THINK TANK

In a climate of ever-increasing US and EU sanctions against Iran, what will the country’s election of a ‘moderate’ president mean for sanctions and the shipping industry?

Iran’s newly elected leader, Hassan Rouhani, has been lauded by some commentators as a vital ingredient to ease the impasse between Iran and the West. Rouhani is a proven moderate, a pragmatist and a technocrat, evidence of which was documented throughout his tenure as Iran’s chief nuclear diplomat between 2003 and 2005. Indeed, the Muslim Cleric’s inaugural speech on August 4 was peppered with reformist language, pledging a government of moderation with “wisdom and hope”.¹

He also spoke about internationally-imposed sanctions on the regime, and the need to acquiesce with the West over Iran’s nuclear programme. During his swearing-in he pledged to engage in, “serious and substantive”²  negotiations over Iran’s nuclear programme, urging the international community to, “talk in the language of respect rather than the language of sanctions”. This is a substantial move away from the Islamic Republic’s former president, Mahmoud Ahmadinejad, who made incendiary decisions on foreign policy, while fervently supporting Iran’s Uranium enrichment program. It was, in fact, during his period in office that some of the most stringent US and EU sanctions were implemented, which has led to the state Iran finds itself in today.

The effect of Iranian sanctions over the last four decades has driven the country’s economy into disrepair and isolated Iran’s energy, shipping and banking sectors. In the last year alone sanctions have caused Iranian oil exports to fall by 40 per cent, forcing the nation to find alternative shipping methods to keep up a flow of crude and other exports out of the country.  Iran has experienced a sharp decline in the value of the Rial, pushing the price of even staple commodities to a level that many Iranians cannot afford.

It seems that Rouhani has awoken to an inescapable truth: if the Islamic Republic is to survive, the economy must be rescued. This can only be done if sanctions are lifted, and international bodies can only lift sanctions if the nuclear issue can be defused. For some, Rouhani’s intention to propose further discussions with the P 5+1 ^{3 i}s a move in the right direction and could signal the beginning of a genuine warming in relations between the regime and the international community. But Iran’s future with the West rides on far more than a change in president and a promise of more discussion, begging the question: is there scope for substantive change?

Those with a more sceptical view are less convinced, believing that genuine trust between the West and Iran, leading to an easing of international sanctions, is extremely unlikely. This is for two reasons. The first is that Iran’s default position on security matters has been – and will continue to be – a hard line. The Supreme leader, Ayatollah Khamenei, will continue to act as the executive on all matters relating to foreign, security and nuclear policy, and his position with regards to Uranium enrichment is unlikely to change. Many agree that the new president has little say with few formal powers, meaning his call for dialogue and nuclear transparency will have little tangible effect.

The second is that it’s far easier for Iran to break an agreement with an international sanctioning body than it is for the international sanctioning body to re-impose sanctions. Iran could be seen to be adhering to a bilateral agreement to relieve sanctions, while continuing a programme to enrich uranium. It is likely, therefore, that the US, EU and other sanctioning bodies continue to maintain a tentative position on Iran, particularly as it took so long to impose sanctions in the first place. Thus, the shipping sector, as the primary mode for trade to and from Iran, is likely to remain heavily under watch, particularly in light of recent attempts by Iran to circumvent sanctions.

So, what does this mean for the shipping industry? It’s likely to be business as usual in the short and medium-term. While Iran is undergoing a seemingly ‘reformist’ makeover, many see this as a calculated decision – and authorisation – by Ayatollah Khamenei to promote Iran’s image abroad, and is unlikely to alter the West’s perception towards Iran. However much Rouhani pledges transparency during his time in office, suspicions toward the overarching aim of the Islamic Republic, particularly on matters relating to security and uranium enrichment, will continue.

In short, it is likely that sanctions will remain for the next two to three years at least. Although it remains unclear whether additional layers of sanctions are to be implemented, the patchwork laws and regulations currently in place continue to be numerous and comprehensive, forcing ship-owners and charterers to do their homework on Iranian entities and their subsidiaries.⁴ As of July this year, sanctions now extend to the automotive industry along with financial transactions in the Iranian Rial, rendering the regime even more high risk for businesses. While the new president could be the catalyst for a warming in relations, residue left over from the previous administration is likely to remain. Iran’s nuclear intentions are far too murky for sanctions to be lifted, despite calls from the new ‘reformist’ leader.

© GRAY PAGE ® 2013

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¹ http://www.bbc.co.uk/news/world-middle-east-23565996

² http://www.tehrantimes.com/component/content/article/52-guests/109862-language-of-respect-is-better-than-the-language-of-sanctions

³ USA, UK, Russia, China and France

⁴ A guide to the current consolidated list of asset freeze targets designated by the United Nations, European Union and United Kingdom under legislation relating to current financial sanctions regimes updated on July 29 2013 can be found here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/206118/irannuclear.pdf

The US Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked persons list updated August 4 2013 can be found here: http://www.treasury.gov/ofac/downloads/t11sdn.pdf

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This paper is intended as a general summary of issues in the stated field. It is not a substitute for authoritative advice on a specific matter. It is provided for information only and free of charge. Every reasonable effort has been made to make it accurate and up to date but no responsibility for its accuracy or correctness, or for any consequences of reliance on it, is assumed by Gray Page.