Iran-US Dollar

The Plan to Save the Iran Deal Needs Private-Sector Buy-In

Iranian street money changers use a smartphone to check the price for the US dollar as they stand out of a currency exchange shop in Tehran's business district. (Morteza Nikoubazl/NurPhoto via AP)

With the election of Joe Biden to the presidency of the United States, dialogue between the US and Iran appears to once again be possible. Both Tehran and the Biden team have expressed a willingness to consider a “clean” return to the terms of the Joint Comprehensive Plan of Action (JCPOA, better known as the Iran nuclear agreement) if the other does the same. Namely, Iran would revert its nuclear activities to within the limits set out in the JCPOA, which it began breaching in May 2019, and the US would once again lift sanctions on Iran as prescribed by the agreement.

Reality, of course, will be more complicated. Securing economic benefits will be a priority for Tehran in any dialogue on the future of the deal, or any agreement that may succeed it. However, as became clear following the initial removal of US and international sanctions on Iran in 2016, the degree to which sanctions-lifting on paper translates to economic relief in practice depends in no small part on the willingness of the private sector to engage with the Iranian market. If the US and E3 (Germany, France, and the United Kingdom) hope to present renewed trade and investment as a credible and meaningful incentive for Iranian cooperation, it will be necessary to both address private sector concerns and manage Iranian expectations.

At the moment, many businesses around the world have opted out of engaging with Iran. The scope and complexity of US economic measures against Iran, as well as the high costs of potentially losing access to the US market and financial system in case of an accidental breach, is sufficient to turn even the most well-resourced compliance departments off of engaging with Iran. Iran is also one of only two countries—alongside North Korea—on the “blacklist” put forth by the Financial Action Task Force (FATF), the global standard-setter on countering financial crime. As a result of Iran’s failure to address “strategic deficiencies” in its financial crime regime, the FATF currently requires jurisdictions to apply “enhanced due diligence” to their transactions with Iran, leading many banks to opt out of transacting with the country altogether. This means that businesses struggle to access financial infrastructure necessary for doing business with Iran.

There is some indication that, even if US sanctions on Iran were lifted, the uptake for private sector engagement with Iran would remain slow and limited. A few weeks ago, Iranian president Hassan Rouhani reportedly requested that Iran’s Expediency Council reprise its review of legislation that would address the deficiencies in Iran’s financial crime legislation called out by the FATF, which may help address some private sector concerns. However, persistent challenges in relations between Iran and the US and E3 will continue to create uncertainty for businesses. On December 17, the European Parliament passed a resolution condemning Iran’s detention and execution of human rights defenders and prisoners of conscience and called for the application of targeted financial sanctions on the Iranian individuals responsible. A few days earlier, a European Union-funded virtual business conference was postponed following the execution in Iran of journalist Rouhollah Zam.

Furthermore, some key US economic measures against Iran—for instance, sanctions on the Central Bank of Iran and on the Iranian Revolutionary Guard Corps (IRGC), as well as the designation of Iran as a jurisdiction of primary money laundering concern—are not related to Iran’s nuclear activities and may not be lifted as part of a return to the nuclear deal. These sanctions will continue to create complexity for banks and other businesses and will factor into private sector risk calculus. The possibility of another snapback of US nuclear-related and secondary sanctions on Iran under a future change of administration in Washington will also discourage businesses investment. Persistent concerns over exposure to US sanctions within the financial sector in particular will complicate renewed economic engagement with Iran, as businesses will have trouble finding banks willing to support financial transactions with Iranian counterparts. Efforts by the Biden administration to figure out the legal and regulatory logistics of lifting sanctions, while ensuring that sanctions remain an effective tool of US foreign policy, will therefore also have to address challenges in the practical implementation of sanctions relief.

Reversing the economic impacts of private sector reticence to engage with Iran will be top of mind for the Islamic Republic as it engages with the new Biden administration. Tehran has previously called for compensation for “damages” to the Iranian economy caused by US sanctions—although Iranian leadership appears to have dropped such demands as a precondition for an Iranian return to compliance with the JCPOA in recent statements. And while Iran’s Supreme Leader Ali Khamenei expressed support for seeking sanctions-removal in recent remarks directed at Iranian officials and the Iranian public, he also stressed the importance of “nullifying” the impact of sanctions on the Iranian economy. He distinguished “neutralizing” sanctions from the lifting of sanctions and seemed to express skepticism over US and European ability to deliver on the former.

Assessing business’ levels of interest in re-engaging with the Iranian market and addressing concerns where possible will lend greater weight to US and European incentives of economic relief, hopefully encouraging greater cooperation from Iran in any future diplomacy—whether on its nuclear program or more broadly. Relaying to Tehran the results of these private sector consultations may also help manage Iranian expectations on the level of foreign economic interest it can expect following the lifting of sanctions, while also stressing the need for Iran to get its financial regime in order. On the part of Washington, this may include preparing comfort letters, granting sanctions exemptions, updating general licenses, and expanding the guidance issued via the Office for Foreign Assets Control “Frequently Asked Questions” on Iran sanctions.

By consulting with their private sectors, European governments can also better understand business concerns and uncertainties around engagement with the Iranian market and how these may shift—or fail to do so—with the lifting of US sanctions. In October 2020, the European Commission launched a “Due Diligence Help Desk” aimed at supporting European companies in navigating European sanctions on Iran. While the platforms are well-intentioned and may provide businesses with helpful guidance, it is unclear how effective they will be in practice. The platforms do not address some of the key challenges raised earlier, including the lack of financial infrastructure to support transactions with Iran and concerns over exposure to US sanctions.

The UK and European governments may wish to identify and reach out to specific sectors that are likely to be of greatest importance to renewed trade with Iran—for instance, the banking sector or those engaged in energy trade—to ensure they have the assurances, guidance, and infrastructure they need to proceed with confidence. Coordinated efforts across capitals—for instance, through the issuing of joint guidance by American, British, and European financial regulators, as well as dialogue with the US on the concerns of UK and European businesses—will also be valuable.

As renewed diplomacy on the Iranian nuclear question gets underway, it will have to be supplemented by consultations with businesses to assess whether the private sector will be able to make good on economic promises made at the negotiating table, as well as to manage Iranian expectations. At the same time, understanding and, where possible, addressing private sector concerns will help businesses do what they do best—moving goods, people, and capital to ensure that the lifting of sanctions on paper translates into real economic uplift for Iran.

Darya Dolzikova is a research analyst with the Royal United Services Institute’s proliferation and nuclear policy program. She tweets @DDolzikova. This article was originally published on Bourse and Bazaar.