Economy, Domestic Economy

Impediments to FDI in Iran

Impediments to FDI in IranImpediments to FDI in Iran

During the past many months, much has been said by Iranian officials about the necessity of attracting foreign direct investment in the post-sanctions era.

President Hassan Rouhani, various ministers and governor generals of provinces have stressed that FDI will be a top priority for the government in the years to come.

There is an obvious explanation to this: Iran’s economy is heavily under-invested. As all-time low oil prices have restrained the country’s budget, domestic resources do not suffice for the mass investments needed to push the country forward. So the above position of governmental officials seems to be more than justifiable.

But what can be done to achieve this goal in a highly competitive global market, in which all countries are striving to attract foreign investors? For this, two main concerns have to be addressed.

A traditional fear of investors before making an investment in developing countries is the risk of being “locked in”, i.e. not being able to repatriate the capital invested in the host state or accrued profits of that investment. This can be caused by government policies of the host state that restrict the movement of capital to control the balance of foreign payments, or to foster domestic development.

In order to safeguard the entrepreneurial freedom of the investor and, at the same time, find a solution for the needs of the host state, most investment agreements and laws in recent years have been modified to include provisions on transfer of capitals.

Yet Article 13 of the “Foreign Investment Promotion and Protection Act”, ratified by Iran’s Parliament in 2002, asserts that the foreign capital invested and the accrued profits can be transferred out of Iran upon the approval of the Foreign Investment Board and the confirmation of the economy minister. Only after such approvals are granted, the Central Bank of Iran is allowed to provide to the foreign investor the equivalent foreign currency to be transferred abroad.

As can be seen, this provision provides little comfort to a foreign investor, bearing in mind the extremely unstable foreign exchange situation faced by Iran during 2010-13.

Another typical concern of foreign investors is the availability of an efficient and impartial mechanism for settlement of disputes, in case a dispute occurs between the investor and the host state. As in all commercial activities, such a dispute is probable and as the outcome of the dispute settlement mechanism is decisive in maintaining the interests of the investor, availability of such a mechanism is pivotal in influencing the decision to invest in a country or not.

In addressing this concern, modern investment laws have made an efficient dispute settlement mechanism available to the investor. This includes international arbitration, normally under ICSID (International Center for Settlement of Investment Disputes, which is an affiliate of the World Bank), International Chamber of Commerce or Permanent Court of Arbitration. These arbitrations take place according to generally recognized procedures and the resulting decisions are normally enforceable under the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards.

In this regard, Article 19 of Iran’s foreign investment act stipulates that disputes between foreign investors and the Iranian government shall be decided by domestic courts (unless a bilateral investment agreement has been concluded between two countries, which encompasses a different rule).

Obviously, a foreign investor will not feel comfortable by resorting to the domestic courts of the same state that it has entered into a dispute with, fearing that state courts have a tendency to maintain national interests and most likely not decide under full neutrality.

In order to facilitate FDI in Iran, these two concerns have to be addressed appropriately by executive and legislative authorities, so that while Iran’s sovereignty and national interests are maintained, a proper and welcoming environment is also set up for foreign investors. Otherwise, political invitations will not yield the result they intended to.