Iran's Financial Long Game to Beat the Nuclear Deal

Iranian oil minister Bijan Namdar Zanganeh. Wikimedia Commons/Hossein Zohrevand

Tehran hopes investment at home and abroad will ward off future sanctions.

Recent diplomatic efforts on the part of Tehran reveal it to be pursuing a two-pronged strategy towards attracting investment and reintegrating with the global economy: (1) seeking foreign capital to rebuild the country’s domestic infrastructure, while (2) using Iranian capital to finance the construction of oil refineries throughout the world. With Iran’s infrastructure investment needs estimated at $1 trillion over the next ten years, Tehran will be heavily reliant on project finance arrangements in order to rebuild its infrastructure. Under these arrangements, investors put up large sums of money in exchange for a return based on long-term cash flows—often for up to thirty years.

Iran’s heavy reliance on project financing arrangements will have consequences that far outlive the initial terms of the Iranian nuclear agreement, while creating a potentially unique set of incentives for the various parties in the event Iran defaults on its commitments or resorts to old patterns at the expiration of the Joint Comprehensive Plan of Action (JCPOA). As such, Tehran’s strategic thinking is clearly calculated well beyond the terms of the JCPOA. In its strategy to reintegrate with the world economy, Iran is playing the long game.

Sanctions Snapback and Incentives

The three main players involved in the sanctions regime were the United States, EU and UN. One of the most significant features of the JCPOA is the provision for the “snapback” of sanctions in the event of “significant non-performance by Iran.” In the event of a sanctions “snapback,” companies would not be punished directly for having entered into agreements with Iran at the time sanctions were lifted. Moreover, such contracts may also benefit from a grace period for investors to wind down operations in Iran. In the case of basic trade relations, the flow of goods must simply cease before the expiration of any wind-down period. What is less clear, however, is how this provision will be applied in the context of large infrastructure projects, which are often built and financed on the basis of cash flows that will last well beyond the terms of the JCPOA. Indeed, this provision could be applied to allow anywhere from a significant amount of time to wind down investments all the way to a more aggressive application that leads to absolute and immediate loss.

Given the possibility of total loss, European governments are likely to only seek “snapback” in the most egregious of circumstances—for example, an increase in Iran’s uranium stockpiles beyond the agreed limits. Of course, after the expiration of the JCPOA (in roughly fifteen years), UN and EU sanctions will completely terminate, making any reimposition of UN sanctions subject to the veto power of the UN Security Council. Any reimposition of EU sanctions will require the unanimous consent of the member states in the Council of the European Union. The United States can always unilaterally reimpose its secondary sanctions (which pre-JCPOA applied extraterritorially to non-U.S. entities that invested in Iran’s petroleum sector), but will likely find itself increasingly isolated and alone if it chooses to do so.

Iran’s strategy of utilizing long-term financing arrangements with foreign investors will thus give Iran additional leverage against efforts to rigorously enforce the JCPOA before it expires in roughly fifteen years. After the expiration of the JCPOA, however, Iran’s leverage will only increase, as any reimposition of UN sanctions will require significant international coordination. Such coordination will likely prove more difficult to come by, as non-U.S. investors will have made significant financial commitments while sanctions were lifted, and therefore have the most to lose.

Building at Home