People walk along Si-o-se bridge in Isfahan, Iran.
Iran hopes for end of sanctions boom but investors wary
Dubai, June 25, 2014
With the prospect of a diplomatic breakthrough next month bringing an end to Iran's international isolation, officials in Tehran are preparing to roll out the red carpet to foreign firms. But a tough legal environment and tricky domestic market mean the hoped-for billions in investment may not come soon.
Only a few more weeks remain before the July 20 deadline to conclude talks between Iran and Western powers aimed at ending sanctions in return for limits on Tehran's nuclear programme.
Hopeful of a breakthrough, Iranian officials are putting together a package of incentives to lure foreign investors into sectors ranging from oil and gas to agriculture, light manufacturing and free trade zones.
The incentives, which could be unveiled quickly after a diplomatic deal, are expected to include tax breaks, steps to ease the burden of bureaucracy on foreign firms, and possibly assistance in obtaining resources such as land, say businessmen and lawyers. Iranian officials have talked of the possibility of new types of production-sharing contracts to lure oil investors.
But as the deadline approaches, some foreign firms' initial euphoria over the prospect of investing in Iran is giving way to a harder-headed assessment of the obstacles and the risks.
Even if a nuclear deal is reached, unravelling the web of sanctions is likely to be a long, complex process, possibly taking years. Companies will then have to deal with an uncertain legal framework and chaotic business environment within Iran.
Hamid Mojtahedi, group legal counsel at Links, a Dubai-based consultancy that helps foreign firms set up in the region, cited the case of a German automaker which earlier this year explored the possibility of establishing a sales venture in Iran.
The idea was to get a jump on its competitors by having a skeleton operation already in place when the sanctions were eventually lifted, Mojtahedi said, declining to name the company because of commercial sensitivities.
The firm ultimately calculated the potential profits didn't justify the risks, deciding not to go ahead until the sanctions outlook and Iran's own regulatory framework were clearer.
"There are two main considerations for companies planning to establish themselves in Iran: the sanctions regime and the domestic business environment," Mojtahedi said. "The latter is in some ways more of an obstacle. So most companies are moving cautiously."
Nobody doubts the potential of Iran, with a population of about 76 million, to become a big investment draw. It is attractive partly because it has a far more diverse economy than its neighbours; major industries include not only energy but autos, farming for export, electrical goods and even medicines.
Consultancies around the world are offering seminars on Iran to interested foreign executives. Last week, France's Renault said it was looking for a financial partner to resume making vehicles with local partners in Iran, from which it withdrew after sanctions were tightened in 2011.
But this interest may not translate into any quick flood of money into the country. For one thing, the nuclear talks may not succeed; the latest round of talks ended in Vienna last week with Iran denouncing "excessive demands" on it.
At an Iran investment seminar attended by scores of executives and lawyers in Dubai last month, some said the best scenario they could realistically hope for would be an extension of the talks into next year.
Even if a nuclear deal is reached, the sanctions won't disappear quickly. Over decades of confrontation between Iran and the West, they have developed into a complex network of overlapping measures introduced by the U.S. government, the European Union and the United Nations, covering areas from banking and shipping to autos and aviation, as well as individual Iranian firms.
Untangling the rules will take considerable time - and in the meantime many foreign companies, alarmed by fines worth hundreds of millions of dollars imposed by the U.S. government on violators of its sanctions, may avoid taking legal risks.
"It will be a long and gradual process. The idea that the sanctions will disappear overnight is not correct," said Suzanne Maloney, senior fellow at Washington's Saban Center for Middle East Policy and a former U.S. State Department policy advisor.
She said the cases of Iraq after the 2003 U.S. invasion and Libya after the fall of Muammar Gaddafi in 2011 suggested it would take many months or even years for the Iranian sanctions to be dismantled completely.
The single most damaging U.S. sanctions measure against Iran was imposed in November 2011, when the U.S. Treasury used Section 311 of the USA PATRIOT Act to identify Iran as an area of "primary money laundering concern".
This effectively froze Iran out of the international banking system, making much investment there almost impossible, by forcing banks around the world to choose between dealing with Iranian institutions and doing business with U.S. ones.
In theory this measure could be lifted soon after a nuclear deal if the Treasury changed its designation. But the original designation was based not only on Iran's nuclear programme but also on allegations of support for terrorism; Washington might find it politically difficult to row back on that charge.
Iran's oil industry would be one of the most attractive areas for foreign investors, but for that reason, the sanctions web around it is particularly dense. Related sanctions have been imposed on shipping lines and ports. So a nuclear deal might not mean any quick boost to the industry.
An executive at a top European consumer electronics firm, in Dubai to explore the possibility of doing business in Iran, said Western companies would have to worry about the "reputational risk" of investing there even after sanctions were lifted, as they could face pressure from their shareholders and the public.
Attracting foreign investment is a priority for the administration of Iranian President Hassan Rouhani, who won a landslide election victory last year partly by promising to repair the sanctions-ravaged economy.
Iran's stock of foreign direct investment was just $37 billion in 2012, according to the latest data from the United Nations Conference on Trade and Development, against $76 billion for Nigeria and $199 billion for Saudi Arabia.
The data suggests Chinese firms have been using the absence of Western competitors in the past few years to increase their presence in Iran, but even they have moved slowly: the stock of Chinese investment reached $2.1 billion, according to UNCTAD.
Despite the measures expected in the incentives package, Iran is still a tricky environment in which to do business.
Labour laws, for example, make it very hard to lay off staff, the legacy of Iran's 1979 revolution. For now, Rouhani may lack the political capital to reform these laws.
"Institutional changes need to happen, in laws and regulation, for the country to become an investment destination for a wide range of foreign companies," said Mojtahedi. "The economy has been closed for 30 years and has to revamp itself."
Iranian-born economist Mehrdad Emadi of the Betamatrix consultancy in London said foreign investors would face opposition from entrenched, politically powerful interests in Iran which have profited from preferential access to state contracts and hard currency supplies during the sanctions years.
"The bigger foreign companies may be able to cope with this, but for the medium-sized ones it may prove difficult."
The European consumer electronics executive said that even after sanctions were lifted, she expected Iranian officials to restrict foreign companies in order to protect what they see as the interests of the national economy. Repatriating profits could also be hard.
And even if foreign firms get the wholehearted support of the government, they may find it challenging to operate in a business environment long isolated from global trends.
Selmar Welloso, manager for the Middle East and North Africa at Magnesita, a Brazilian maker of materials for steel, cement and glass manufacturers, said his firm might eventually establish operations in Iran if sanctions were lifted. But he said he had been struck by the obstacles on his visits there.
"In some ways their way of doing business is like the early 1980s. There were two or three secretaries to every manager. People running $1 billion companies didn't use personal computers."
Welloso said it was not yet clear how welcoming Iran would be to foreign investors: "Iran needs to decide - do they want to be a Turkey or a Venezuela? At the moment it's not clear which one it will be." – Reuters