We recently had the chance to speak with Paul Wilson, Director General of the British-Iranian Chamber of Commerce, based in London.
Below is part of our conversation with Paul on investing in Iran.
Figures published by the UK Office of National Statistics for the year ending Q2 2018 show nearly GBP 400 million in bilateral trade with Iran, an increase of about 40 percent on the financial year ended Q2 2017.
I'm fully anticipating a drop-off in trade, but at this stage we just don't know what level of drop-off that will be. Will it dramatically drop to where it was in 2012 and 2013, at approximately GBP 80 million or will the decline be a little bit slower?
In 2018 the European Union announced it would establish a Special Purpose Vehicle, now labelled INSTEX, in order to facilitate transactions with Iran. However, senior officials in Iran, including Ayatollah Khamenei, have been largely underwhelmed and dismissive of the value of the mechanism. How do you view INSTEX from the British side?
I hear what you say from the perspective of people in Tehran, though I wouldn't be so dismissive of this development.
I think in that France, Germany and Britain have decided to go down this route, very much contrary to the wishes of the current administration in Washington, it is a major development and Tehran simply shouldn't dismiss it out of hand at this stage.
Let me elaborate on INSTEX’s primary objectives to begin with. They quite rightly set themselves the objective in the first place of handling humanitarian transactions. Now I think this is a very sensible way forward. Humanitarian transactions must always be the first and foremost concern.
And there are problems, no doubt, in the ability of British companies in the field of pharmaceuticals, health care, and agritech in exporting their goods to Iran because they cannot transact payments easily. Now this cannot be good under any circumstances. But more to the point, humanitarian supplies have never been sanctioned throughout even the tightest period of sanctions on Iran. So there are no grounds for stopping those kinds of transactions anyway.
There is also the fact that the US administration has confirmed that there are broad exemptions for the supply of humanitarian goods to Iran. So it’s not running counter to their express statements on this sort of subject area.
In the International Court of Justice’s provisional judgment on the case that the Iranians requested them to review – which was that the new US sanctions were in breach of a longstanding treaty of amity between Iran and Unites States – it ruled that the US should do nothing to stop the supply of humanitarian goods. So all of these things add up to INSTEX taking the right steps, getting the priorities right by focusing on these things first.
Now, if INSTEX can carry out these transactions effectively, operationalise the system, find proper channels through which the money is paid to exporters from Europe, then it gives them the opportunity to exercise the mechanism and then to see whether they can comfortably extend it into other non-controversial areas.
Let's talk about risks around doing business in or investing in Iran. What are the key elements of political and commercial risk as you see them? How should investors attempt to mitigate those?
Well, I think foreign direct investment is clearly going to be on everybody's mind as an area of concern while the current tensions continue. It's very difficult to imagine serious companies investing hundreds of millions into Iran when they don't know immediately what the future - in the medium term - is going to bring. But in terms of a straightforward transactions, I think that there are more opportunities.
Exports to Iran in certain areas can still be affected, but the concern will be this: as the oil sales do decline, Iran's ability to earn hard currency will drop off. Then the value of the Iranian Rial will decline as well. We've seen it halve perhaps in a year and that in turn makes it difficult to buy hard currency.
So the big question for exporters to Iran is going to be how do I get paid? Even if I can find a channel down which I can get paid, which could be INSTEX, how will the Iranians be able to pay me? Will they have the hard currency to settle their bills?
Now, what the Iranians in turn have been doing is prioritising various sectors for hard currency. And that means that if you are buying something in the pharmaceutical or the agricultural sectors, anything to do with humanitarian goods and so on - the basic requirements of the country - they go to priority number one. Whereas luxury goods are simply not going to get the formal government approval for transactions in which hard currency is to be sent abroad.
So there's going to be a push and pull effect here. Is the exporter confident that their goods are going to get into the top category for payment in hard currency? And is the government confident that the goods being imported are worthy of being in that top category? And that is, I think, going to determine the precise areas for interest in trade with Iran, which brings us right back to the humanitarian sector again.
Given that the IRGC dominates, or monopolises, key sectors in Iran and taking into consideration the nature of the security apparatus there, how much consideration should this issue be given by foreign investors in Iran?
Well, notwithstanding the most recent US State Department designation there has always been a set of entities and individuals who have been designated under sanctions regimes. Any British company coming to us for advice is directed to consider whether they know exactly who owns the company that they are trading with.
So doing due diligence, other people are more careful and call it a partner profiling, is very important. You need to be confident that the organisation you're dealing with is not one of those that is sanctioned by the British government.
On the website of the British government Treasury there is a list called the consolidated sanctions list. And that consolidated sanctions list includes the individuals and the entities which are sanctioned by the British government. And it covers every country and organisation in the world which Britain has under sanctions.
But, when you do your due diligence a simple scan may not be good enough in the current circumstances. It may be more important to increase the level of due diligence given the difficulty of the circumstances. Risk goes up. So, your effort has to increase.
There are certainly companies who still think that trading with Iran is worthwhile and those who want to trade in the pharmaceutical areas or healthcare are still committed to trade with Iran. And therefore British companies should just go that extra yard or two to make sure that the people they're dealing with are not sanctioned as far as the UK is concerned.
I have to go on to develop this and say that there are commercial considerations beyond sanctions and that is this: if your company has an opportunity to trade with Iran but currently trades with the United States, and the value of your trade with the United States is, let's say five times that of your trade with Iran, you have to consider whether you want to take that risk of trading with Iran. Because the American position as expressed by a number of senior officials has been in the first place, ‘you can either trade with Iran or you can trade with America, but you can't trade with both.’
So the idea there is, that if a company wants to deal with Iran, there will be circumstances in which the US is not going to stop that, but what they can stop is the ability of that company to continue trading with America. So that then becomes a purely commercial calculation and a number of companies are making their decision based on that set of factors, rather than, on a concern that they're going to be hit hard by any extra territorial sanctions.
How do the US secondary sanctions affect British trade with Iran?
Well the US had always maintained a set of sanctions on Iran and that was a set of sanctions that the UK never imposed post the implementation date.
So any British company, for instance, that wanted to trade with Iran had to be really sensitive to some primary sanctions that were still in place from the US side.
There were notably three things a British company could not sensibly engage in without upsetting the Americans or endangering or putting themselves in jeopardy. First, the company could not trade in US dollars. Second, it could not export goods which contained 10 percent or more by value of American supplied components. And third, American citizens were not permitted to trade with Iran.
British companies had more or less come to terms with that. So they traded in Euros. They were very careful either not to include American components in what they were selling to Iran, or they would go out and seek permission from the American side, perhaps with a waiver from the Office for Foreign Asset Control. And they were all very cautious about engaging American citizens in the exercise.
But even bearing that in mind, there were still substantial difficulties. And the single biggest difficulty, since the lifting of UK sanctions, has been that British clearing banks have not wanted to handle transactions with Iran, despite the UK government's encouragement of trade with Iran.
They have simply taken the position, ‘we are just not going to take this risk.’ And I think that was for a number of reasons.
For example, a number of banks had had a bumpy time, in terms of getting caught by US authorities in money laundering exercises. Not consciously. But failing to do due diligence.
In other cases, European banks had traded with Iran at a time when the Americans were strictly against it. Deutsche bank and BNP Paribas both got heavily hammered and this was a warning to British clearing banks.
Despite the fact that the British government said it is okay to trade now, and despite the fact that some senior officials from the Obama administration were trying to give reassurance, the banks simply did not want to take that risk.
And since the election of President Donald Trump and the cranking up of sanctions, I can imagine there would be people inside the banks who would say: ‘yes, we did the right thing. We weren't lulled into trade with Iran during the Obama period. We were much more prudent in staying away, otherwise we would have been caught out by a backlash.’
And of course, in the past couple of days, there have been further media reports of Standard Chartered having been hit for a USD 1 billion fine precisely because of transactions relating to Iran and Huawei.
How do you view the future trade relationship between the Britain and Iran post-Brexit?
So this is a very interesting question simply taken from the trade point of view.
If you look at the bilateral agreements that have been put in place by the Department for International Trade to facilitate a continuation of British trade with the rest of the world post-Brexit, you see that there has been a huge effort in setting up continuity arrangements with a large number of countries with which Britons have a long-term relationship.
But they are not big countries in terms of the level of trade. We are talking about places like the Dominican Republic, the Faroe Isles, and Suriname. These countries have their continuity agreements in place. The UK government even has a continuity agreement with the Palestinian Authority. Now, Iran is a much bigger potential market than any of those.
So, if Britain is prepared to do continuity trade deals with these countries, scale will not be the reason why it would hold back from doing a deal with Iran. Clearly, how high up Iran is on the list of priorities for the UK will be determined not so much by the potential scale of its economy – attractive as it is – the obstacle will be political.