Economy, Business And Markets

Rift Between Foreign Financing Hopes, Reality

Rift Between Foreign  Financing Hopes, RealityRift Between Foreign  Financing Hopes, Reality

Companies are working on running more projects and plans, as Iran emerges from recession and a decade of sanctions. What they lack most, however, is money.

Banks are riddled with overdue debt and have little to lend to new borrowers. So they look to a door that opened in mid-January: foreign investment. But what they find is a chasm between their expectations and what foreign financiers are willing to offer.

Sanctions against Iran’s nuclear energy program were lifted as part of the historic nuclear agreement with the P5+1—France, Britain, China, Russia and the United States, plus Germany. The accord seeks to limit the scope of Tehran’s nuclear energy program. In exchange, Iran has been freed from sanctions imposed by the United Nations, EU and US.

Following the sanctions relief, Iran is resuming its banking ties with international players. However, some US sanctions remain in place and their looming shadow continues to scare away foreign firms.

Many government, quasi-state and private sector players are looking into finding foreign investors. In Iran this is called “finance” in short.

“You hear people saying everything is prepared for an industrial or infrastructural project and that we are looking for ‘finance’,” writes Mehdi Nosrati, a foreign investment expert, in an editorial published in our sister publication Donya-e-Eqtesad on Monday.

As sanctions intensified after 2012, efforts to circumvent them to keep the economy afloat were doubled. Deals were done behind closed doors and large sums of money were moved by individuals.

A case in point is billionaire Babak Zanjani. He managed to get around sanctions to sell oil abroad during the presidency of Mahmoud Ahmadinejad. He was found guilty of embezzling more than €2.7 billion after Hassan Rouhani, a moderate who pledged to tackle high-level corruption became president in 2013. He was sentenced to death on March 6 and the final verdict on his appeal has not been announced yet.

According to Nosrati, this has given the impression to Iranian managers that tens of millions of dollars are pocket money and such sums can easily be borrowed from foreign banks. They are out of touch.

“It is inconceivable to think that a bank would lend such sums as cash. Banks prefer to deal with suppliers as well. For funding larger projects, banks usually syndicate loans. So the reality is you cannot define a project with all its bells and whistles, and then go looking for a financier,” he said.

Banks prefer to be involved from the beginning.

Nosrati also asks the inevitable question: “With what credit rating do companies and project executives want to deal with foreign banks?”

Global ratings agencies like Moody’s and Fitch stopped rating the Iranian government nearly a decade ago. They have yet to analyze Iran’s markets.

Banks operate on a “know your client” basis. Their reluctance in quickly embracing Iranian businesses, most of whom are far behind on business reporting standards, is natural. It will take a while for Iran and its businessmen to normalize relations with foreign counterparts.

Nosrati posits that the most accessible sources of foreign funding are foreign credit lines—like the multibillion dollar one provided by China for holding Iran’s oil money—export credit agencies and export banks in developed countries.

According to local media reports, institutions from Italy, Japan, South Korea and Sweden have started dealing with Iranian businesses; most provide funding on condition that the money is used to purchase from manufacturers in that country.

Italy’s SACE, which offers a wide range of insurance and financial products, signed three collaboration agreements with Iranian banks, namely Pasargad, Parsian and Saman, to facilitate a more rapid resumption of trade and investments from Italy last year. More will come.

Iranian businessmen and government officials should catch up on how business is done internationally.