, most firms will be treading very carefully.

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