Iran clash adds to growing political risk for automakers

WASHINGTON — European and Asian car brands aren't the only ones that have to worry about new economic sanctions after the U.S. withdrew from the multilateral Iran nuclear accord.

In repudiating the agreement signed in 2015, the Trump administration has staked out a hard-line position against Iran that could include a complex sanctions regime. That means global suppliers and even U.S. automakers will need to be extra careful about who they do business with to avoid getting tripped up by legal problems that could disrupt operations, experts say.

"If you've got a supplier that's doing risky activity that could be subject to U.S. sanctions, and they get put on a [restricted party] list, then that could impact the supply of parts to you and might require cutting ties with that supplier," said Steven Brotherton, who heads the export controls and sanctions practice at Sandler, Travis & Rosenberg.

The U.S. policy U-turn presents yet another wild card for a global industry already reeling from a series of political shocks, including acrimonious negotiations on the North American Free Trade Agreement, a trade war with key U.S. allies over steel and aluminum imports and an escalating trade dispute with China. It highlights the challenge of managing international political risk as the Trump administration's "America First" policies force manufacturers to rethink their investment plans and supply networks.

"The auto sector was one of the biggest beneficiaries when the nuclear deal was struck in 2015," BMI Research wrote in a note. Now, it's one of the primary areas targeted by the Treasury Department for snapback sanctions. Non-U.S. companies have until Aug. 6 to unwind operations in Iran to avoid facing possible U.S. enforcement actions, according to the Office of Foreign Assets Control, which can bar U.S. companies from doing business with blacklisted foreign companies or individuals.

‘Multiplier effect'

Trade attorneys anticipate sanctions will revert to terms in by President Barack Obama, which forced many auto companies to pull out of Iran. But the Trump administration could be more willing than its predecessor to impose secondary sanctions — targeting non-U.S. parties outside U.S. jurisdiction — given its rhetoric about Iran as a regional security threat, said Paul Amberg, a partner at law firm Baker McKenzie's Amsterdam office.

The primary tool for enforcing sanctions is placing companies or individuals on the Specially Designated Nationals List, which essentially warns U.S. banks and companies not to do business with those parties. Those entities are effectively cut off from access to the U.S. financial system, hampering their ability to do business in U.S. dollars.

Such blacklisting has a "multiplier effect," said Farhad Alavi, managing partner at Akrivis Law Group, as companies around the world will avoid doing business with the restricted party out of an abundance of caution.

"Banks are going to police it because they don't want to take the risk of being fined," Brotherton said.

No automaker has yet announced a pullout from Iran. Two big foreign automakers in the market, PSA Group and Renault, may weigh their risk differently.

Together, they hold almost 40 percent of the Iranian auto market, which saw total sales of 1.59 million cars in 2017, according to global automotive trade association OICA.

PSA could be forced to choose between Iran, where its market share exceeds 25 percent, and the U.S., where it has just embarked on a 10-year plan to re-enter the market. Renault, which is seeking to nearly double production in Iran and has an 11 percent share, sells no cars in the U.S. and even continued limited production in Iran when sanctions were in effect.

But it might be penalized in the future if it substantially strengthens financial ties to alliance partner Nissan, with its huge U.S. presence.

Experts say it's difficult to predict to what extent and against whom the U.S. will choose to apply the sanctions or even when they will kick in. With the Office of Foreign Assets Control focused on deterring material support to Iran's auto industry, an enforcement action could be triggered by a transaction's size. Even sales of finished vehicles to Iran could run afoul of U.S. law if they are large enough.

"It's not as if U.S. authorities are going to provide a large amount of guidance on what will, or will not, trigger the threshold," Amberg said. "But you can imagine that it could be circumstances where there is more involvement, deeper involvement, and higher transaction value that tips the balance to significance."

The primary U.S. embargo that prohibits U.S. parties from most commercial interactions in Iran never was lifted, so American companies know to stay away from direct sales there.

But U.S. automakers or suppliers could get in trouble if they have an overseas supplier that they know lawfully restarted business in Iran in the past two years but is now at risk of violating the Iran sanctions, Miller & Chevalier attorney Timothy O'Toole said.

A foreign company with a distributor or other partnership in Iran may have transactions that are significant enough to get sanctioned.

"So, I think a U.S. company is going to be very wary of doing business with that foreign supplier because at that point, it has some reason to believe it is subject to U.S. sanctions and, furthermore, that its goods may end up in Iran," he said. "Every U.S. company that is sending goods to Europe, especially in the auto sector, is going to have to think hard about what that company is going to do with those goods."

Old inventory

The situation gets more complicated, he added, when dealing with old inventory. If a foreign business partner, for example, buys replacement parts from a U.S. manufacturer and puts them in inventory, it could sell them to an Iranian company later without complication for the U.S. partner, as long as at the time of the original transaction, nobody knew the parts were going to end up in Iran and the components didn't fall under some export technology controls.

"But if they call the U.S. company to order the part, that's illegal," O'Toole said.

Swiss supplier Autoneum is an example of a company caught in the shifting policy sands around Iran. In December, it signed a license agreement with Iranian supplier Ayegh Khodro Toos to produce carpet systems and other interior parts in 2019 at its plant in Mashad for a joint venture between Iranian car manufacturer Iran Khodro and PSA Group.

Autoneum is also a supplier for Ford Motor Co., Fiat Chrysler Automobiles and General Motors.

"In view of the pending U.S. sanctions, Autoneum is examining various options," spokeswoman Anahid Rickmann said via email. "Withdrawal from the license agreement is not excluded."