Trump’s Presidency: An end for MNC Opportunities in Iran?

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US President-elect Donald Trump’s comments on his Middle East policies have been extremely vague and contradictory. Yet, he has clearly conveyed a hostile attitude towards the Joint Comprehensive Plan of Action (JCPOA), known as the Iran nuclear deal, leading senior executives to question the fate of their Iran plans.

While it is unclear if and how Donald Trump would act on his campaign promise to prioritize “dismantling this disastrous deal with Iran,” or -as interpreted by his foreign policy advisor Walid Phares- review the deal and renegotiate it, it is clear he will increase efforts to prevent its implementation. There are several scenarios of what he can do, and their effects on multinational companies (MNCs). While the picture is mixed for European companies, in all scenarios American companies are unlikely to see improvements in their ability to do business with Iran. Regardless of where they are based, companies must devise contingency plans specific to their legal vulnerabilities and ensure they have mechanisms to signposts for scenarios most critical to their business.

Scenario 1: Inaction by the US leaves the Iran deal ineffective for American companies

Likelihood: High

Effect on US companies: Negative

Effect on non-US companies: Neutral

Regardless of whether Trump can “rip up” the nuclear deal or not, simple inaction by the Office of Foreign Assets Control (OFAC), the branch of US Department of Treasury that regulates sanctions- related issues, in terms of easing restrictions on US companies as well as the financial sector could make the deal de facto dead for US companies.

Albeit minimally, OFAC had in fact eased some restrictions in the last few months, allowing subsidiaries of US companies to do business with Iran under certain conditions, and allowing banks to process US dollar transactions with Iran as long as those dollars didn’t enter the US financial system. Similar moves are highly unlikely to occur under Trump’s term. This, in effect would significantly discourage large international banks from entering Iran in the foreseeable future.

Effect on MNCs:

Non-US companies would be able to do business with Iran, but by only using Tier 2 European or some emerging markets banks. This scenario would keep the cost of financial transactions and compliance checks high for the foreseeable future. Companies planning to increase their commercial activities with or in Iran in 2017 must factor this into their plans now.

US companies on the other hand, would still need to obtain licenses from OFAC to directly do business with Iran. Under specific circumstances, they could use a subsidiary based outside of the US. However, operating in this environment becomes increasingly risky as the outlook for further OFAC guidance is unclear and the pressure on OFAC to limit and complicate commercial relations with Iran will intensify, increasing compliance risk for American companies.

Scenario 2: Radical Trump unilaterally ends deal implementation

Likelihood: Medium

Effect on US companies: Negative

Effect on non-US companies: Neutral

Technically, President Trump, with the support of a Republican Congress could unilaterally decide not to implement the Iran deal and abrogate it. Under President Trump and the Republican Congress, OFAC could rescind the previous guidance it had provided, and return regulations to the pre-deal levels. However, this action would leave the US in violation of international law, as the JCPOA had been approved by the UN Security Council. This move would not eradicate the deal itself, rather unilaterally end American implementation of it. The key question here would be whether Trump’s European, Chinese, Russian counterparts will follow, which FSG believes would be unlikely. Not only are these countries looking forward to the economic benefits of Iran’s opening up, but would also be angered by US unilateral action to obstruct a deal that was a result of years of negotiations.

Effect on MNCs:

This scenario would leave the US companies at a significant disadvantage, as other countries continue and actually increase trading with Iran, leaving US companies behind their competitors. Similar to the previous scenario, non-US companies would be able to do business with Iran, however, with high cost of financial transactions and compliance checks for the foreseeable future. This scenario would also require all MNCs to continuously monitor changes from the US in terms of further expansion of their unilateral sanctions, possibly creating disruptions for their business.

Scenario 3: Moderate Trump tries to convince multilateral deal abrogation

Likelihood: Low

Effect on US companies: Negative

Effect on non-US companies: Negative

Over the next few years, Trump could take a more gradual approach and begin efforts to convince world leaders to collectively negate or re-negotiate the Iran nuclear deal. In order to do so, he would have to convince those who had signed the deal: other permanent members of the UN Security Council (France, UK, China and Russia) and Germany. To pass such a resolution, he would also need to have four additional votes from rotating members of the UN Security Council. FSG believes Trump would find it quite difficult to convince all actors, and considering his campaign statements, may not even prefer a multilateral approach, making this a low likelihood scenario.

Europe: Under current governments, European countries are highly likely to maintain their commitment to the nuclear deal. Since the deal’s implementation, they have shown considerable efforts to initiate trade missions, memorandums of agreement, and encourage their companies to invest in Iran. Even in a scenario of right wing parties increasing their power in France and Germany, these governments are likely to focus on issues domestic to the EU, rather than prioritizing a difficult task of re-negotiating the Iran deal.

China: China will benefit significantly from Iran’s opening up, whether it is through importing Iran’s oil, selling to its large population or investing in the country directly. Thus, Trump will find it very difficult to convince China, especially if he also increases his rhetoric against trade deals with China or China’s handling of its currency.

Russia: Currently Russia has a relatively pragmatic and effective relationship with Iran in the Middle East and is unlikely to compromise that in the near future. However, President Putin could also use the Iran deal as a negotiation tool with his American and European counterparts to secure concessions in other areas.

Meanwhile, the success of Trump’s efforts will highly depend on Iranian actions. The only condition under which this scenario becomes more likely is if Iran acts in such a way as to clearly signal to the world that it is pursuing a nuclear weapon, and that it will not cooperate with the IAEA.

The Iranian regime would like to blame the US for not holding its end of an internationally-negotiated agreement. For this reason, FSG expects Iran to largely cooperate with the IAEA, and increase efforts to improve diplomatic and trade relationships with Europe as well as other major powers such as Russia and China, complicating Trump’s efforts in invalidating the nuclear deal. Perceived security risks regarding Iran would increase if a hardliner is elected president in May 2017 elections, and if under that president Iran significantly reduces its cooperation with the IAEA, which FSG believes has a low likelihood.

Effect on MNCs:

A scenario of eventual abrogation of the JCPOA, including by the UN Security Council, would prevent almost all companies from doing business with Iran. While this could take a few years to occur, MNCs should watch signposts of this scenario and begin preparing contingency plans for their investments if this scenario’s likelihood increases.

Signposts to watch:

  1. Rightwing parties in Europe obtaining significant power over policy making in the numerous elections scheduled in 2017, as well as increased reference to Iran in their statements
  2. Rapprochement between Russia and USA, that triggers statements from Putin criticizing Iran’s nuclear program
  3. Hardliner candidate being elected in Iran who increases anti-US rhetoric in Iran, where the focus returns to a security-focused economic and political policy making, emphasizing the importance of self-sufficiency in both economic and military means

All scenarios require MNCs to prepare contingency plans

While risk levels for different companies vary across different scenarios, Trump and the Republican party’s clearly hostile attitude towards the Iran deal requires all firms to re-evaluate their Iran plans, re-calculate their current and future risk exposure, and accompany their Iran strategy with contingency plans.

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