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The Iran Nuclear Deal
BusinessImplicationsoftheJointComprehensive
PlanofActionbetweenIranandtheP5+1
October,2015
2 | 2015 | BRUNSWICK ©
Overview
of the Deal
The Iran nuclear deal seeks
to ensure that Iran’s nuclear
program will be excl...
© BRUNSWICK | 2015 | 3
not abiding by its promise to
lift sanctions.
Once the International Atomic
Energy Agency verifies ...
4 | 2015 | BRUNSWICK ©
Telecommunication, or SWIFT,
is expected to have a particu-
larly significant impact on for-
eign i...
© BRUNSWICK | 2015 | 5
underdeveloped real-estate
market.
India, too, has been stead-
ily improving its relationship
with ...
6 | 2015 | BRUNSWICK ©
to be constantly vigilant not
to violate remaining sanctions
against Iran. Most of the eco-
nomic s...
© BRUNSWICK | 2015 | 7
list of Specially Designated
Nationals with whom
business engagements are
prohibited. This will be ...
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Brunswick analysis - The Iran nuclear deal

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Business implications of the Joint Comprehensive Plan of Action between Iran and the P5+1

The Iran nuclear deal, officially known as the Joint Comprehensive Plan of Action, promises to lift many of the sanctions that have hindered the Iranian economy for years. In return, Iran has agreed to scale back its nuclear program.

The opening of the Iranian economy presents significant economic opportunities, both for Iran and for multinational corporations. However, entering the Iranian market is replete with risk, especially for corporate reputation. To help mitigate risk, prospective investors should prepare thoughtful communications strategies to explain, and where appropriate, defend their position.

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Brunswick analysis - The Iran nuclear deal

  1. 1. The Iran Nuclear Deal BusinessImplicationsoftheJointComprehensive PlanofActionbetweenIranandtheP5+1 October,2015
  2. 2. 2 | 2015 | BRUNSWICK © Overview of the Deal The Iran nuclear deal seeks to ensure that Iran’s nuclear program will be exclusively peaceful by scaling back Iran’s plutonium and highly enriched uranium production. The P5+1 (China, France, Russia, the United Kingdom, the United States and Germany), in return, have agreed to cease the implementation of nuclear- related sanctions against Iran. The deal is to be implemented in phases; as Iran fulfills key steps to limit its nuclear activities and build confidence, additional sanctions will be removed. Importantly, the deal includes a so-called “snap- back” provision, allowing the P5+1 to re-assert sanctions if Iran is deemed noncompliant. Iran has stated that it too has a snap-back provision. According to its leaders, the country can reverse the limits on its nuclear program if it feels the P5+1 are The hotel lobbies of Tehran are reportedly filled with international business delegations. The groups have come seeking investment opportunities in a crippled economy that may have a brighter future. The Iran nuclear deal, officially known as the Joint Comprehensive Plan of Action, promises to lift many of the sanctions that have hindered the Iranian economy for years. In return, Iran has agreed to scale back its nuclear program. Iranian President Hassan Rouhani has said the deal will open “a new page with the world” and bring “progress, development and stability.” International companies, whose representatives are now touring the country, may agree with the Iranian president. The opening of the Iranian economy presents significant economic opportunities, both for Iran and for multinational corporations. However, entering the Iranian market is replete with risk, especially for corporate reputation. To help mitigate risk, prospective investors should prepare thoughtful communications strategies to explain, and where appropriate, defend their position. Introduction
  3. 3. © BRUNSWICK | 2015 | 3 not abiding by its promise to lift sanctions. Once the International Atomic Energy Agency verifies that Iran has completed its initial obligations, most European Union sanctions, including the embargo on Iranian oil and prohibitions on energy invest- ment, will be lifted. The Unit- ed Nations Security Council measures, which served as a platform for most of the ac- tions undertaken by the rest of the world against Iran, will cease as well, with a few no- table exceptions pertaining to conventional arms and ballistic missiles. The United States will rescind restrictions against third parties conducting trade with Iran, which will allow non-U.S. entities and foreign subsidiaries of U.S. companies to engage with the country. More than 400 Iranian compa- nies or individuals, 75 planes and 200 ships will be removed from the United States’ black- list. Iran will also be able to access $100 - $150 billion of oil revenue currently frozen abroad. Although not specifi- cally included in the nuclear deal, the P5+1 and Iran also agreed to lift restrictions on conventional arms after five years and restrictions on ballis- tic missiles after eight years. American sanctions tied to Iran’ssupportforterrorism,hu- man rights and regional desta- bilization will remain in place. Prospective investors will have to carefully research their Ira- nian counterparts to avoid the legal and reputational costs of engaging with an American- sanctioned entity. For Ameri- can firms and individuals, the remaining sanctions crimi- nalize any involvement in the Iranian economy outside the specific sectors exempted un- der the deal. Thus, most Ameri- can firms will still be prohibited from doing business in Iran. The agreement involves an ex- tensive procedure for gaining approval from various legisla- tive and legal bodies. The Unit- ed States Congress, which had 60 days to review the deal, was unable to block it despite the best efforts of House Republi- cans. The Obama Administra- tion expects Republicans will continue to undermine the deal by calling for additional sanc- tions against Iran. For some op- ponents, the goal is not only to limit the purview of the nuclear deal but, more importantly, to goad Iran to walk away from it altogether. Iran’s legislative body, the Majlis, is reviewing the deal now, and Iran analysts say Supreme Leader Ayatollah Khamenei is using the politi- cal cover of the Majlis to keep his options open over whether to support the agreement in the future. Assuming the deal survives domestic political hurdles, its implementation will still take several months. Sanctions during this time will remain in place, and businesses will have to hold back on inking deals. The Obama administra- tionhasmadeclearitsresolveto prosecute companies that jump the gun. Business Opportunities The business opportunities associated with Iran’s reinte- gration into the global econ- omy are substantial. With roughly 80 million people, the Islamic Republic boasts an at- tractive consumer base. Over- all consumer expenditures are projected to be about $176.4 billion this year, with annual disposable income pegged at about $287 billion, accord- ing to researcher Euromoni- tor. But more than trade, Iran wants long-term partners who are willing to invest in the country and help develop its industries. As its banking sec- tor reconnects with the global financial system, Iran will of- fer investment opportunities in manufacturing, infrastructure, shipping, communications and tourism. The country’s renewed ability to transfer funds through the Society for Worldwide Interbank Financial
  4. 4. 4 | 2015 | BRUNSWICK © Telecommunication, or SWIFT, is expected to have a particu- larly significant impact on for- eign inflows. A core focus for the country will be natural resources as it has the fourth biggest proven crude oil reserves and the larg- est natural gas reserves in the world, according to the latest BP Annual Review of World En- ergy. Current production levels are well below what the coun- try produced prior the revolu- tion of 1979. Over the next five years, the country needs an estimated $230 billion to $260 billion of new capital toward its oil and gas industry, ac- cording to analysts. Foreign oil companies see an opportunity in Iran’s under-capacity. Iran’s energy production costs are among the lowest in the world at $5 to $10 per barrel for oil, and the country is optimally located between the major de- mand centers of Europe and Asia. Moreover, the National Oil Company of Iran, which is plan- ning to introduce 40 projects for competitive bidding after the removal of sanctions, has announced revisions to energy sector regulations and a new contract model that may allow for more profit sharing with foreign partners. The new con- tract, called the Iran Petroleum Contract, is akin to a production sharing agreement in which, aside from profit sharing, the foreign partner might also be allowed to own equity. This is a major new development for prospective investors. Asian and European energy compa- nies, such as Total and Eni, have indicated interest, experts say. American energy companies like ExxonMobil, Chevron and ConocoPhillips are more cau- tious, given the remaining U.S. restrictions after the deal. Mining is another promising Iranian industry attracting for- eign investors. Iran has 2.7 bil- lion pounds of iron ore, which is used to make steal, and the country plans to double steel production by 2025. German, French and Dutch delegations have visited Iran recently to discuss mining investments. European countries see op- portunities in Iran beyond the extractive sectors as well. Ger- many, France, and the United Kingdom have already collabo- rated to form the European- Iranian Business Alliance in an effort to facilitate commerce between the EU and Iran. Ap- proximately 100 German com- panies currently have branches in Iran and another 1,000 Ger- man companies operate there through sales agents. The Ger- man-Iranian Chamber of Com- merce predicts that German exports will reach €10 billion annually once the sanctions are officially lifted. Companies like Siemens, Volkswagen, Daimler- Benz, Bayer and E.On are ex- pected to lead the trend. French auto manufacturer Peugeot re- cently signed a contract to start making cars in Iran, joining rival Renault, which has been producing cars there for years. Debenhams, a British chain of department stores, also has a presence in Iran. The arms trade is expected to increase after sanctions are lifted, and Russia is assembling S-300 anti- aircraft defense systems to start shipments to Iran by next year. The rising economies of Asia, whose growth is propelled by exporting manufactured goods, will be attracted to Iran’s grow- ing consumer base. The elimi- nation of American and Euro- pean extraterritorial sanctions will allow China, Iran’s largest trading partner, to conduct business in Iran with fewer repercussions. Iran is in par- ticular need of infrastructure investment, suffering from an- tiquated roads, bridges and buildings. An Iranian deputy minister claimed last year that China has already pledged to double its infrastructure in- vestment in Iran to $52 billion. Iran also lacks modern hotels and office space, a further op- portunity for Asian investors, especially the big hotel groups, who are likely to rush into the
  5. 5. © BRUNSWICK | 2015 | 5 underdeveloped real-estate market. India, too, has been stead- ily improving its relationship with Iran, hosting several high-level meetings in recent months. An expansion of Ira- nian oil output will help India diversify its supplier base and gain more leverage over other sellers like Saudi Arabia. This might, in turn, facilitate Prime Minister Narendra Modi’s as- piration to scale back energy subsidies. In the private sec- tor, Indian energy companies such as Reliance Industries might consider upstream pro- jects and the possibility of re- suming exports of petroleum products. At its peak in 2008 and 2009, India was exporting over $1 billion worth of petro- leum products to Iran. While many of Iran’s neigh- bors remain strongly opposed to the nuclear deal, some will gain from it economically. An increase in trade with Iran is likely, at least in the short- term, to boost the economy of the UAE, which serves as a main gateway to Iran. The UAE is Iran’s second-largest trading partner and is particu- larly strong in the areas where Iran has struggled in recent years, including air transport, energy infrastructure and fi- nance. By one estimate, the UAE currently hosts nearly 10,000 Iranian businesses and trading companies, which are optimally positioned to ben- efit from the ease of sanctions. Dubai, in particular, will likely see increased demand for its shipping and logistics servic- es. Turkey is also one of Iran’s primary trading partners; bi- lateral trade between Turkey and Iran reached $21 billion in 2012. Turkey’s Ministry of Economy has identified op- portunities after sanctions are lifted in tourism, energy, banking, petrochemicals, tele- communications, automotive, transportation and infrastruc- ture. According to the minis- try, about a hundred Turkish companies are already active in Tehran. The United States, which spearheaded the nuclear ne- gotiations, may ironically have the least to gain economically from the resulting agreement. American firms will face far more stringent restrictions than their competitors. Many American firms will remem- ber the lessons of Iraq, where American sanctions were lifted too slowly and rather reluctantly by Congress after Saddam Hussein’s defeat, leav- ing the field open to America’s competitors. A similar dy- namic could well transpire in post-sanctions Iran. For American businesses, secur- ing an exemption from certain sanctions may often be the safest way to do business in Iran. Such will be the case for Boeing, which, due to an ex- emption, will be allowed to supply commercial passenger aircraft and related parts to Iran after the deal is imple- mented. Other American com- panies like General Electric Co., Bausch & Lomb and Bos- ton Scientific have also been granted waivers in recent years. Business Risks The possibility of a sanctions snap-back may be the great- est cause for concern. If Iran is caught cheating, Europe and the United States will re-apply sanctions. While the re-appli- cation would not affect busi- ness contracts completed up to that point, foreign compa- nies that continue to operate in Iran may face international condemnation. American and European leaders would like- ly push foreign companies to leave. Some Iranian leaders might encourage anti-foreign- er sentiment and openly chal- lenge international companies operating in Iran. In general, the re-imposition of sanctions would destabilize the country and bring added risk to the foreign business community. Even without a snap-back, foreign companies will need
  6. 6. 6 | 2015 | BRUNSWICK © to be constantly vigilant not to violate remaining sanctions against Iran. Most of the eco- nomic sectors are controlled and owned by the Iranian state, meaning foreign compa- nies must navigate the govern- ment’s legal trade frameworks and limited labor laws. The Iranian bureaucracy, however, is frequently intertwined with the Revolutionary Guards, the radical element of the coun- try’s armed forces, which re- mains blacklisted by the U.S. In recent years, such hard-liners have come to play a key role in some of the country’s big- gest industries, like energy and telecommunications. Foreign companies that engage with the Revolutionary Guards and other blacklisted entities, even unknowingly, will hurt their credibility in the West and al- ienate regional countries which despise Iran’s hardliners. Iran also presents systemic challenges to foreign invest- ment. Iran ranked 136 out or 175 in Transparency Interna- tional’s 2014 Corruption Per- ception Index. The country is not a member of the Interna- tional Center for Settlement of Investment Disputes, the World Bank Group’s arbitration ser- vice. International banks are concerned about becoming enmeshed in Iranian corrup- tion and money-laundering ac- tivities, and past fines levied at banks for violating sanctions serve as a strong deterrent to future investment. While the vast majority of Iranians, who have for years suffered under sanctions, are likely to welcome greater commercial interaction with the outside world, Iran’s government hardliners may not be as welcoming. Even Iran’s energy industry has a long history of frustrating Western companies. The Na- tional Iranian Oil Company has not clarified significant details about its new contract model, such as whether international investors will be able to book reserves or enter into produc- tion-sharing contract arrange- ments. Investors will look for clarification at an international conference on the new Iran Pe- troleum Contract to be held in London towards the end of this year or early 2016. Finally, investing in Iran poses a reputational risk because key stakeholders at home might object to it on principle and therefore politicize the is- sue. Especially in the United States, but also in Europe, some elected officials and private investors may criticize interna- tional companies for engaging with a country that many see as antagonistic. Reputation Management Foreign companies and inves- tors considering business in Iran should be prepared to address reputational risk. Brunswick sees there being a number of communications principles for doing business in Iran. These are as follows: • At the most basic level, the investment should be incorporated into a larger business narrative that provides context and rationale. The company must convey the ways in which the opportunity in Iran furthers its overall business goals. Framing the decision in these terms will shift the conversation away from political controversy and toward the aspirations of the business. • Foreign companies in Iran must identify trustworthy partners on the ground. These partners will be critical in order to operate in a country that has had limited foreign investment for decades. Foreign companies will need to hire third parties to complete due diligence on prospective partners. Moreover, the U.S. Treasury Department maintains a
  7. 7. © BRUNSWICK | 2015 | 7 list of Specially Designated Nationals with whom business engagements are prohibited. This will be a constantly changing list, and companies must have outside advisors monitoring it on their behalf. • Navigating Iran’s complex media landscape will require sophisticated knowledge of the country’s culture, politics and business norms. Communicating to stakeholders inside Iran, where the media is state-controlled and almost entirely in Farsi, will present a challenge. Companies should also assume that disparaging remarks made abroad could make their way back into the country and erode any relationships that have been established between the government and foreign businesses. • Understanding Iranian political agendas is important. Seemingly contradictory government statements can be quickly clarified by looking at who has said them. The Iranian presidency and the cabinet, the Supreme Leader and Guardian Council, the parliament, the Revolutionary Guards and the Assembly of Experts, to name but a few of the major political players, all have different agendas and address various overlapping constituencies. Companies will have to traverse this complicated field to determine where to exert their limited influence and where to hold their cards. • Government relations at home will be critical as well. Foreign governments, especially the U.S. and the EU, will be keeping a very close eye on those who engage with Iran early on. Proactive communication with these governments will be imperative to sustain their tepid support. Home governments will also play a key role in developing public sentiment towards engagement with Iran, making communication with them even more important. Finding the right partners, preparing prudent communi- cations and proactively engag- ing key stakeholders will help to mitigate the reputational risks associated with investing in Iran. Perhaps this should be the topic of conversation in the hotel lobbies of Tehran.

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