Western petchem progress slow in Iran despite promise, US casts a shadow

17 January 2018 12:07 Source:ICIS News

LONDON (ICIS)--Progress by western businesses into Iran has been slow despite the promise the resource-rich country offers for petrochemicals producers, due to challenges of doing business there and fear of sanctions snapping back in the wake of US uncertainty on the deal.

The South Pars Epecial Energy Economic Zone, Iran (source: FLPA/REX/ShutterstockThe opportunity offered by the lifting of trade sanctions on the second-largest Middle East and North Africa (MENA) economy in early 2016 was viewed by some market players as equal to that of post-glasnost Russia.

An investment-starved country with a young, highly-educated workforce and the second-largest gas reserves in the world, Iran was an especially intriguing and daunting proposition for petrochemicals players.

For some, sanctions were a dam holding back a tidal wave of petrochemicals, ready to flow into Europe the moment the floodgates opened, and for others it offered a potential site for new world-scale complexes.

2016 was dotted with reports of firms considering multi-billion dollar commitments in the country, with the Iranian government actively courting western chemicals firms.

Iran’s PressTV reported in 2016 that BASF was considering a $6bn investment, and CEO Kurt Bock confirmed in February 2017 that the company was considering opportunities.

However, few of the investments under consideration have come to pass yet, with no large-scale production complexes yet agreed by European petrochemicals players in Iran in the last two years.

Iran has been plugged back into the global financial system and international companies are becoming more comfortable with how to comply with the letter of the law for remaining sanctions, but the country remains an intimidating place to operate, according to William Breeze, a partner at law firm Herbert Smith Freehills.

“The country has a lot of promise but remains pretty challenging from a lot of respects. Anti-money laundering, counter-terrorism financing, just the financial architecture of the country, they’re all way behind the curve, so it’s not an easy place to get involved in,” said Breeze.

“It is an amazing opportunity, one client described it as big as China, but people have been incredibly wary, particularly on the banking side.”

Financing remains difficult to secure, with western banking groups remaining wary of the sensitivities of doing business in a place where due diligence is tough to carry out, staying compliant with remaining sanctions can be problematic, and the current nuclear deal seems fragile.

“Talking to banking clients, 98% of them just say 'we can’t do this'. US banks can’t operate there, UK banks say the risk profile is much higher than the reward,” Breeze (pictured) said.

Despite the nuclear deal, US primary sanctions remain, and some key operators in the country also remain censured by the EU and UN.

Western players cannot deal with Iran’s Islamic Revolutionary Guard Corps (IRGC), a paramilitary organisation controlled by Supreme Leader Ali Khamenei, which is reported to control around a quarter of Iran’s economy.

“It is pretty much impossible to deal with an IRGC-linked entity, unless you’re willing to take some extremely relaxed views of sanctions which not many people are,” Breeze said.

Aside from the worry of finding itself in violation of remaining sanctions, the shadow of the US has loomed large over the country, with uneasiness about the stability of the current status quo continuing to hang a question mark over feasibility of investments in Iran.

“Fear of sanction snapback is definitely a big feature, and Trump’s non-recertification last year didn’t help with that. There is also the idea of shadow sanctions – not having sanction per se in place but worrying about irritating the US,” Breeze said.

“If I am a bank and I know I’m not sanctioned and I start doing business with Iran, I might be concerned that the Department of Justice might start crawling all over my American business,” he added.

People pass by posters of candidates in the run-up to May 2017 elections (Maryam Rahmanian/REX/Shutterstock)
People pass by posters of candidates in the run-up to May 2017 elections. Source: Maryam Rahmanian/REX/Shutterstock

Relations between Iran and the US deteriorated further last week.

The terms of the US-Iran nuclear deal require a waiver to be approved by the US President every 180 days, and Donald Trump – an outspoken critic of the deal long before he took office – had originally refused to sign the waiver in October.

The US President eventually signed the waiver on 12 January, but said that it would be the last time unless the terms of the deal were made considerably stricter.

In a fiery statement, Trump condemned Iran as “the world’s leading sponsor of terror”, and called for measures against the country developing a nuclear programme to continue indefinitely, as well as adding 14 new names of the individual sanctions list, among them Iran's chief justice Sadegh Larijani.

Iran’s foreign ministry responded in kind, calling the statements “hostile and illegal”, and threatening reprisals.

While a more positive outcome than the reintroduction of nuclear sanctions, the hostility from either side is unlikely to calm worries over the stability of investments in Iran.

“Uncertainty remains. It's unclear whether pending investment will be shaken loose by Friday's [12 January] announcement,” Breeze said.

The reintroduction of sanctions by the US could be sufficient to close the door on Iran for western investment in Iran before it has properly begun, according to Breeze.

“I think if sanctions came back it would be very chilling, not just because of retrospective sanctions but what that says about doing business in the country generally, and whether that will cause companies to avoid it,” he said.

Even if the US can be mollified by its European partners, the volatility surrounding the increasingly threadbare nuclear accord over the last two years makes the prospect of investing capital long-term difficult.

Provision of project finance to western companies to pursue projects in Iran may also be daunting to many financiers, raising further hurdles for chemicals firms looking to take the plunge.

“It would still be putting the money in. If you are investing in the country and sanctions snap back then you might have to get that money out very quickly, which could prove difficult, so you’ve got a challenge there,” Breeze said.

“For a lot of companies with existing documentation on loans or bonds, the sanction wording may well inadvertently catch them out. That’s a point to be careful about,” he added, noting that companies looking for funding should look east rather than west at present.

There is also the risk that the lack of investment from the west so far and the ratcheting tensions with the US could cause Iran to turn its gaze inward.

Many Iranian citizens also bought into the idea of a gold rush once sanctions relaxed, with the anticipation of an immediate influx of foreign capital to boost wages and aid the replacement of antiquated telecoms, infrastructure, residential and airline stock.

The failure of this to materialise so far was a key factor in the street protests that broke out in the country in January, leading to mass arrests.

“I think they were expecting to get a lot more international investment than they have. The unrest in the last couple of weeks directly comes out of that, and the fact that they haven’t been able to achieve the level of investment, particularly the trickle-down effect that they’ve hoped for,” Breeze said.

Trump was quick to characterise the protests as a groundswell of activism pushing for a regime change, but this is belied by current Iranian President Hassan Rouhani’s decisive victory in a general election held in May 2017, widely regarded as continued endorsement of his reform proposals.

“My hope is that the unrest of the last couple of weeks will drive the authorities to open up the country a little more, because they’ll say ‘okay, we’ve taken steps so far, we need to get more international investment, more international engagement’,” Breeze said.

“If they go back to the autarky they had before, that is not going to help anyone. Rouhani promised a lot, he tried his best. He hasn’t delivered yet but is trying, and there needs to be more of the same."

Pictured top: The South Pars Special Energy Economic Zone on Iran's Gulf Coast
Source: FLPA/REX/Shutterstock

Interview article by Tom Brown

By Tom Brown