The 14 July agreement on Iran’s nuclear programme has set in motion a gradual easing of the West’s position towards Iran and begun the processes towards a dismantling of the sanctions enforced by the United States, the European Union and individual countries aligned with either the USA, the EU or both.(1)
The ‘reopening’ of Iran, as it is being described in the West, has also raised questions of its potential adverse impact on the oil market. One individual who’s been in the forefront of the campaign to have the Iran sanctions lifted, of course, is none other than Sarosh Zaiwalla (pictured), senior partner of the London law firm Zaiwalla & Co. Mr Zaiwalla has built his own and the law firm’s reputation on successful litigation resulting in the end of several Iran sanctions in recent past. On 27 August, Mr Zaiwalla responded by email to The Middle East in Europe questions on the follow-up to the Vienna accord on 14 July 2015.
The Middle East in Europe. Can you summarise what sanctions are in place?
Sarosh Zaiwalla. Since the existence of undeclared nuclear facilities at Arak and Natanz in Iran came to the knowledge of the international community, the UN and EU have imposed sanctions to prevent Iran’s nuclear proliferation activities. The UN sanctions go back as far as 2005. (2) These early sanctions were then significantly expanded by both UN and the OFAC of US Department of Treasury (3) and also followed by the Council of the EU. These sanctions have included a block on arms exports, the imposition of asset freezes on a wide number of key individuals and companies, and the blacklisting of Iranian financial institutions, banks and a blanket ban on the import, purchase and transport of Iranian oil and gas.
MEE. What sectors of Iran are affected?
Zaiwalla. The international nature of the banking and energy sectors has meant that these industries have been specifically hurt by the sanctions regime. In particular, the funding of trade finance has suffered from sanctions on Iranian banks; in fact, in the three years following the UN sanctions resolution on Iran in 2009, UK exports to Iran fell by 73%.
Meanwhile, sanctions have crippled Iran’s oil production, halving oil exports and severely limiting new development projects. The prospect of the sanctions being lifted is creating great excitement within the industry, as foreign trade and investment will allow Iran to make huge efficiencies and drive down the cost of production. It is clear that Iran is preparing to make up lost ground and re-establish itself as a major supplier. Iran proposes to launch the new Iran’s Petroleum Contracts (IPCs) during December in London to increase recovery from its fields with the help and investment of foreign companies.
MEE. What sanctions are up for review and what kind of review can be expected, ie suspension, partial suspension, permanent cancellation or phased cancellation? It would be good to know what precise terms are being applied in the reconsideration of Iran sanctions currently in effect.
Zaiwalla. The P5+1 have signalled the lifting of all nuclear proliferation related sanctions. This will constitute a comprehensive lifting of all UN Security Council sanctions as well as multilateral and national sanctions relating to Iran’s nuclear programme.
However, the agreement will only come to effect in October 2015 (90 days after the UN Resolution 2231), ie the Adoption Day, and all sanctions will remain into place till the IAEA verification of Iran having abided by its obligations under the JCPOA (Implementation Day), which will lead to the lifting of the first phase of the sanctions. The sanctions will be lifted effectively in two stages, with all relevant UN and EU sanctions being fully terminated at the end of a third stage, being the Termination Day. The majority of sanctions relating to Iran’s financial energy and shipping sectors will be lifted after the IAEA verification of Iran’s obligations under the JCPOA, this is estimated to take anything between 6-9 months and reports indicate we could see the first and the most extensive phase of the removal of sanctions by the first quarter of 2016. This will lead to the de-listing of all individuals and entities listed in Attachment 1 to Annex II to the JCPOA, which includes the majority of Iranian banks and their EU subsidiaries and major Iranian companies in the oil, gas, petrochemical, shipping, and transport sectors.
The agreement is also subject to snapback provisions if Iran fails to comply with the terms outlined in the agreement, namely ensuring the UN has access to Iranian nuclear and military sites. The arrangement of snapback sanctions will last for 10 years until the Termination Day. Any disputes in this respect is to be resolved by the prescribed method of dispute resolution included in the JCPOA.
MEE. From what you know, recognizing that you represent an independent law firm and not Iran—nation or state—can you summarise for us the effects on Iran of the sanctions currently in place in humanitarian, economic, financial and fiscal terms?
Zaiwalla. It is quite clear that ordinary Iranians have suffered significantly as a result of sanctions. High rates of inflation in the Iranian economy have been a long-lasting problem for citizens, especially in relation to basic necessities such as food and medicines. These sanctions are therefore arguably in breach of United Nations 1948 Human Rights Declaration (4), which all member countries of United Nations have signed and which by Article 17 provides that the State will not injure the property right of any human being without a due process. Although necessary goods such as food and medicine have been exempt from sanctions, as a result of the wide nature of the financial sanctions and serious consequences enforced by the OFAC Department of Treasury of the United States and the relevant European authorities it has been extremely difficult for even the most necessary items to be imported into Iran. Whilst this has not resulted in a humanitarian crisis per se, the Iranian public and their businesses have suffered greatly and their chance to prosper significantly has been undermined.
MEE. Can you summarise effects on countries and organisations responsible for implementing the sanctions on Iran that currently are in place?
Zaiwalla. Sanctions often result in collateral damage to multinational corporations, whose operations underpin the global economy. A report by the National American Iranian Council estimated that sanctions on Iran last year  cost the United States up to $175 billion in lost export revenues. In the UK, the Government continues to prohibit banks from conducting any business with their Iranian counterparts, including the Central Bank of Iran. As a result, UK banks have found it very difficult to secure trade finance arrangements for contracts in Iran, which contributed to a fall of total of UK trade.
Once more, after our successful case against the HM Treasury, Bank Mellat—Iran’s largest private Bank sanctioned by the UK in 2009—is suing the UK Government for a damages claim of $4 billion. This landmark case has opened the floodgates for dozens of other sanctions-hit enterprises to follow suit which, if successful, could result in significant costs to the taxpayers of Europe.
MEE. Iran has been exporting oil and other commodities, industrial manufactures, raw materials and intangible goods even while it has been under sanctions. How will that trade be affected by any change in the current sanctions regime?
Zaiwalla. Iran is one of the largest oil exporters in the region. Reports from Iranian government officials indicate that upon a lifting of the sanctions Iran’s oil exports would reach 2.3 million barrels, an increase of 1.1 million barrels. This will also lead into a reduction of oil prices by 2016. Furthermore, with the opening of the market, competition will grow between importers into the country which will lead into an increase in overall supply in the market.
MEE. Iran has robust reasons for distrusting the powers behind the sanctions which, by and large, are the powers behind the destruction of its first democracy in the coup of 15-19 August 1953. Very ironically these are also the powers responsible for the perverse manner in which they obstructed, up to the last minute, the transition of power in 1979, with the resulting loss of many lives of the innocent. Then, again, these are the same powers who unquestioningly promoted Iran’s nuclear programme (5) in the 1970s despite poor governance under the shah and then considered bombing Iran into submission before the P5+1 nuclear deal of July 2015. Against this grim backdrop, what kind of working relationship can be expected to evolve between Iran and the parties to the sanctions?
Zaiwalla. Like the negotiators who spent many late nights trying to reach an agreement in Vienna, we have to approach this in the here and now. The ability of the P5+1 and Iran to strike this deal gives me great confidence that we are entering a new chapter of cooperation between Iran and the West. Iran is one of the three existing ancient civilisations and, as an ancient civilisation, will have the wisdom of only using nuclear energy for peaceful purpose. The deal is a step forward for a stronger, more stable region and it sends a strong signal to the world that Iran is opening its hand to friendship.
Iran can play a great and effective role in the region and remains to be the last untapped market and will provide a land of new opportunities and a very sophisticated market for traders. Officials from Germany, France and Italy have already visited the country to secure their position before the overall lifting of sanctions, which reflects the exceptionally high level of completion in place in this respect.
MEE. More oil—Iranian oil this time—on the market isn’t necessarily good news for the exporters or the consumers. Isn’t the importance of Iran oil’s return more in the symbolism than in the substance?
Zaiwalla. Iran’s return to the oil market could lead into tension between the competitors within the region and cause complications within OPEC. As far as there is demand in the market there should be room for Iran to take its fair share of the market. Although Iran is estimated to have a larger oil reserve in comparison to its competitors it should be noted that it will require foreign investments in its oil and gas fields to make a real influence on the market. Therefore, although Iran will be doing its best to regain its position as a major oil exporter on the market, the short-term effect will not be as large as Iran’s expected larger influence on the market in the coming years.
MEE. Current predictions suggest Iranian oil will depress the prices further and likely will kill off some of the exploration and certainly dampen the current shale bonanza? How, in your opinion, is this being viewed in Iran?
Zaiwalla. Iran has been very optimistic on regaining its position as one of the largest oil exporters in the region at any cost with estimates of 1 billion barrels being added to production within the next few months.
In my opinion it is correctly anticipated that the lifting of Iran’s oil and gas related sanctions will lead into a further reduction of oil prices, however it will take some time for the majority of Iranian oil to hit the market, as Iran will require foreign technologies to explore the majority of its oil and capital injection before being able to seek a return from it.
MEE. Does the Iran sanctions story signal conclusively that all such sanctions, historical as well as those in place elsewhere, are defeatist and a poor substitute for informed and measured diplomacy, Cuba being by far the most glaring example after Iran?
Zaiwalla. Sanctions are a necessary and effective tool in the act of diplomacy. If an entity has conducted wrongdoing, and the prosecuting party has sufficient evidence that it has done so, then sanctions are a more attractive punishment than war. However, sanctions must not be imposed without serious consideration—the sanctioned entity has every right under the principle of the Rule of Law to challenge the sanctions and prove their innocence. As the case of Bank Mellat shows, if the sanctioning country gets it wrong, then they could face a colossal damages claim which ultimately is handed down for tax-payers to pay.
© Some parts of this interview are subject to minor updates after replies from the interviewee. Please revisit and do not use, in the interim, any direct quotes without express written permission from the Editor.
Editor’s Notes & Background
- The Joint Comprehensive Plan of Action (JCPOA) is the official term currently applied to the international agreement on the nuclear programme of Iran. The signatories to JCPOA, signed in Vienna on 14 July 2015, are: Iran, the so-called P5+1—the five permanent members of the UN Security Council—China, France, Russia, United Kingdom, United States—plus Germany), and the European Union. Formal negotiations toward the Joint Comprehensive Plan of Action on Iran’s nuclear program began with the adoption of the Joint Plan of Action—an interim agreement on the Iranian nuclear program signed between Iran and the P5+1 countries—in November 2013. For the next twenty months, Iran and the P5+1 countries engaged in negotiations, and in April 2015 agreed on a framework agreement for the final agreement. In July 2015, Iran and the P5+1 agreed on the Joint Comprehensive Plan of Action. Under the agreement, Iran agreed to eliminate its stockpile of medium-enriched uranium, cut its stockpile of low-enriched uranium by 98%, and reduce by about two-thirds the number of its centrifuges for at least fifteen years. For the next fifteen years, Iran will only enrich uranium up to 3.67%. Iran also agreed not to build any new uranium-enriching or heavy-water facilities over the same period. Uranium-enrichment activities will be limited to a single facility using first-generation centrifuges for ten years. Other facilities will be converted to avoid proliferation risks. To monitor and verify Iran’s compliance with the agreement, the International Atomic Energy Agency (IAEA) will have regular access to all Iranian nuclear facilities. The agreement provides that in return for verifiably abiding by its commitments, Iran will receive relief from U.S., European Union, and United Nations Security Council nuclear-related sanctions.
- List of UN sanctions against Iran. https://en.wikipedia.org/wiki/List_of_United_Nations_resolutions_concerning_Iran
- Office of Foreign Assets Control (OFAC), US Department of the Treasury | Sanctions program
- The Universal Declaration of Human Rights
- Iran’s nuclear programme timeline