Earlier this year, Iran reached an agreement with the US and five other world powers -- Britain, France, Germany, Russia and China -- over the future of its nuclear program. In exchange for Iran’s agreement to ensure that its program is peaceful, the US and its European allies have lifted a wide range of sanctions hindering Iran’s involvement in the world economy. Reports abound of foreign investors flocking to Iran to size up the new market. Even so, the investment scene in Iran will not be a free-for-all. Investors must carefully gauge the risks of entering an untested business environment, and of falling foul of remaining US sanctions.
A Very Attractive Destination—after “Implementation Day”
The US and its allies began to selectively remove sanctions against Iran in November 2013, when Iran and the other negotiating states reached an interim nuclear agreement, or “Joint Plan of Action.” This agreement, says Erich Ferrari of Ferrari & Associates, a Washington, D.C. firm specializing in US sanctions law, gave Iran a waiver of specific “secondary” US sanctions, which limited Iran’s dealings with countries other than the US. This waiver eased, among other things, restrictions on Iran’s trade in petrochemical products, its access to parts and services for civilian aircraft, and to payments Iran had received in foreign bank accounts.
Following the July 2015 nuclear deal, or “Joint Comprehensive Plan of Action,” (JCPOA) Iran will receive further substantial “secondary” sanctions relief that will allow it to deal far more freely with countries other than the US. This will only happen on “Implementation Day,” an unnamed future date when Iran has satisfied the International Atomic Energy Agency that it has completed the nuclear-related steps required by the 2015 agreement.
According to a US State Department official, Implementation Day will see the lifting of US and EU nuclear-related sanctions, but many US sanctions will remain in place. “These include sanctions related to Iran’s support for terrorism and destabilizing activities in the region, as well as sanctions targeting those who are connected with Iran’s missile program and the commission of human rights abuses,” he says. The US, he says, will also license limited dealings between Iran and the US, including the sale of US aircraft, and the import of Persian carpets and Iranian foods.
While US business dealings with Iran will remain extremely limited, the same is not true for investors in countries, who will enjoy a clear advantage entering Iranian markets. “Iran is generally a very attractive destination for investors,” says Bijan Khajehpour of Atieh International, a Vienna-based consulting firm that advises companies entering Middle Eastern markets. “It has enormous natural resources, and very educated and ready-to-engage human resources. Add to that the domestic market of about 80 million people, and the regional potential – that Iran borders on so many emerging markets – and the combination of these factors makes it very attractive.”
A New Landscape with New Risks
Investors arriving in Tehran will encounter a President—Hassan Rouhani—who is eager for investment, but also a conservative leadership and security state wary of foreign influence. “Iran has not politically made up its mind whether it wants foreign firms to operate inside Iran,” says Djavad Salehi-Isfahani, a professor of economics at Virginia Tech. “Iran is still a revolutionary country with fluid politics and a vociferous radical wing that dislikes foreign presence.” Yet while Iran’s historical experience with foreign investment had been clouded by coups and foreign intrigue, he says, Supreme Leader Ali Khamenei has not opposed foreign investment.
Iranian officials, Salehi-Isfahani says, are likely to seek foreign direct investment that will bring western capital to Iran, transfer technology, and train Iranian workers. They are less keen to see Iran simply become a major consumer market. But even where foreign direct investment is concerned, the state has some doubts. “There is fear in Iran that too many foreign investors may make it harder to enforce restrictions regarding hejab, drinking alcohol, and so on.” The model for cautious investors, he says, might be the experience of investors in China, who have done business successfully without proselytizing against the communist government.
Investors will also face continued risks from remaining US sanctions, which will continue to target specific Iranian entities, notably the Islamic Revolutionary Guards Corps (IRGC). The IRGC is widely believed to be heavily -- and sometimes obscurely -- involved in Iran’s economy. “As long as the US government maintains those sanctions against the IRGC,” says Ali Alfoneh of the Foundation for Defense of Democracies, “companies will face great difficulties proving that their Iranian business partner is not an affiliate of, or entirely or partially owned by the IRGC. Only small companies with little or no presence in the American market can afford to ignore US sanctions against the IRGC.”
Unless foreign companies can find a way of negotiating this dilemma, they are likely to face financing difficulties. “Financial institutions will be reluctant to process trade and provide project finance unless they can be sure of the beneficial owners of any Iranian entities involved in a transaction,” says Henry Smith of the London-based consultancy Control Risks. “Companies considering consortiums to deliver or finance projects will need to have a shared understanding and threshold of risk in order to decide which entities they – and their financial partners – will be comfortable engaging with.”
Copyright and Corruption
Big questions remain, too, about legal problems in Iran. “Copyright is definitely an issue,” says Khajehpour. While Iran does have patent rights, and intellectual property can be registered according to Iranian law, he says, “It is not the most advanced legal framework.” Salehi-Isfahani says Iranian copyright laws are weak. But he is also optimistic. “That is the kind of thing that can change with engagement,” he says. “I am sure that Iranians, as they begin to innovate, will become interested in stricter copyright laws. There is no big obstacle to updating those laws in Iran. That will happen.”
Corruption, meanwhile, is a problem widely acknowledged in Iran, including by the government. “Corruption is a problem in all developing countries,” says Salehi-Isfahani. “I suspect Iran is better than India, Mexico, Nigeria or Pakistan.” While low-level corruption is low, he says, high-level corruption tends to peak with the price of oil, and has been exacerbated by sanctions. Khajehpour says the Rouhani government is trying to fix the problem, even if it will be a long process. “Corruption spread widely during the Ahmadinejad years. The current government is addressing the issue through legal and structural reforms. There have also been very public legal cases against corrupt officials and bank managers.”
A Growing Middle Class
Even if investment in Iran won’t resemble a gold rush in the near future, there remains an atmosphere of optimism. Following years of economic isolation, Iranians appear ready to take a new view of global markets. Whereas in the past Iranians tended to fear outside exploitation, Salehi-Isfahani says, there may be an opportunity for investors to win them over. “If this turns into more of ‘I give you my labor and you give me training, and I get income and then I can decide what to buy with it,’ that is the globalization that has been successful in India and East Asia. It hasn’t really worked in the Middle East yet, but it can work in Iran.”
The US, for its part, has promised to issue guidance on how sanctions will affect “non-US persons” in the future. “The JCPOA is designed to expand the scope of permitted business activity with Iran through sanctions lifting in exchange for Iran’s full compliance with its commitments,” says a State Department official. “We look forward to seeing all of these steps taken in the interests of the region and the world. The US government will not stand in the way of permitted business activities.”
The lives of ordinary Iranians will almost certainly improve following Implementation Day. “There is going to be a significant impact on the Iranian people,” Ferrari says. “As Iran becomes more integrated in the international financial system, as they gain increased access to their oil revenues, as they engage in more export, they will have more foreign capital available to them, which will cause the Rial to become stronger, and that will in turn allow Iran to import more consumer goods, more food, more medicine and medical devices.”
While sudden changes are unlikely, Khajehpour says, job creation and purchasing power will likely increase with positive long-term effects. “My feeling is that with some stability, and with an relatively sanctions-free environment, the overall business climate will improve. If the business climate improves, we will see the growth of the middle class, and we know that the growth of the middle class will also help the political and social development of the country.”