Business World

Monday 19 February 2018

Why the private sector will decide if historic nuclear deal with Iran survives

Iranians celebrate in Tehran this week after the nation’s nuclear negotiating team struck a deal with world powers in Vienna. Photo: Getty Images
Iranians celebrate in Tehran this week after the nation’s nuclear negotiating team struck a deal with world powers in Vienna. Photo: Getty Images

Nate Olson

The twists and turns on the path to the final deal on Iran's nuclear programme might pale in comparison to those yet to come. And delivering on one of the deal's most important commitments will depend on a party that was never at the negotiating table.

The accord calls for removal of a portion of the sanctions levied against Iran. That would be a largely pro forma exercise at the UN and in countries' respective legal systems. But Tehran does not care about sanctions relief per se. What it wants is an economic benefit that lasts.

That will require trade and investment decisions made by companies around the globe to fall in its favor. For the private sector, though, this is no ordinary cost-benefit calculus.

Behind closed doors, firms mulling major engagements in Iran have stressed one thing: They need to see greater clarity in the international regulatory environment toward Tehran.

Years of security tensions and multiple waves of sanctions - not to mention billions of dollars in related industry fines and settlement agreements - have made Iran a toxic place to do business. Many firms have cut back relevant business relationships beyond what the letter of the law mandates.

The envisioned sanctions relief alone is unlikely to reverse this trend of private-sector disengagement. Companies still fear that political events down the road could again change the rules of engagement - exposing them to economic, legal and even reputational damage.

They also must continue to respect the sanctions that remain, some of which include complex, multijurisdictional, due-diligence requirements. Financial services companies are particularly concerned.

The basic dynamic at work here is obviously not lost on government officials. Their thinking was perhaps best summed up by US Treasury Secretary Jack Lew: "The mere possibility or anticipation of sanctions has real economic consequences as investors take notice and businesses are disrupted.

"And when we act, governments, businesses, banks and financial institutions around the world often comply even when they may not be legally obligated to."

It is no coincidence that he delivered his remarks in June 2014, well before a long-term nuclear deal with Iran was at hand. So he was able to stop at explaining - cogently - how sanctions helped officials meet their original objectives, at least temporarily. In fact, industry disengagement was a sign of just how effective sanctions could be.

More than a year later, as the focus shifts to implementation of the freshly concluded deal, it is apparent that Mr Lew did not capture the full consequences. The fallout could be more far-reaching and endanger even the core security objectives of the United States, Britain, France, Russia, China and Germany, the six world powers that negotiated the deal in Vienna.

If industries are not confident that political and regulatory conditions will settle into relative stability, disengagement could persist long after sanctions go. And if Iran judges its economic dividend has not materialised, it might be tempted to scuttle the security dividend sought by the P5+1 - verifiable limitations on its nuclear activities.

The deal's "snapback" provision to restore sanctions amplifies these tensions. It would fast-track the reimposition of sanctions if Iran were to break its commitments. Far from bringing clarity to business expectations, it amounts to a political tripwire for yet another shock to the legal framework.

What steps can officials take in the near term to mitigate the risks that continued industry disengagement could pose for the long-term success of the deal? For starters, they must improve coordination at national and international levels - and they must bring the private sector into the process. Streamlined communication and enhanced industry feedback would better enable them to tackle related challenges, such as limiting legal entanglements that firms could face from new sanctions tactics and harmonising regulatory and enforcement actions. While priorities might change, this coordination would remain crucial. In all likelihood, its benefits would extend to how many other sanctions regimes function.

Ideally, one or more existing institutions could lead the efforts. One would be the Financial Action Task Force, whose 36-member governments and regional organisations develop standards to combat money laundering and terrorist financing. To its credit, it recognises industry disengagement as a serious concern, and addressed the issue again in June.

But its private-sector outreach - essentially, occasional meetings with financial services firms - is not adequate. While finance companies are the weapon of sanctions architects, the disengagement issue demands more regular consultation with a more diverse set of international commercial players.

In addition, the task force is not equipped to handle the broader problems against which sanctions are being deployed. Not least the very deliberately named "nuclear-related sanctions" at issue in the Iran deal.

Other potentially helpful organisations, including the UN, have similar gaps. The lack of a robust role for nongovernmental stakeholders is the most common, and most severe.

But given the urgency to shore up this hard-won pact, searching for the perfect institutional formula is not an option. With the drama of reaching the nuclear deal soon to give way, officials should look to sit down at a different negotiating table - with industry leaders and independent experts - and set about this work together. (Reuters)

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