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The Interim Agreement on Iran’s Nuclear Program: Implications for Iran Sanctions

November 25, 2013

 

On November 24, 2013, Iran and the E3/EU + 3 (United States, Russia, China, European Union, United Kingdom, Germany, France) reached a set of initial understandings intended to halt the progress of Iran’s nuclear program for six months as a first step toward a long-term comprehensive solution. Joint Plan of Action; Fact Sheet: First Step Understandings Regarding the Islamic Republic of Iran’s Nuclear Program. Among other commitments, Iran accepted limits on uranium enrichment above certain levels and construction of additional enrichment and processing facilities, and it consented to IAEA monitoring and inspection of certain nuclear facilities. In exchange, the E3/EU + 3 will provide an initial six months of limited relief from economic sanctions. This relief includes pausing efforts to further reduce Iran’s crude sales, refraining from imposing new nuclear-related sanctions, and facilitating humanitarian trade for Iran’s domestic needs.

The White House emphasized that “the key oil, banking, and financial sanctions architecture” remains in place, and that the E3/EU+3 “will continue to enforce these sanctions vigorously.” The interim sanctions relief nevertheless will have important immediate consequences for U.S. trading partners, who will benefit from the suspension of the threat of U.S. secondary sanctions regarding trade in Iranian crude oil and petrochemicals.

Others must remain cautious: Nothing in the Plan of Action will alter requirements embedded in U.S. law, including sanctions targeting new investments in Iran. In addition, many aspects of the interim relief appear relatively inconsequential, as licenses for exports of food, agricultural commodities, medicine, and medical devices to Iran already may be secured under U.S. regulations, and U.S. sanctions generally except transactions outside of the United States involving shipments of such items by non-U.S. persons to Iran.

Longer term, the Plan of Action may well mark a watershed event in the projection of U.S. economic sanctions extraterritorially. Market observers have already speculated that oil-importing nations will exceed the projected cap on Iranian exports of crude oil, and that lifting sanctions on marine insurance will enable greater Iranian exports. With the resumption of increased trade, it may prove difficult to reinstate the full sanctions so long as negotiations on Iran’s nuclear program continue, even if a comprehensive solution is not reached during the next six months.

The Sanctions Pause

The announcement addresses several sanctions measures that are mandated in U.S. law, subject to Presidential waiver decisions.1 Among other specific items:

  • The EU and United States will pause efforts to further reduce Iran’s crude oil sales and suspend sanctions on associated insurance and transportation services.
  • The EU and United States will suspend sanctions on Iran’s exports of petrochemicals, gold, and precious metals.
  • The United States will suspend sanctions targeting Iran’s auto industry.
  • The E3/EU+3 will license the supply and installation of spare parts and associated services for Iranian civil aviation.
  • The EU, the United States, and the United Nations Security Council will refrain from imposing new nuclear-related sanctions.

Notably, the National Defense Authorization Act requires the President, every six months, to determine whether countries have “significantly” reduced their purchases of petroleum and petroleum products from Iran. If so, he may waive sanctions that would otherwise ban banks of such countries from doing business in the United States. Such waivers have been granted repeatedly.

On September 6, 2013, Secretary of State Kerry announced that such waivers had again been extended to Japan and 10 European countries. On December 2, the State Department similarly must decide whether to extend the waivers previously given to South Korea, China, Turkey, India, and five other countries. The Plan of Action clearly anticipates that those waivers will be extended; an open question is whether more general waivers will be granted on the basis of the interim agreement, to avoid potentially difficult “significant reduction” decisions for some countries.

Potential Congressional Reaction

The Plan provides that the “U.S. Administration, acting consistent with the respective roles of the President and the Congress, will refrain from imposing new nuclear-related sanctions.” On its face, this commitment ensures a presidential veto of new sanctions targeting Iran’s nuclear program – but not, for example, of new legislation responding to Iran’s support of international terrorism.

Senior Congressional leaders of both major political parties, including members of the Senate Banking and Foreign Relations Committees, have voiced concerns about the agreement and have indicated that they may pursue sanctions legislation. The House of Representatives passed an Iran sanctions bill last July which, among other specific items, would broaden sanctions against Iranian officials involved in terrorism or responsible for human rights violations. That bill also would make it even more challenging to find a “significant reduction” of Iran oil imports. The Obama Administration, however, seems likely to succeed in opposing any Congressional action that would undercut the Plan of Action while negotiations proceed to their next milestone in six months.

Implications for the Business Sector

Since 1995, the United States has prohibited U.S. companies and persons from exporting, importing, or investing in Iran. Many Iranian entities are also targeted under U.S. economic sanctions measures aimed at persons involved in the proliferation of weapons of mass destruction. Beginning more than a decade ago, the United States has periodically extended the extraterritorial reach of Iran sanctions policy, moving beyond restrictions on U.S. persons to sanctions that target non-U.S. persons doing business in Iran, so-called “secondary sanctions.”

While the new Plan of Action is a momentous development, it leaves untouched the comprehensive Iran sanctions regulations that apply directly to U.S. companies and their foreign subsidiaries. There is no immediate prospect that either the Congress or the Administration will alter that legal regime. For non-U.S. companies (particularly for those with existing business in Iran), the temporary easing of some of the secondary sanctions is a favorable development. Nonetheless, uncertainty about the outcome of future negotiations means continuing significant risk for anyone seeking new opportunities to do business involving Iran.

[1] For a full description of current U.S. sanctions targeting Iran, see O’Melveny & Myers Client Alerts: New Executive Order Extends Extraterritorial Reach of U.S. Iran Sanctions, Broad New Legislation Further Expands Economic Sanctions Against Iran and Syria, and New Iran and Syria Sanctions Pose Compliance Challenges of both U.S. and non-U.S. Businesses.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Theodore Kassinger, an O'Melveny partner licensed to practice law in the District of Columbia and Georgia, Greta Lichtenbaum, an O'Melveny partner licensed to practice law in the District of Columbia, and David Ribner, an O'Melveny associate licensed to practice law in New York and the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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