By Sarah Townsend

Despite the lifting of sanctions in January, many foreign companies remain so nervous about entering Iran that the country's leaders have asked the IMF to step in to reassure investors, proving that Iran has its work cut out if it is to be a significant player in the international economy


Last month, Iranian financial institutions gathered in Muscat to set out their case for the Gulf and beyond to invest in post-sanctions Iran.

The newly-opened country, they claimed, is among the most diversified economies in the Middle East and one of the most liquid. It also has the region’s largest Islamic finance sector, with an asset base worth $500bn, low corporation tax at 10 percent and relatively straightforward investment laws.

The only thing holding it back, they argued, was a dearth of foreign investment due to restrictive sanctions imposed by the US and the European Union (EU) for the past decade and more.

Now, following the lifting of sanctions in January, Iran is “open for business”, allegedly capable of attracting billions of dollars of trade and investment and rewarding pioneering global partners with substantial returns.

In an interview with Arabian Business during the Muscat event, Tehran Stock Exchange CEO and president Hassan Ghalibaf Asl says: “Iran has good potential for growth but sanctions deprived it of this growth. They overheated the market and dampened foreign investment.

“Still, under sanctions, the capital market performed reasonably well. We had monthly initial public offerings (IPOs) and were trading around $25bn every year, generating significant volumes. However, most of our investors are local. We do not yet benefit from considerable and material investment from foreign investors.

“The ratio of market cap to GDP in Iran is 25-30 percent and the average in the world is 100 percent, which shows the opportunity for growth.

“I believe with the lifting of sanctions the atmosphere will change and foreign investors will come in. I think what will be possible then.”

According to Central Bank of Iran governor Valiollah Seif, the removal of sanctions could trigger at least $50bn a year in foreign investment. He told Bloomberg in January that GDP growth could accelerate to between 5 and 6 percent, from 3 percent, in the year to March 2017. Seif was also adamant that Iranian banks would reconnect to the world within days of sanctions being lifted following years of isolation.

There have been indications that foreign companies are starting to enter Iran. For example, it was reported last week that Meliá Hotels International had signed to open its first hotel there, the five-star Gran Meliá Ghoo Hotel. UAE payments firm Network International has said it is in talks with Iranian banks to process transactions in Iran, while Oman’s Port of Salalah has reportedly signed a memorandum of understanding (MoU) with Iranian ports to facilitate trade growth, and Bank Muscat aims to open an office in Tehran.

Ghalibal Asl claims he saw interest among foreign investors rise tenfold in the 10 days after sanctions were lifted, while the ‘Big Four’ accountancy and professional services firms have said they are taking steps to set up operations in Iran to support clients eager to work there.

However, experts say foreign business activity has remained largely subdued. Many argue that bureaucracy and residual political stigmas will make companies nervous about doing business in Iran.

One real estate professional who wishes to remain anonymous says that even expat Iranians living elsewhere in the Middle East are reluctant to do business with Iran at present, citing lack of transparency.

Within the country, confidence is waning. Last week, state news agency IRNA reported that Iran’s leaders had complained that European banks were wary of resuming business in the country and had asked the International Monetary Fund (IMF) to step in and allay prospective investors’ fears. IRNA quoted Hamid Tehranfar, vice-governor of the central bank, as saying: “There is still ‘Iranophobia’ in the banking sector that we’re trying to overcome.

“We have asked the IMF to review our [banking sector] regulations so other countries’ banks feel reassured. The IMF will announce its assessment in 2018.”

On the surface, the case for investing in post-sanctions Iran is compelling. It is the second largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, with an estimated GDP of $406.3bn, according to the World Bank. It also has the second largest population of the region after Egypt, with an estimated 78.5 million people in 2014. Iran is home to some of the world’s largest fossil fuel reserves, with oil production constituting 23 percent of the country’s wealth.

While government expenditure still depends to a large extent on oil revenues and therefore remains vulnerable, Iran is a more diversified economy than some of its neighbours. For example, services (professional, specialised, real estate and hospitality in particular) account for 51 percent of GDP, while manufacturing and mining makes up 13 percent, according to Trade Economics.

Meanwhile, the World Bank’s outlook for Iran is positive. The bank’s country update from September 2015 stated: “If all sanctions are lifted by March-June 2016, and reforms to the business environment are made to promote competition and reduce the influence of state-owned enterprises in the economy, real GDP should rise to 5.8 percent and 6.7 percent in 2016 and 2017 respectively, as oil production reaches 3.6 and 4.2 million barrels per day.”

However, despite this forecast, businesses and commentators remain wary, with some claiming it will be at least a year before global banks and multinational corporations dip their toes in the water.

“The media gave the impression that as a result of the agreement with Iran, the doors were wide open and it was back to business as usual,” says Nicholas Coward, attorney at law firm Baker & McKenzie.

“There was an assumption that a sort of nirvana had arrived, but it has not. While numerous sanctions have been lifted and there are opportunities as a result, other sanctions remain in place.

“The two words that best characterise the current situation are ‘balance’ and ‘caution’. Balance in terms of the government approach to maintaining remaining sanctions and balance from companies in terms of their cognisance of the things they can and cannot do, and how to police that internally.

“We don’t know any major international bank that has said they want to enter Iran and we anticipate it will be at least a year before this happens. Some may wait to see if their competitors do it first, while others may stay out of the market altogether deeming the risks to be too great.”

As Coward notes, not all of the restrictions have been lifted and companies are worried about breaching those that remain in place. In January, the US and EU lifted most sanctions on Iran in return for curbs on its nuclear programme. Under the Joint Comprehensive Plan of Action (JCPOA), the EU de-listed over 400 blackmarked Iranian people and entities, allowing them to do business with the EU. Certain entities and individuals, including several Iranian banks, remain blacklisted.

However, most of the remaining restrictions relate to a larger number of continuing US sanctions. Although the US has lifted the sanctions that in effect prevented international banks from facilitating Iran-related transactions, those sanctions were generally only directed towards non-US citizens conducting business that occurs entirely outside of US jurisdiction and does not involve US citizens.

The remaining sanctions still prohibit involvement of US citizens, US-originating products and supplies exported or re-exported to Iran, and most transactions conducted in US dollars, largely ruling out US banks from doing business with Iran. The sanctions also penalise those who do business with companies connected to Iran’s Revolutionary Guard (IRGC), whcih is accused of having opaque business interests, according to the Financial Times, because the US still considers Iran to be supporting “terrorism”.

It is a much reduced list of sanctions, says Baker & McKenzie partner Jasper Helder, but one that could still cause headaches for prospective investors.

“It is incredibly complex and businesses must do extensive due diligence,” he says. “That is why there was an initial high enthusiasm for opportunities in Iran (and there are real opportunities, in particular for Gulf countries that have historic trading ties and physical proximity).

“But there are cautionary notes too. While Gulf investors themselves are not subject to any of the remaining US or EU sanctions, they must be mindful about whether or not they have US or European stakeholders, use products or services that they have acquired in those markets, or have US citizens anywhere in the supply chain.

“They must also check thoroughly with their banks whether they are willing to support commercial activity in Iran.”

Meanwhile, there are inherent issues with the regulatory landscape that can make doing business in Iran challenging, Helder claims. “It is a more bureaucratic country [than others in the Gulf], with lots of government agencies involved in policing the market. It is certainly not a market you could breeze into.”

Helder says many of his clients also report difficulties in establishing exactly with who they would be doing business. “There are no systematic company records that allow you to check things like ownership structures, so relationships between companies and individuals are not always clear.”

News last week that billionaire Iranian businessman Babak Zanjani has been sentenced to death for corruption for withholding billions in oil revenues channelled through his companies is unlikely to help improve public perceptions.

Another concern is the “snap-back” provisions contained in the JCPOA. The EU and US have reserved the right to re-impose sanctions in the event that Iran is found to have violated its obligations under the agreement. “Investors would want to make sure that they protect themselves and their contract terms – crucially, payments – by having a well-considered exit strategy that does not rely upon conventional force majeure clauses, as those are typically triggered by unforeseen events and you could argue that a snap-back would not be covered,” Coward says.

Ahmad Azizi, senior advisor to the central bank governor, told the Muscat conference: “While there are negative foreign perceptions of [doing business in] Iran, prospective investors must remember that Iran is a large, local market and one of the most diversified economies in the Middle East. Last year it exported every single category of goods as defined by the IMF – a rare attribute in the region.

“Those concerned over the implications of the snap-back provisions contained in the deal should be reassured that the country worked hard to negotiate with the US and would not throw away its investment overnight.”

Dr Moshkan Mashkour, a lawyer and director of the Tehran Regional Arbitration Centre, adds: “Snap-back is unlikely to happen because on both sides the ramifications are great and there is political will [for the agreement to work].

“If any concerns are raised that there has been a serious breach of terms, there would be serious and lengthy discussions, which, if not resolved, would be passed to authorities, which would then seek to resolve the issue. So snap-back would not happen overnight.”

He claims that, for example, if a European contractor had been appointed to build 250 kilometres of roads in Iran and snap-back was imposed while there were still 50km left to build, the investment would likely be legally protected under contract and the roads would continue to be built.

Meanwhile, Iranian leaders and financial institutions claim to be working hard to increase trust among foreigners. IRNA quoted Iran’s deputy foreign minister, Majid Takhteravanchi, as saying this month: “There is no legal obstacle in the way of expansion of Iran-Europe relations”. He said the Iranian central bank was implementing new rules against money laundering and terrorism funding to facilitate ties with European banks.

Central bank governor Seif added: “Transparency is the prerequisite of international transactions. Iran has taken primary steps to make the financial information of Iranian banks as transparent as possible.”

Ghalibaf Asl from the Tehran Stock Exchange says the bourse is in the “late stages” of compiling a new index ranking companies according to their transparency and governance structures – a rare move for a stock exchange and one intended to boost confidence in Iranian capital markets.

Other financial experts working in Iran note the attractive 0.5 percent tax rate on transfer of shares in Iranian stock exchanges, and tax exemption on interest received from fixed-income instruments and dividends received.

Still, this does not cancel out some risks, including the potential impact of volatile regional politics. There are issues related to Iran’s involvement in Syria, which many argue is a major source of the refugee problem in Europe, so from a European perspective this connection is politically very significant and could deter some European companies from working with Iran.

“The sanctions agreement alone is not some panacea,” Coward says. “It was a calculated effort to accomplish something in the nuclear arena, which was achieved, but it does not erase the other political challenges that exist in the region.”

Iran’s 2025 strategic economic plan aimed at doubling the economy from the current $415bn in the next decade requires investments totalling $1.5tr, according to a report by Frost & Sullivan this month.

This is a colossal amount of money, so Iran must freshen up its business environment and public image to attract those companies whose hands are not still tied by prohibitive sanctions – or risk losing out.
2013 Arabian Business Publishing Ltd. All rights reserved.

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Published: 12 March 2016