“Iranians are Ready to go Beyond the Oil Trade”

Iran’s agreement with five world powers over its nuclear program this July brought renewed speculation about how impending sanctions relief, and the foreign investment that follows, will change Iran.

Reports of European businesspeople filling up Iranian hotels and scouting new opportunities present a picture of a country rejoining the world economy after long years of exile.

Even so, Iran remains unfamiliar territory for foreign investors. They have yet to gauge the risks presented by Iranian politics, as well as enduring obstacles like corruption and weak copyright and property laws.

Djavad Salehi-Isfahani is a professor of economics at Virginia Tech, and a non-resident fellow at the Brookings Institution. He spoke to IranWire about the challenges foreign investors now face.

 

How has this year’s nuclear agreement changed prospects for foreigners wishing to invest in Iran?

Before the deal, when there was no prospect of removal of sanctions, foreigners were not even thinking about investing in Iran.  In fact, things were going to get worse. Iran might not have been able to export any oil or gas if further sanctions had been imposed. American companies in particular were prohibited from doing any business in Iran. Businesses from other countries had to obtain permission from the Americans to work with Iran, or else risk being shut out of the US market. So the July 14 deal is a sea change, although the sanctions have not yet been lifted. They await further implementation of the Joint Comprehensive Plan of Action, which is already in progress.

 

What types of sanctions are in place now?

There are at least three types. There are European sanctions, which are probably going to be removed faster. There are US sanctions that can be removed by executive action because they were not put into law by the US Congress, and President Obama has already written a letter committing to do that. The third type are sanctions mandated by US law and to remove them requires congressional action. Those probably will not be removed for a long time.

 

What will the removal of sanctions mean for American vs. European investors?

The differences will be very significant, because US companies are constrained not only by the existing laws of not doing trade with Iran, they are also increasingly constrained by state actions. State legislatures will probably pass laws prohibiting firms that are registered in their states from doing business with Iran. The Iranian conservatives, and Supreme Leader Ayatollah Khamenei, are also apprehensive about doing business with the US. So US firms are going to be disadvantaged relative to European firms.

 

Which areas of the Iranian economy are foreign investors likely to find attractive?

Talk about attractiveness is pretty abstract at this point. When oil prices were high and Iran had a lot of oil money, Iranians were buying a lot of stuff, often at a mark-up because they needed to buy them though third channels like Dubai. This year oil money is at a historic low, about one fourth of two years ago, and prospects for a return to high oil prices in the near future are not good. People are still talking about the last decade. Obviously when foreign firms saw Iranians buying stuff with such difficulty, they correctly concluded that Iranians were hungry for Western goods. That has sort of disappeared now because consumers don’t have the same buying power, and there is a policy shift away from imports.

Iranian officials talk about two kinds of potential foreign investment in Iran. One kind is looking at Iran as a consumer market. The other is foreign direct investment, or FDI. That is, companies that bring capital into Iran, transfer technology, and train Iranian workers. The government is very much interested in the second kind, and officials have made it clear in various speeches that they don't want the first kind.

For foreign direct investment, Iran is an unknown place. Iran has never been a serious destination for FDI because Iran has had oil money and Iranian labor has been relatively expensive. But that’s changed now. Because of sanctions and several years of economic stagnation, even decline, real wages are down. So in terms of taking capital into Iran and using Iranian labor to produce stuff for the domestic market, that prospect has improved. I’d say that Iran could be competitive even with China in export markets. The minimum wage in Iran is about a dollar per day now, and about a third of the work force is actually paid less than that. So that’s a pretty competitive labor cost.

The main obstacle to FDI is that Iran has not politically made up its mind whether it wants foreign firms to operate inside Iran. Iran is still a revolutionary country with fluid politics and a very vociferous radical wing that dislikes foreign presence.

 

What challenges and risks might foreign investors face in Iran, which they wouldn’t necessarily face in other countries?

Security risks are low. Iran is one of the more stable countries in the Middle East, and that's a big plus. 

Political risk may seem high, but firms can get a better feel for it by going in and getting to know Iran’s politics. There is a clear sign from the main centers of power in Iran that they want foreign investment and technology. Ayatollah Khamenei's pronouncements have been in favor of technology transfer and have not ruled out foreign investment.  There is, however, some ambiguity about the cultural effects of FDI and the presence of foreign companies.  There is fear in Iran that too many foreign visitors may make it harder to enforce restrictions regarding hejab, drinking alcohol, and so on. 

 

What about the recurring questions of copyright and corruption?

They are very serious. Iran has very weak enforcement of copyright laws, local or international. But that is the kind of thing that can change with engagement. I am sure that Iranians, as they begin to innovate, will become interested in stricter enforcement of copyright laws. There is no big obstacle to updating those laws in Iran.

Corruption is an issue in all developing countries. I don't know if Iran is worse than other places. I suspect Iran is better than India, Mexico, Nigeria, or Pakistan, at least in terms of low-level corruption, such as when you want to get a piece of paper signed, deal with the police, or something like that. High-level corruption seems to peak with the price of oil. It also peaked with sanctions, because people had to operate outside the law in order to get around them.  If I am correct, corruption will subside when both oil money and sanctions are gone.

The third issue is competition. Foreign businesses generally do better when they enter competitive environments in a foreign country and there is clear enforcement of property laws and contracts. Iran is a weak case when it comes to business climate, in particular because the line between private and public is not very clear. There are lots of companies that are partly owned by the government, and partly owned by the public. Their shares are publicly traded on the Tehran Stock Exchange, but there are major shareholders closely connected to the government or to Islamic Revolutionary Guards Corps [which remains under US sanctions].

Once companies get inside Iran, they can get a better assessment of how serious these issues are. If foreign investors are seen to help young Iranians get jobs and training, then attitudes toward foreign investment will change.  More importantly, investment will increase competition and strengthen Iran’s private sector.  Many private Iranian firms suffer from the anti-competitive environment of business in Iran. So it is not a matter of foreign businesses against Iran. It's foreign businesses and Iran's rising private sector against the pockets of anti-competitive behavior. I am optimistic that the climate will change.

 

In what ways is foreign investment likely to change the lives of ordinary Iranians?

It will mostly come through employment and skills training. If foreign investment goes into petrochemicals and oil exploration, it will have little impact on employment. If instead it goes into manufacturing and more human-capital intensive industries, they can have real impact on the lives of ordinary people.  When a foreign company brings its own money and sets up shop in maybe a smaller city, and starts training workers and giving them steady jobs, people will begin to see foreign investment differently.

Iran’s experience with global markets is clouded by oil nationalization, coups and foreign intrigue but I think Iranians are at last ready to go beyond the oil trade in their interactions with the rest of the world.  

 

This is one of three interviews in a series that looks at the risks of investing in Iran following sanctions relief. Part two to be published tomorrow.

 

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