gulf iran sanctions deal

August 2015 | the gulf the gulf | August 201530 31

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“The United States will … allow for the sale of commercial passenger aircraft and related parts and services to Iran,” states the Joint Comprehensive Plan of Action (JCPOA), the document outlining the deal, before emphasising that aircraft must be “used exclusively for commercial passenger aviation”. In return, Iranian carpet-makers and some food producers will be allowed to export their goods to America.

The special export privileges extended to Boeing, America’s aircraft manufac-turer, suggest a clear understanding of the commercial spoils that await aerospace companies in post-sanctions

Iran. They may also be a tacit admission that earlier US policy towards Iran’s civil aviation sector was misguided.

Ever since the 1979 Revolution, Iranian airlines have been blocked from buying western-built aircraft, spare parts and related services - including much-needed maintenance contracts to keep their fleets airworthy. In princi-ple, the embargo was designed to stop Tehran from using civilian aircraft for military purposes; for example, by shipping arms and personnel to region-al allies such as Syria and Lebanon. In practice, it simply forced Iran’s airlines into the black market.

Deliveries of second-hand Boeing and Airbus aircraft have continued in Iran despite the sanctions, typically facilitated by front companies in the Middle East and former Soviet states. Though some deals were disrupted by the Office of Foreign Assets Control (OFAC), the agency within the US Treasury that enforces sanctions, many more slipped through the net. Once an aircraft had been paid for and landed in Tehran, OFAC had little recourse beyond slapping further sanctions on the intermediaries who helped disguise the transaction. Spare parts for mainte-nance and repairs have made their way into the country through the same illicit channels, along with sub-standard imitations.

While the black market kept Iranian airlines flying, it did so at a cost. Some 28 civilian aircraft have crashed in Iran since the turn of the century, extinguishing more than 500 lives. Ascribing blame for individual incidents is difficult - not least because of Tehran’s inhospitable treatment of air crash investigators - but no-one seriously doubts that sanctions have been a contributing factor to the country’s poor track record.

Undeterred by the humanitar-ian impact of civil aviation sanctions, OFAC was ratcheting up the pressure on Iranian airlines as recently as May 2013. In an expansion of its sanctions list issued that month, the agency reiterated warnings that Iranian aircraft were “used, interchangeably, to move suspected illicit cargo to the Syrian regime and provide civilian passenger flights to Europe and Asia”.

But while its rhetoric was combative,

ThIS is the end of ‘Death to America’,” gushed one Tehran-based analyst as he joined the throngs of

Iranians celebrating in the streets of their capital city. Following 20 months of negotiations, and 36 years of diplo-matic acrimony, Iran and six global powers put their differences behind them on 14 July with the announce-ment of a landmark nuclear agree-ment. Though the talks centred on curtailing Iran’s uranium-enrichment programme, their success promised so much more: a geopolitical re-birth for an international pariah state; a social awakening for 77 million Iranians; a commercial revolution for their $420 billion economy.

Jubilation on the Iranian street was

the average aircraft age of iran air’s fleet is 26 years

While the black market kept iranian airlines flying, it did so at a cost. some 28 civilian aircraft have crashed in iran since the turn of the century, extinguishing more than 500 lives

the special export privileges extended to Boeing, america’s aircraft manufacturer, suggest a clear understanding of the commercial spoils that await aerospace companies in post-sanctions iran

tempered by more cautious reactions in the business community. Nuclear sanctions will not be lifted until Implementation Day, which is still several months away and could be undone by political antagonism on either side. Even after implementation, sanctions relating to terrorism will be unaffected. The suspended nuclear sanctions will, meanwhile, apply mainly to non-US entities, leaving the American embargo almost fully intact.

Giving the rest of the world first dibs in the Persian gold-rush may seem a curious move, but Washington has been careful to provide one all-important domestic sector with a VIP pass.

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by Martin [email protected]

AVIATION

A massive planned fleet renewal programme for Iran’s airlines should deliver a potent symbol for a new era of co-operation between two geopolitical adversaries Airlines to get

their wings “



Washington was in fact on the verge of a historic policy change. Just six months later, in November 2013, the Geneva interim agreement was signed between Iran and the P5+1 countries (China, France, Russia, the UK and the US; plus Germany). A precursor to this summer’s JCPOA, the pact outlined the steps to be taken by both sides on the path to a final settlement. Chief among these was the introduction of temporary sanctions relief for specif-ic Iranian sectors - including civil aviation.

The relief period initially ran for six months from January 2014, but was subsequently extended through to the final deal. Under the terms of the agreement, OFAC authorised the supply and installation of spare parts necessary “for safety of flight for Iranian civil aviation”. It also approved “safety-related inspections and repairs”. Boeing later confirmed that it was among the ten or so western firms issued export licences, initially opting to supply flag-carrier Iran Air with aircraft manuals, drawings, navigation charts and data for safe operations. Engine manufacturer General Electric also received a licence.

Farhad Parvaresh, the chairman of Iran Air, welcomed the development as a positive step forward, while voicing concerns about the limited scope of the relief. “In my opinion, everything in the aircraft is a matter of safety,” he said in June 2014. Parvaresh added that several western companies were thought to be sitting on the sidelines, waiting for the sanctions to be permanently lifted before devoting resources to Iran. Their opportunity has now arrived.

From Implementation Day onwards, OFAC’s remit to issue aviation-related licences will be dramatically expand-ed. As well as facilitating the mainte-nance, repair and safe operations of Iran’s existing fleet, the US agency will for the first time since 1979 authorise the sale and lease of civilian aircraft. Tehran’s Civil Aviation Organisation (CAO) estimates that the country could acquire 400 planes over the next decade, overturning its ignominious reputation as an aviation museum for retired models. About one quarter of

still in commercial operation globally - was built in 1977.

Abbas Akhoundi, Iran’s transport minister, indicated in July that fleet renewal will also be a priority for Iran Aseman Airlines, one of the country’s main private carriers. But the govern-ment has so far avoided comment-ing on the outlook for its larger rival Mahan Air.

In OFAC’s May 2013 update, the US agency reserved particular scorn for Mahan Air’s managing director, hamid Arabnejad, whom it accused of having a “close working relationship” with the

iran has seen 28 civilian aircraft crashes, resulting in the loss of more than 500 lives since the turn of the century

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Quds Force, the special forces unit of Iran’s Revolutionary Guards. By adding Arabnejad to its Specially Designated Nationals (SDN) list, OFAC express-ly prohibited US and non-US entities from business dealings with the airline boss. Mahan Air itself had already been designated in October 2011 for its alleged involvement in a plot to assassinate Saudi Arabia’s ambassador to Washington. The lifting of nuclear sanctions in accordance with the JCPOA will not affect these designa-tions, raising the spectre of “complica-

tions” for western aviation firms.“Any US companies that explore

opportunities for sales of aircraft or spare parts to Iran … will need to take steps to ensure that licensed aircraft, goods and services are not provided to persons on the SDN list, and that they are intended for civil aviation use,” US law firm Skadden warned in its analysis of the JCPOA. “OFAC can be expected to actively monitor this activity.” Its admonishment applies to non-US entities in equal measure, due to OFAC’s extra-territorial reach for

terrorism sanctions. Mahan Air likely saw the writing

on the wall long before the nuclear agreement was signed. In May, just as the diplomatic talks were coming to a head, the airline took delivery of eight widebody Airbus A340s and one narrowbody A321. It allegedly used Iraq’s Al Naser Airlines as a front to acquire the aircraft, most of which had previously been operated by Britain’s Virgin Atlantic Airways.

The new additions have pushed down the average age of Iran’s active fleet to 19 years, according to Akhoundi. Recent maintenance work has also lifted the proportion of operational aircraft in the 250-strong nationwide fleet to 68 per cent. Though welcome news for Iranian airlines and passen-gers, these incremental improvements pale in comparison to the transforma-tive renewal now on the horizon.

Iran’s estimated requirement of 400 aircraft over the next decade has been broadly endorsed by western analysts, who predict aggregate deal values in the tens of billions of dollars. Airlines often place large orders spread over a broad timeframe in order to reserve delivery slots with aircraft manufactur-ers.

Speaking to reporters in May, Marty Bentrott, Boeing’s vice-president of sales for the Middle East, Russia and central Asia, confirmed: “We’ve done a pretty good assessment on our side and we think the demand, should things open up, would be very strong.” Approached by Reuters after the nuclear

tehran’s Civil aviation Organisation (CaO) estimates that the country could acquire 400 planes over the next decade, overturning its ignominious reputation as an aviation museum for retired models

as the prime beneficiary of a rejuvenated aviation sector, iran air will become the public face of the re-fleeting

those aircraft will be destined for Iran Air, which has a fleet with an average aircraft age of 26 years. Iran Air’s oldest plane - the only Boeing 747SP

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deal was unveiled, the US manufac-turer was more reserved, declaring that it will wait for Congressional approval before commenting. European aircraft manufacturer Airbus also said any discussions would be premature before Implementation Day. Their cautious tone was not echoed in Tehran, with Akhoundi proudly declaring that “extensive negotiations with companies supplying planes” are already under way.

As the prime beneficiary of a rejuvenated aviation sector, Iran Air will become the public face of the re-fleeting. Parvaresh is keeping the field wide open, declaring his interest in all four of the most popular widebod-ies currently produced: Boeing’s 787 Dreamliner and 777, plus Airbus’s A330 and A350. For short-haul flights, he has previously described the A321 - a stretched version of the hugely popular A320 - as well suited to Iran’s long domestic sectors.

Some political quid quo pro will almost certainly be necessary if Washington is to win an order for the 747-8, the latest version of its double-decker jet. Boeing has sold just 51 passenger versions of the 747-8, with many operators discouraged by the low fuel efficiency of the four-engine type. “We have been an operator of the 747 for so long … but economically and commercially we have to see [if the 747-8 is suitable],” Parvaresh said last year, acknowledging that his pilots and engineers have a soft-spot for the aircraft. “I think 777 or Dreamliner would be a better aircraft than 747-8 for our present network. For the future, maybe 747-8 is possible.”

In step with warming bilateral ties, Iran’s new aircraft will almost certainly be used to restore nonstop US connec-tivity. The one-million-plus Iranians living in America are currently forced to take connecting flights over Europe or the Middle East when travelling back to their homeland.

Iran’s CAO has been talking up the prospect of approving both Iranian-operated and US-operated flights since 2013. Though premature two years ago - when no American carriers had expressed interest in serving Tehran, and Iranian airlines were

blocked from re-fuelling their planes in the US - nonstop flights have become markedly more viable under the JCPOA. The appetite for route launches was affirmed in July, when Mohammad Khodakarami, the CAO’s newly appointed head, announced the imminent addition of several new European services.

In spite of the positive outlook, some analysts have downplayed the signifi-cance of the nuclear deal to Iranian civil aviation. Speaking to Bloomberg, Richard Aboulafia, a consultant with Teal Group, argued that Iranian airlines have irrevocably fallen behind the Gulf’s ‘big three’ carriers: Emirates, Etihad and Qatar Airways. he speculat-ed that rising passenger demand in Iran

will primarily benefit those regional market leaders.

however, while it is true that Iran Air and others have significant ground to cover, it is wrong to suggest they face an insurmountable handicap. The CAO will almost certainly protect local operators by tightening bilateral traffic agreements with the Gulf countries, thereby restricting two-stage journeys over the UAE and Qatar. As Iran Air expands its fleet and adds new destina-tions, the flag-carrier’s economies of scale should gradually move closer to that of the ‘big three’. Together with favourable political developments and long-term investment at Tehran Imam Khomeini International Airport, Iran’s capital can aspire to the same intercon-tinental ‘mega-hub’ model as Dubai, Abu Dhabi and Doha.

Whatever the moral justification for imposing international sanctions on Iran, targeting the country’s civil aviation sector has always been an unpopular move within the global aerospace community. The forthcom-ing fleet renewal will help reverse this historic mistake, while deliver-ing a potent symbol for a new era of co-operation between two geopolitical adversaries. <

as iran air expands its fleet and adds new destinations, the flag-carrier’s economies of scale should gradually move closer to that of the ‘big three’

the agriculture destruction wrought by conflict is not at the top of the assad regime’s in-tray. exports have fallen to only a fraction of the average of about $12 billion a year in the 2006 -10 period

Mahan air used an iraqi front to acquire aircraft for its expanding fleet in May

the FaO has warned that syria will face a deficit of 800,000 tonnes of wheat this year

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By any measure, Syria’s econ-omy is in dire straits. Even its ability to feed itself is under strain; wheat production this year will only reach 2.445

million tonnes, according to the Food and Agriculture Organisation (FAO), leaving a deficit of 800,000 tonnes.

Since the country’s dramatic late 2000s drought played a major role in shaping the anti-Assad movement - forcing impoverishment on many rural areas of Syria - this will trigger concern among the Assad regime’s leadership. A severe drought in 2008 and poor rainfall in the following two years led to massive population movements in the main cities. Many of these were in the forefront of the protests that were met with a tough response back in 2011.

As a timely new report from UK thinktank Chatham house, Syria’s

Rising extremism and loss of natural resources have set the once growing Syrian economy back decades of development

Conflict economy staggers on

by James [email protected]

Economy: Picking up the Pieces notes, economic grievances, including popular resentment at market-oriented reforms, played a part in the 2011 uprising against the regime. Increased poverty and inequality alongside the rise of a new wealthy business elite made for a combustible mix, says the report.

The more than 50 per cent contraction in the Syrian economy since 2011 means agriculture has assumed a bigger role in national output in relative terms, and food production has fallen sharply as a result of the conflict.

But the truth is, the agriculture destruction wrought by conflict is not at the top of the Assad regime’s in-tray. Exports have fallen to only a fraction of the average of about $12 billion a year in the 2006-10 period.

The Syrian pound has depreciated by about 80 per cent since the start of the conflict. The Assad government has had to cut fuel and food subsidies, with a budget deficit of about 20 per cent of

SYRIA

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GDP, which can only by financed by borrowing from the central bank.

The president has this year lost much of his ability to generate income, having seen significant losses of territory in the Euphrates valley to rebel groups, result-ing in a steady decline in oil output to 164,000 barrels per day (b/d) in 2012, about 30,000 b/d in 2013 and only

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gulf iran sanctions deal

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