Economy, Business And Markets

Three Approaches to Doing Business With Iran

Three Approaches to Doing Business With IranThree Approaches to Doing Business With Iran

Iran has reentered the global market and investors are lining up. See who is leading the pack and who is lagging behind.

With the fall of Iran’s international sanctions in January, many countries have begun to sign investment deals with Tehran. It is not every day that an economy of 80 million people enters the global market.

With the rise of China, we have become spoiled by massive emerging markets. But investors should not let this overshadow the opportunities that Iran’s reentry presents.

Though Iran is the second largest market in the Middle East, it has the same population as Germany with an economy more than nine times smaller.

Iran is seeking $50 billion in annual foreign investment to jumpstart its $400 billion economy. This fact alone highlights how under-serviced Iran is and why many are seeking to do business with Tehran.

That being said, not everyone is taking the same approach, reads an article recently published in Global Risk Insights—a leading online publication that provides analysis on political risk and geopolitics for the business community. The full text of the article follows:

  Being Bold

Iran and its moderate President Hassan Rouhani were right out of the gate in January, signing investment deals with France and Italy just 10 days after the end of sanctions.

France and Italy had been major partners prior to the implementation of sanctions and both countries wasted no time in reengaging with the Islamic Republic.

Rouhani and Italian Prime Minister Matteo Renzi met in January and enjoyed an amiable rapport. Italy was Iran’s largest pre-sanctions’ European partner. Rome and Tehran cemented their cooperation by signing $18 billion worth of contracts.

Germany is also looking to invest in Iran’s renewable energy sector. Iran has substantial green energy opportunities, with 30 GW in potential wind generation capacity alone (Iran’s current total generating capacity is 60 GW).

France garnered even greater investment deals with Iran, most notably a $21.8 billion contract for 118 planes from Airbus. French construction firm Vinci also won contracts to overhaul Tehran’s airport, as well as construct and operate airports in Mashhad and Isfahan, Iran’s second and third largest cities respectively.

Peugeot also announced plans to open a factory in Tehran with the aim of producing 200,000 vehicles per year.

Alongside European countries, Iran is seeing major interest from both developed and developing Asian nations. For instance, India is considering a $20 billion joint-development deal in the Farzad-B oil field and the construction of new refineries on the Indian Ocean coast to process Iranian oil and gas.

Similarly, China is also increasing its economic ties with Iran, with Beijing pledging $70 billion worth of FDI for Iran’s petrochemical industry by 2025.

While China was not a party to international Iranian sanctions, it had nevertheless reduced economic activity with Tehran to avoid Washington’s wrath.

The end of sanctions has seen China quickly seek to reestablish its prominent role, with both governments agreeing to a 25-year cooperation plan that aims to boost bilateral trade to $600 billion by 2026 alone.

The latest country to strike deals with Iran is South Korea, with President Park visiting the Islamic Republic accompanied by over 230 business executives on May 1. Seoul and Tehran signed upwards of $10 billion in agreements, with a focus on energy.

Specific deals include KOGAS winning a contract to develop the Balal gas field. Furthermore, Hyundai Engineering Group secured a contract to build a 500-MW power plant.

South Korea is the world’s fifth largest oil importer and was a major customer of Iran, prior to international sanctions. Since January, Iran has quadrupled energy exports to 400,000 barrels a day to South Korea. While bilateral trade currently stands at $6 billion, it was $17 billion in 2011. Consequently, both sides have pledged to increase trade to $30 billion in future.

  Being Cautious

While many Asian nations are jumping on the Iran bandwagon, a notable exception is Japan, which remains cautious about investing in the country, having been burned by the fallout from international sanctions.

Prior to the sanctions, Japan’s largest oil developer, Inpex enjoyed a 73% stake in the Azadegan Oilfield–one of the world’s largest untapped fields.

Sanctions saw Inpex lose its share in the field, not only a major blow to the business but to Japan in general, as the country’s oil imports have skyrocketed following the post-Fukushima nuclear shutdown.

Similarly, the Bank of Tokyo-Mitsubishi UFJ (the country’s largest banking conglomerate) was penalized in 2013 for alleged transactions with Iran, resulting in a $250 million fine.

This event has soured Iran in the eyes of the Japanese financial sector, making securing capital for investments in the country all the more difficult.

While Prime Minister Shinzo Abe has laid the groundwork for bilateral trade treaty, another worry for Japan (and others) is the fact that Iran is not party to the World Bank dispute settlement mechanism—a disincentive to Japan’s generally risk-averse businesses.

  Being Absent

One would image that given the prominent role played by US President Barack Obama in negotiating the Iranian nuclear deal and ending sanctions, American firms would be at the forefront.

Obama’s similar rapprochement with Cuba has already seen American investment in the island and given the size of Iran’s consumer base, American firms have much to gain.

Despite this, American companies remain absent from the Iranian investor scene. Part of this is understandable, as four decades of hostility act as a strong disincentive.

Another concern for US businesses is the patchwork American approach to Iran. While the Obama administration supported the lifting of (nuclear program-related) international sanctions, it maintains some sanctions on Iran unrelated to the nuclear program.

This coupled with staunch opposition in Congress and from the Republican Party has left businesses wary. Fears about inadvertently running afoul of American sanctions, combined with political uncertainty surrounding the US election, has resulted in American firms staying away from Iran.

The result of this reluctance has been a failure to reestablish the kind of pre-1979 American market presence that made Washington the main mover in Iran.

Consequently, European firms are benefiting from America’s absence, a notable example being Iran’s switch from Boeing to Airbus. After all, it would have been easier for Tehran to replace its aging Boeing fleet with product from Seattle. America’s loss is Airbus’ gain.

America’s rivals and a host of its allies are already in Iran. Whether Washington joins in, remains to be seen.