Since the implementation of the JCPOA in January of 2016, and throughout the current period of accelerating investment by foreign enterprises in Iran, many participants have taken for granted that in the event of a “Snapback” or the reimposition of UN, U.S. and EU sanctions under the provisions of the JCPOA, foreigners must perforce exit all investments in Iran and Iran’s major industries would be relegated to the shadows as an unlawful destination for foreign capital.
The operative assumption has been that any such reimposition of sanctions under a Snapback scenario would make it “impossible” for such foreign participants to maintain, lawfully, their investments in the various projects within Iran, investment they have made a huge effort to structure and uphold in the still-new era of significantly relaxed sanctions. In fact, the very idea of the impossibility of maintaining significant investments in Iran under such sanctions has become something of a fixation. To the dismay of Iranian partners in various ventures, their foreign partners tend to focus on securing their own interests, rights, and recompense under a Snapback. An efficient exit strategy is often sought.
In reality, those who are here on the ground in Iran know that, regardless of the whims of the American President or the vicissitudes of foreign capital flows, the continued development and renovation of Iran’s domestic economy, both in terms of absolute production, as well as in terms of sophistication, efficiency, and integration, will continue apace, and therefore, the wiser among the stewards of foreign investment in Iran understand that it is as much a question of ensuring business continuity for their Iranian-Foreign joint venture projects despite changing international sanctions regimes, which have been imposed by the West against Iran for decades.
As a result, the most basic and fundamental considerations for any prospective foreign project participant and its Iranian partner become:
1. How the foreign participant can, through appropriately drafted “Impossibility Clause(s)”, remain invested in the Iranian venture for as long as possible under the threat of renewed or reimposed sanctions, and without incurring unacceptable risk.
2. How the foreign participant can contractually envision the broadest range of adverse sanctions scenarios through a single and efficient impossibility mechanism.
3. How the foreign participant can provide for a gradual approach to any putative withdrawal procedure, as opposed to the simplistic solution of outright termination upon Snapback after a period of suspension.
4. How the foreign participant can, in the event of the extinguishment of impossibility, subsequent relaxation or obtained exemption of sanctions, reasonably provide for the right, or at least the option, for itself to reenter an investment project which it may have exited because of Snapback.
The legal thought process underpinning successful solutions which industry practitioners may be likely to embrace is beyond the scope of this article, but the conceptual summary can be a useful guide for all of us as we come to grips with what can be made possible by “Impossibility Clauses”.
1. Remaining invested, minimizing risk: Of course, it is true that for many projects, a direct investment by the foreign participant though its stake in an Iranian joint venture entity may be the most straightforward means of effecting the transfer of capital that allows the foreign party to have a stake in a project. It also allows for the simplest mechanism by which a foreign party may apply for and successfully obtain an investment license in accordance with the Foreign Investment Promotion and Protection Act.
Nonetheless, such a direct investment may, particularly in the case of European entities which also do business in U.S. jurisdictions or in jurisdictions which have significant links with the U.S. financial system, provide little or no cushion under even the most benign reimposition of any form of secondary sanctions. This is because the direct investment leaves the foreign party little room to maneuver by way of restructuring or otherwise allocating its participatory interest in the project as sanctions change.
For this reason, a more effective solution could include the formation of a foreign special purpose vehicle to act for the project entity. In the case of a joint venture, an SPV incorporated in a jurisdiction less likely to be adversely affected by reimposition of sanctions would allow for a more flexible platform to facilitate intelligent solutions such as exit and re-entry options, trustee or agency relationships, and contingent sale-repurchase strategies to prepare for the worst outcome of a sanctions scenario which may force a foreign party to exit Iranian investment.
2.Knowing unknowns, counting uncountables: Even now, with the most recently issued ultimatum by the American President declaring that the end of the JCPOA as we know it is nigh (to be either amended or abrogated, if Mr. Trump is to be believed), there exists a wide variety of circumstances involving the reimposition of sanctions, ranging from those that would make the maintenance of an interest in a project by a foreign party merely inconvenient to those which would make maintaining such an interest lawfully untenable. These may range from largely toothless, otherwise symbolic targeted secondary sanctions which apply only to the entities of specific countries, as we have continued to see since Trump’s October 2017 decertification, or those which may apply only to certain economic sectors or types of goods or projects, to those which render further financial flows in support of such a project functionally impracticable. Most challenging of all would be the failure of the UN to continue to waive the imposition of sanctions against Iran.
Thus, a single mechanism to classify sanctions in some way as materially adverse changes and evaluate consequences seems a more pragmatic solution than contemplating what may constitute an “impossibility” event, and including it under grounds for termination.
Under a scenario in which the foreign party has made appropriate structuring preparations as suggested, the determining exit remedies depends on compliance with mandatory applicable laws of the project vehicle’s jurisdiction. To put it another way, the most straightforward test of whether the foreign party may have to adjust, or exit from its participation, comes down to whether it can fulfill project obligations while abiding by all applicable regulations that may apply to it. Beyond such a litmus test, imagining or prognosticating about the myriad complexities of a possible Snapback scenario may be fruitless and contractually inefficient.
3.Avoiding the black-and-white trap: Of course, a foreign project participant can easily avail itself of the opportunity to stipulate that under any kind of scenario of project impracticability caused by sanctions, certain or envisioned, termination shall be the one and only prescribed remedy.
But this is likely to disadvantage the foreign party in the context of negotiations over comprehensive project terms with its Iranian counterparty, and it may limit the scope of the project work itself and fail to allow for a more complex investment structure which cannot survive the threat of termination overnight due to a “Snapback” of one kind or another.
Aside from termination, and its precursor remedy, suspension, there should also be the possibility to contemplate a variety of concepts including assignment, agency and delegation, in order to benefit from the vagaries of sanctions regulations and their exemptions. In some cases, project obligations which would be in violation of sanctions for some foreign entities may not be so for others. As has been shown by the agreements between foreign export credit agencies (“ECA”s) such as EKF, BPI and Invitalia, developments at an international level, especially where adequate sovereign support and sufficiently ringfenced banking facilities exist, are being contemplated to facilitate the kind of continuity required for the decades-long projects now underway in Iran. In addition to these ECAs, other parties such as quasi-sovereign corporations, particularly those from less dollarized jurisdictions, can play a role as fallback transferees of the exiting foreigner’s project interest or shares under Snapback. Moreover, it should always be noted that under even the most negative circumstances, the potential for a foreign party to obtain a waiver does exist and can be specified for the benefit of all parties.
4.Saving face, weighing options: Although some foreign entities have a checkered past derived from cutting and running under the threat of or the actual imposition of sanctions against Iran, time has shown that many of the same foreign parties which were forced, or chose, to exit their project ventures are the first ones to have returned since the JCPOA. Such is the compelling nature of Iran as a destination for foreign capital.
Iranian parties to a project know both this history itself and its implications. Foreign participants may wish to keep close to the exits, but foreign companies that have been victimized by their own government’s whims regarding sanctions, and the slippage inherent in exiting and reentering, cannot be understated.
For this reason, foreign project partners may choose to consider the solution of exit and entry “options” for themselves under adverse sanction scenarios, and thus it is important for all parties involved to understand what an “option” precisely means, and how to value such an option.
In financial speak, an option is defined as the right but not the obligation to sell (or buy) an asset in a fixed quantity at a fixed price on (or before) a fixed date in time. In the case in question, the asset is the participatory interest of the foreign party in the Iranian project, and the date is that point in time at when the parties to a project agree that the foreign party must leave due to sanctions (or is able to re-enter due to easing of sanctions).
However, it is not obvious immediately what the fixed price should be for foreign project interest at the time of exit or re-entry, and, most importantly, what may be overlooked is the tremendous value that such an option has. In finance, the greater the underlying uncertainty about an asset, the more valuable any option on that uncertain asset is. Similarly, the longer the life of an option on an asset, the more valuable that option is. In the context of long term investments, any option to exit (or re-enter) should be linked with a significant premium (that is, the worth of the option), and the contract parties should ensure that they successfully negotiate an appropriately fair value for the flexibility the options offer. As an illustrative example, the alternative to any exit put option for the foreign party is a fire-sale in the face of illiquid conditions for its share interest under the menace of reimposed international sanctions, or more problematic still, the inability to exit its share interest altogether, which an option is supposed to protect against.
Absent a foreign investor’s legal immunity to the whims of the UN, OFAC, or other authorities, there is no perfect panacea for fool proofing long-term Iranian projects against the kind of uncertainty which the spectre of sanctions create. But although this threat, to a certain extent, has forestalled the growth in Iran’s industry and economy despite the strengthening of Iran’s relationships with the international community, it is now apparent, moreso than ever before, that foreign parties can be expected to take an increasingly pragmatic approach in efforts to remain engaged with their Iranian projects for as long as possible. They can effectively do so by allowing for the most flexible and broad classification of sanctions-related termination risks, by specifying a menu of contractually stipulated responses to reimposed sanctions (in conjunction with intelligent and pre-emptive project structuring) and by exchanging due consideration with the Iranian party for the invaluable options which allow them to remain confident that they can, if absolutely necessary, exit the project and someday re-enter, at a fair price.
Thus, it seems that the operative watchword for all foreign investors in Iran is continuity: continuity of the progression towards innovation, development and growth, and continuity of the participation of foreign interests in that process, bolstered by intelligent structuring solutions, both legal and financial, for dealing with the complicated reality of international economic sanctions. With a measure of foresight, and a functional, flexible contractual framework, all participants in long-term, large-scale project joint ventures can move closer to the ideal of mitigating most, if not all, of the adverse consequences of sanctions regulations on investment decisions and risk management.
First published in our partner Tehran Times
Deeper reforms in Korea will ensure more inclusive and sustainable growth
Short-term prospects for the Korean economy are good, with an uptick in world trade and fiscal policy driving growth, but productivity remains relatively low and the country faces the most rapid population ageing in the OECD area, according to a new report from the OECD.
The latest OECD Economic Survey of Korea looks at recent economic developments, as well as the challenges to ensure that the benefits are shared by all. The Survey projects growth of about 3% for the 2018-19 period, and lays out an agenda for ensuring broader-based and more inclusive growth going forward.
The Survey, presented in Sejong by the head of the OECD Korea/Japan Desk, Randall Jones, highlights the need for new policies to help the government overhaul the traditional export-led growth model and to promote innovation led by SMEs and start-ups. It discusses reforms to the large business groups (chaebols), to achieve higher productivity and more inclusive growth, and proposes policies to enhance dynamism in SMEs and boost entrepreneurship. It also outlines the key challenges for reaching higher levels of well-being.
“Korea has rebounded after several years of sub-par growth, and the expansion is expected to continue,” Mr Jones said. “However, the traditional economic model of manufacturing and export-led growth is running out of steam. The challenge going forward will be to develop a new growth model that addresses today’s economic and social polarisation and leads to a more sustainable and inclusive economy for all Koreans.”
Despite the important role of the large business groups in Korea’s economic growth, the Survey says that a more balanced economy with larger roles for services and SMEs would promote inclusive and sustainable growth. The Survey suggests that strengthening product market competition, by relaxing barriers to imports and inward foreign direct investment and liberalising product market regulation, would reduce rent-seeking behaviour by large firms. Corporate governance reform is also necessary.
Beyond chaebol reform, the Survey identifies measures that would enhance dynamism and productivity growth in SMEs, including regulatory reforms, better access to credit, changes to the insolvency framework and improvements to the vocational education system.
The Survey proposes a range of potential reforms to boost well-being in Korea, including measures to expand female employment; labour market reforms to break down the segmentation between regular and non-regular workers; policies to reduce elderly poverty; and the use of economic instruments to reduce greenhouse gas emissions and air pollution.
Extending people’s working lives could add US$3.5 trillion to OECD GDP in long run
Extending people’s working lives to reflect the ageing of their populations could release massive untapped value for their economies to the tune of US$3.5 trillion across the OECD as a whole in the long run.
Iceland, New Zealand and Israel are the leaders in boosting employment rates among older workers, setting a model for others to follow, according to the latest research by PwC.
Between 2015 and 2050, it’s estimated that the number of people aged 55 and above in the 35 OECD countries will increase by almost 50% to over 500 million. But how many of these half a billion people will be working?
PwC’s Golden Age Index benchmarks, ranks and analyses the performance of OECD countries in fostering older people’s participation in the workforce through employment and training data. It reveals how large potential economic gains are available if employment rates for those over 55 can be raised to those of the top performers.
Current employment rates for workers aged 55-64 vary dramatically across the OECD, from 84% in Iceland and 78% in New Zealand to 38% in Greece and 34% in Turkey.
For example, increasing the over-55 employment rate to New Zealand levels could deliver a long-run economic boost worth around US$815 billion in the US, US$406 billion in France and US$123 billion in Japan – with the total potential gain across the OECD adding up to around US$3.5 trillion. This economic uplift would be combined with significant social and health benefits from older people leading more active lives and having higher self-worth through continuing to work where they wish to do so.
John Hawksworth, Chief Economist at PwC UK, comments:
“Of course, it’s good news that we’re living longer. But an ageing population is already putting significant financial pressure on health, social care and pension systems, and this will only increase over time. To help offset these higher costs, we think older workers should be encouraged and supported to remain in the workforce for longer. This would increase GDP, consumer spending power and tax revenues, while also helping to improve the health and wellbeing of older people by keeping them mentally and physically active.”
For governments, ways to realise these benefits include reforming pension systems and providing other financial incentives to encourage later retirement – steps that several countries are already prioritising.
Significantly, the top-performing countries on the Index tend to share a number of characteristics, including a labour market that supports flexible working and the implementation of reforms targeted at older workers, such as redesigning jobs to meet physical needs. Successful policy measures include increasing the retirement age, supporting flexible working, improving the flexibility of pensions, and providing further training and support help older workers become ‘digital adopters’.
To help governments take the right actions, PwC has used this year’s update of the Golden Age Index to carry out a rigorous statistical analysis of the underlying drivers of higher employment rates for older workers across 35 OECD countries.
The findings from this analysis include that financial incentives like pension policy and family benefits can influence people’s decision to stay employed, and that longer life expectancy is associated with longer working lives. The study also shows that flexible working and partial retirement options can pay dividends for employers, as can redesign of factories, offices and roles to meet the changing needs and preferences of older workers.
A further area that the latest Golden Age Index examines concerns the implications for older workers of rising use of artificial intelligence (AI) and related automation technologies in the workplace. It finds that these technologies raise both potential opportunities and challenges for the over-55s.
Up to 20% of the existing jobs of older workers could be at risk of automation over the next decade, so retraining and lifelong learning will be critical to enable older workers to take up the many new job opportunities that AI and related technologies will create.
PwC UK Chief Economist John Hawksworth explains: “AI technology can boost economic growth, generate more labour demand and support longer working lives, for example through the use of digital platforms that allow older workers to market their skills more widely. However, our estimates suggest that older workers do face a higher risk of job automation compared to other age groups, with up to 20% of the existing jobs of over-55s at potential risk of automation over the next decade. Measures to support lifetime learning and retraining for older workers will be critical to maximising the gains from these technologies while mitigating the costs.”
Further reforms needed for a stronger and more integrated Europe
The European economy is growing robustly, helped by accommodative monetary policy, mildly expansionary fiscal policy and the global acceleration. The current economic expansion should be used to speed up implementation of reforms to the euro area architecture and EU policies that would support greater European integration and ensure stronger, more inclusive long-term growth, according to two new reports from the OECD.
The latest OECD Economic Survey of the European Union and Economic Survey of the Euro Area look at the factors behind the strong recovery, as well as the challenges facing Europe. The Surveys project growth topping 2% for the 2018-19 period, and lay out an agenda for boosting long-term growth and living standards across Europe.
The Surveys, presented in Brussels by OECD Secretary-General Angel Gurría, highlight the need for EU budget reform, more efficient cohesion policies to reduce regional divides and further efforts to deepen the single market. The OECD also discusses how completing the banking union, creating a common fiscal support scheme and simplifying fiscal rules would strengthen the euro area by making it more resilient to economic shocks.
“After years of crisis, positive economic momentum has taken hold across Europe,” Mr Gurría said. “Growth continues at a solid pace, and has broadened across sectors and countries. The conditions are right for a new wave of reforms to revive the European project and ensure that the benefits are shared by all.”
The Surveys say that macroeconomic policy must be tailored to support economic expansion while reducing imbalances. Monetary policy should remain accommodative until inflation is durably back to the objective, even as the ECB prepares for a very gradual normalisation of its policy. With an economic expansion under way, governments should reduce debt-to-GDP ratios. Simplified fiscal rules and a stronger focus on expenditure growth should help achieve this objective without derailing the recovery.
Ensuring the stability of the monetary union and enhancing the common currency’s resilience to downturns will be critical to future economic progress. More risk sharing will be necessary. The Survey calls for a European unemployment reinsurance scheme to cope with economic shocks too large to be dealt with solely by national fiscal policies or monetary policy. Reforms to develop the capital markets union along with a rapid reduction of non-performing loans are also important to allow a better functioning of the Economic and Monetary Union.
Additional reforms to complete the banking union are also necessary, in particular the setting up of a common European deposit-insurance scheme and using the European Stability Mechanism as a backstop for the Single Resolution Fund; both reforms would help prevent any future banking crisis developing into a sovereign debt crisis. The introduction of additional capital charges for banks holding high levels of government debt from their own country should occur alongside the creation of a new European safe asset. This would favour the diversification of banks’ exposure to government debt and mitigate negative feedback loops between weak banks and stressed public finances.
Reforms to the EU budget can enhance growth and make it more inclusive. There is scope to increase member states’ contributions, including by reassessing how the European budget is financed, as the current financing does not reflect countries’ ability to pay. The EU Survey suggests that resources to finance growth-enhancing spending, including R&D, be freed up by phasing out production-based payments in the Common Agricultural Policy and better targeting regional policy to lagging regions.
Improving the functioning of the Single Market would boost growth and living standards, the Surveys said. There is scope to ease regulatory burdens and address barriers to trade in services, improve cross-border cooperation in the energy sector through better power system operation and trade, and help member states boost digital skills acquisition.
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