Wednesday, March 16, 2016

Japan’s return to Iranian market ‘complicated’

The Oilholic is back in Tokyo, some 6,000 miles east of London, and is finding Japan Inc. rather content with a crude oil buyers’ market. In fact, if anything, even the relatively higher oil price, has fallen to a third of the level this blogger noted when he was last here (in September 2014).

One outstanding issue – of re-establishing ties with the Iranian market – remains ‘complicated’ to quote analysts and legal professionals in the Japanese capital. Up until 2006, the point of the first wave of stringent UN sanctions on Iran against its nuclear programme, Tokyo enjoyed good ties with Tehran, symbolised first among other things by its stake in the Islamic republic’s Azadegan oilfield

However, that was then, and by 2010 matters progressively worsened as the US and European Union moved to impose yet more stringent sanctions on Iran following an escalation of Tehran’s nuclear ambitions, and the West’s wariness of it. 

Subsequently, Japan duly shunned Iran in wake of international sanctions, even if it wasn’t easy for the largest liquefied natural gas importer and third-largest net importer of crude oil and oil products in the world to do so. Following Iran’s return to the international fold and a lifting of international sanctions, unsurprisingly Japan’s government was among the first to follow China in resuming ties with the country’s oil and gas sector, and the wider economy. 

In February, a framework was also put in place under which Tehran would guarantee $10 billion in investment projects financed by the coveted Japan Bank for International Cooperation (JBIC) and insured by Nippon Export and Investment finance. There’s one nagging problem though – the US is yet to fully lift its sanctions on Tehran and that makes Japanese banks, heavily intertwined with American financial system, wary of participating.

Unless commercial banks participate and capital flow mechanisms are established, JBIC cannot finance a project. And in any case an international remittance system needs to work, and major commercial banks, not just Japanese ones, need to resume normal operation before things can get off the ground. Not much of that has happened. 

Experts at law firm Baker & McKenzie’s Tokyo office say the appetite for investment in Iran is definitely there, yet very few Japanese companies have actually signed deals on account of risk associated with falling foul of US sanctions. 

Of course, leading law firms are ever willing to conduct due diligence to protect their clients’ foray into Iran. Furthermore, Washington has lifted sanctions on non-US banks, but nothing is quite so straightforward.

Partial US sanctions require anyone international banks deal with in Iran is not on the US Treasury’s “Specially Designated Nationals” (SDN) roster. The sanctions also cover any company that’s 50% or over 50% owned by an entity or person blocked by the US State Department, even if the company in question is not on the Treasury Department’s SDN roster. 

The only ‘crude’ saving grace is that a stagnant Japanese economy’s demand for oil is at its lowest since 1988, while glut troubled suppliers are queuing up twice over to sell their cargo at discounted prices. Given current oil and gas market permutations, the headache is as much Iran’s to contend with. That’s all from Tokyo for the moment folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Tokyo Skyline from Sumida River ferry, Tokyo, Japan © Gaurav Sharma, March 2016.

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