Expanding Horizons for US-Turkey Trade?

It was announced this week that Turkey’s Economy Minister has proposed the upcoming creation of a working group for a US-Turkey Free Trade Agreement (FTA). This overlapped a visit to Washington by a Turkish delegation which included a US Chamber of Commerce hosted event in honor of Turkish Deputy Prime Minister Ali Babacan on Wednesday. The recurring theme in that event by seemingly all the speakers was the need to expand US-Turkish bilateral trade. Certain indicators albeit perhaps anecdotal can lead one to think that this relationship will only grow over time.

Most measures indicate that Turkey’s economy has been booming in the past decade.  Indeed, it is now the world’s 17th largest. According to the US Trade Representative’s Office, US exports to Turkey increased 38% in 2012 alone, and the general figure is 292% from 2000. However, anybody who visits Turkey will likely notice that US commercial penetration is probably not where it should be and Turkey’s business footprint in the US is still somewhat faint. More can clearly be done.

As Turkey works to expand its economic influence throughout the globe, it is only natural that trade with the United States will increase.  Furthermore, it is to be expected that US interest in Turkish trade will also expand as Turkey will become a more critical regional and global player.  Given Turkey’s goal of becoming a top 10 economic power by 2023, Turkey and the US may find their economic ties increasingly indispensable and needing of expansion.

Libya – The Next Frontier for U.S. Business?

International media showered viewers with historic images of the Libyan rebels parading into Tripoli and chipping away at the final vestiges of Muammar Qadhafi’s 42-year rule.  The past 42 years were wrought with lost opportunities for a country with a relatively low population and wealthy in natural resources.  With the emergence of the Transitional National Council (TNC) as the new governing power in Libya, there is some optimism for what the future may bring for global, particularly U.S. business.

International business is not an entirely new prospect to Libya.  A number of years had passed since Qadhafi had terminated Libya’s weapons of mass destruction (WMD) program (among other conciliatory gestures) and that Libya had been to some extent reincorporated into the international community.  However, 2011 has been a year of fighting, and turn of political events had been very troublesome for American business.  This was not the least because of the constant sanctioning of Libyan state-affiliated entities by the U.S. Treasury Department – an action that was throwing oil companies up in arms with a constant need for submissions and permissions to continue doing business in Libya.  Some businesses simply picked up and left, not wanting to be tied up in a civil war.

Libya has the potential of holding immense opportunities for U.S. businesses in the short and long terms. Why?

1. Libya is a wealthy country.  According to OPEC, Libya in 2010 was ranked 7th in the world in proven oil reserves, holding 3.9% (as a comparison, Iraq holds 12% and Qatar holds 2.1%). With less than 7 million people, there is a high per capita GDP (the 2009 estimate cited by the U.S. State Department is $13,400).  Literacy rates are not low either – the CIA World Factbook puts it at over 80%.

2. Libya is underdeveloped relative to its wealth.  Decades of sanctions and international isolation have taken their toll on Libya.  Investment in the energy industry has been healthy, but Libya holds potential in terms of various knowledge-based sectors and the infrastructure (utilities, transportation, tourism, health care, etc.) could potentially use substantial investment, particularly after the NATO strikes of recent months.

3. Libya does not appear prone to internal strife.  Libya’s demographics do not appear to lend it to sectarianism by some accounts.  Therefore, the likelihood of an Iraq-type civil war appear very low.

4. Libya is geographically well positioned.  It’s no surprise that Italy imports a great deal of Libyan oil, the history between the two countries aside.  Libya is smack across southern Europe on the other side of the Mediterranean.  This makes its energy sectors very attractive as there is no need to take oil across the Persian Gulf or the Suez Canal to deliver to Europe and the U.S.  Also, sectors like tourism can benefit immensely from this proximity to continental Europe.

In all, the signs are promising.  How long it will take the TNC to establish a stable government and what types of legal and economic reforms are intended are as of yet unknown. What is known is that a number of western countries are not only poised to release billions in frozen Libyan assets but to remove trade barriers and promote bilateral trade.  This could bode well for U.S. business, particularly as the U.S. economy digs itself out of a recession.

Iraq Oil Sector Heats Up

After over 8 years of war and violence, it appears that Iraq’s oil industry is showing some very tangible signs of growth and promise.  A report in the San Francisco Chronicle yesterday noted that over 40 companies (including some major international giants) have been approved to bid in exploration upcoming opportunities in the country.  Indeed, the multinationals have been active in the semi-autonomous Kurdistan region in northern Iraq for years, and it is widely known that Turkish giants are exceptionally present in the industry there (the Energy Exchange of London will be hosting an Iraq oil conference in Istanbul in September).  Although political tensions exist, particularly in regions such as Kurdistan and the south, Iraq is poised to become one of if not the hot spot in the industry in the very near future.

Who is involved?

It seems that everybody wants to be involved in the action.  The fourth licensing round led to the qualification of a diverse list of countries – examples include U.S., Russia, Egypt, Croatia, Kuwait, and Italy.  Just today, Russia’s Lukoil was awarded a contract to drill 23 wells in the southeast (see the article here) which it will be doing with U.S. giant Baker Hughes.

What is the legal framework?

To say that Iraq’s regulatory framework for hydrocarbons is vague and onerous is a bit of an understatement.  The main corpus of the law was initially drafted in approximately 2006-2007 and it is still unclear as to whether it will be approved.  There has been a tug of war between the Iraqi cabinet and the Parliament on this law and there has been recent movement to finalize it.  There is also the 2007 Refining Law, which sets forth certain standards on operations and foreign involvement.

Stay tuned for more information on this exciting sector.

U.S. State Department Imposes More CISADA Sanctions

The U.S. State Department last week announced a new round of sanctions on entities allegedly aiding Iran’s energy sector.  The announcement on May 26 subjected the following seven entities to sanctions under the Iran Sanctions Act (ISA), as amended by the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 (“CISADA”)

  1. Associate Shipbroking (Monac0)
  2. Ofer Brothers Group (Israel)
  3. Petroleos de Venezuela (PDVSA) (Venezuela)
  4. Petrochemical Company International (Jersey)
  5. Royal Oyster Group (UAE)
  6. Speedy Ship (aka Sepahan International Oil Company) (UAE)
  7. Tanker Pacific (Singapore)
Among the more interesting entities are Petroleos de Venezuela (PDVSA), which is Venezuela’s state oil company (and owner of the Citgo gas station chain in the United States) and Ofer Brothers Group, an Israeli concern that has allegedly done other trade with Iran in recent years as well.
The companies named in the directive are for violations of provisions in the ISA prohibiting assistance to Iran’s energy sector beyond certain thresholds, including the sale of refined petroleum.   Some have been accused of hiding their transactions with Iran in an attempt to evade sanctions.
This current round of sanctions is surely to cause concern for many middle tier and smaller companies as it shows that the United States is not simply targeting the major oil giants, a number of which avoided any sanctioning under the ISA by implementing the CISADA “Special Rule,” enabling them to forgo investigation in exchange for a vow to wrap up and business in Iran.  Again, the message sent by State is arguably that it is not just looking at the oil majors but other smaller entities as well.  This is particularly critical to those third country companies that have tried to profit from the recent withdrawal of major giants from Iran’s market.

Increase in MENA Mergers & Acquisitions

Alas, a posting about something other than sanctions!  This week’s entry will focus on transactional matters concerning the Middle East and North Africa (MENA).   Arabian Business magazine’s website recently posted an article discussing a tremendous jump in MENA region mergers and acquisitions in 2010 over 2009 according to international consultancy Ernst & Young.  This is certainly good news for business in the region.  According to the article, most transactions were in Egypt, Jordan, and Saudi Arabia.

For all the fanfare, there are concerns that 2011 may not be as much of a continuation of this trajectory as planned. The political events in the Middle East have put some business activity on hold.  One of the victims of this may be the now-cancelled proposal by Etisalat (the UAE’s top telecommunications provider) to acquire 46% of  Kuwait’s Zain telecommunications company, what would have been a $12 billion transaction.

Political issues aside, the downturn in the Persian Gulf states following the global financial crisis may provide great opportunities for companies willing to invest in the region.  Jurisdictions such as Dubai have proven time and again to be stable havens for MENA (and other) capital in times of political strife elsewhere.  With the events going on around the region, we may yet see a rise in inbound GCC investment, a primary driver for statistics such as MENA region M&A.  The question remains, however, how the current economic and political climate will affect acquisitions outside MENA by MENA-based players.  Investors in the region may in fact see that there could be compelling motivations to invest their money at home.

Indian Central Bank Stops Clearing Payments for Iranian Oil

The Reserve Bank of India (RBI), India’s central bank, announced that it will no longer clear payments for purchases of Iranian oil and other raw materials.   This could likely be interpreted as a result of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA).

Is this news important? Considering India buys roughly 20% of Iran’s oil, the answer would be yes.  It also signals that one of Iran’s few remaining channels of international finance, India, is closing its doors to Iranian trade.

The RBI’s recent decision highlights another key issue of the sanctions – that the sanctions are biting Iran indirectly.  As this article in the Times of India indicates, although the UN (or even U.S. sanctions such as those provided in the CISADA) do not ban the purchase of Iranian oil by non-US companies, there is pressure on purchasers of Iranian oil as well.  So, even if the sale of certain goods to Iran is not per se prohibited, the inability to finance, ship, or insure these goods makes it very difficult for these goods to reach Iran, and if they do, their prices will invariably go up.  Also, the Iranian Financial Regulations, 31 CFR Part 516 poses a substantial threat to third country banks that deal with Iran’s Revolutionary Guards Corps (IRGC) and related entities, imposing potential sanctions on those banks’ activities in the U.S.  Also, with the IRGC’s increasing role in Iran’s economy as well as the IRGC’s expanding use of Iranian and non-Iranian front companies, many third country entities are finding it increasingly difficult to distinguish between IRGC and non-IRGC controlled businesses and are just forgoing business with Iran all together.

India is not the first country to effectively pull the brakes on its purchases of Iranian oil.  Other countries have done the same – a clear rebuff to those who claim that the Iranian government has unrestrained access to the cash cow that is the country’s oil reserves.  With less purchasers of Iranian oil, and the drying up of Iranian oil wells thanks to a lack of access to proper technology and investment, Iran’s role as an oil exporter is increasing day by day.

Interpreting the New US Sanctions on Iran

President Obama signed into effect the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 on July 1.  Just when you thought the United States had exhausted all its recourse against the Islamic Republic of Iran (due to very comprehensive, existing sanctions), a new legal framework has been implemented that makes full use of the U.S.’ economic prowess and influence over third countries.  I was quoted on this law in the Financial Times on July 14, 2010.  Click here for a link to the article.  The Los Angeles Times has also quoted me – click here.

How Does the Bill Affect Iran?

As mentioned above, the United States maintains comprehensive unilateral sanctions on Iran, preventing U.S. persons (as defined in the applicable regulations) from engaging in transactions for the provision of most goods and services to Iran.  As the United States has fewer levers to pull given the breadth of the current sanctions, Congress did the next best (and possibly better) thing – implementing sanctions on third country entities that assist or do business with Iran in key sectors, such as the country’s nuclear, finance, and energy sectors, not to mention the Islamic Revolutionary Guards Corps (IRGC) and related entities.

What’s Covered?

The new bill covers a range of entities and activities. Additionally, it requires that the administration periodically collect data on Iranian business done by G20 nations.  Notably, human rights play a key role as well – with the placement of sanctions on individuals responsible for human rights violations in Iran following that country’s June 2009 presidential elections.

A summary I wrote on the new law is available on the Iranian-American Bar Association (IABA) website.  Click here.

Shutting off Iran from the International Downstream Oil Market

This week saw several important developments with respect to Iran’s relations with the international oil and gas market.  Following a long history of US sanctions, including the 1996 Iran-Libya Sanctions Act, the OFAC sanctions, as well as the more recent blacklisting of certain Iranian banks, large multinationals are increasingly being encouraged to leave Iran.  This initially started with international financial instutions and increasing disinterest on the part of the major oil companies in doing business in Iran.  The problem is now deepening.

It was reported this week that Russia’s Lukoil would no longer be selling gas to Iran.   Another report stated India’s Reliance would be abandoning a contract to import Iranian oil.  Reliance had earlier stated that it would no longer sell Iran refined gas.

Reports have abounded that the Iranian government is increasingly stockpiling gasoline in the event of increased sanctions.  Interestingly, this problem is concurrent with the regime’s plan to remove subsidies on key commodities such as gasoline.  Given Iran’s limited refining capacity, increased sanctions and the lack of subsidies could arguably force Iran’s economy to grind to an effective halt.  Another critical issue is that Iran is desperately in need of international investment and technology in its current oil fields and its refining capacity cannot even meet local needs.

As a follow-up, reades may find this article useful as it outlines parties in Iran’s crude oil export business.