With a country as insular as Iran, it is difficult for foreigners to know exactly what is going on. Speak to the government and the latest sanctions laid down by the EU, UN and US are mocked as an insignificant nuisance. They are not entirely wrong. Iran’s economy is far less dependent on foreign trade than many countries, so when the global crisis hit, the effects were not so severe. Iran has been getting through despite punitive sanctions for decades and, while it is not a booming economic success story, life in the country goes on. Its GDP grew by 6.9% in 2008, according to government figures.
US bank Goldman Sachs has identified Iran as one of its ‘Next Eleven’ countries, a list of nations it believes have the potential to become the world’s largest economies in the 21st century along with the BRICs (Brazil, Russia, India and China).
But speak to foreign businesspeople operating in Iran and there is real fear. An official from Siemens working in the oil and gas sector, who has been doing business in Iran for years, says the government and almost everyone in the country is in denial. He adds that it is only a matter of time before he receives a phone call from his boss and is told that the game is over.
While Iran is getting by, there is no doubt that the sanctions matter. For example, no Western bank cards work in Iran, so any Western traveller will need to load up on cash before visiting. If cash runs out, it can take days and countless headaches to get more.
Dr Behrouz Alishiri, who bears the title of viceminister for international affairs and president of the Organisation for Investment, Economic and Technical Assistance of Iran, appears far from concerned. He touts the country’s growth and asks where else in the world you could find capital market growth of 60% in 2009 and a stock exchange that hit new highs during the financial crisis.
The goal [Iran has] set is to close [the gap between] our existing capacity for investment and our potential capacity
Mr Alishiri also notes a World Bank report that said Iran’s business climate is improving and points to a recent $5m investment from Japanese firm Kansai Paint Company, which opened a factory in Garmsar, a city about 100 kilometres east of Tehran, as evidence that foreigners are still investing in the country.
“The goal we have set is to close [the gap between] our existing capacity for investment and our potential capacity, and we have taken some measures to do that,” says Mr Alishiri.
“We have implemented structural amendments to get the private sector more involved in the economy. We have reviewed Article 44 of the constitution [which mandates state ownership of many industries] and will privatise lots of state-owned firms and companies. As of now, about $60bn-worth of state-owned companies have gone private. These were in oil, gas, steel, automotive and various other sectors.”
Despite the sanctions, investing in Iran is not as difficult as many might perceive, at least at the Iranian end. Foreign companies that are able to navigate their way around the rules – and several have – will find a most welcoming government and business climate. One reason could be that, although official greenfield FDI levels in Iran grew from $900m in 2007 to $3bn in 2009, there is still a notable dearth of activity from the largest economies, such as the US.
The investment process, though, is fairly straightforward, especially if the investing company has a partner in Iran. Companies must first submit an application to Mr Alishiri’s organisation. Based on the application, a report is produced to the country’s foreign investment board, which then issues a licence. This process may sound cumbersome, but there are guarantees in place that all applications will reach the investment board within 15 days, and that a decision on the licence will not take longer than one month.
Tax reforms Iran has also made efforts to reform its tax system and promote several free-trade zones. Corporate income tax is levied at a flat rate of 25% and there are several generous tax holidays. There are production-activity tax exemptions of 80% of income for four years, and 100% of income for 10 years in less-developed regions.
There are even more generous exemptions in the country’s 15 free-trade zones. In these zones, tax exemptions last for as long as 20 years, and restrictions found elsewhere in the country are not usually present. Perhaps most interestingly to foreigners, Iran’s onerous visa requirements are completely waived in the freetrade zones.
We don't appreciate the sanctions...[they] will have an impact, but we should not exaggerate their effect. We have the ability to survive and we will
The country’s financial and banking system also looks to be opening up to foreigners. Iran’s parliament, the Majlis, recently passed a law that will allow foreign groups to purchase up to 50% of the shares of any Iranian bank. This reform has been universally welcomed by the country’s banks, which say it will benefit them in a number of ways.
Seyed Ahmad Taheri Behbehani, chief executive officer at EN Bank, is encouraged by the banking reform, as well as by a general trend towards more liberalisation of the country’s economic policies. He says: “It could increase the volume of our business activities as well as the size of our business. It will promote a better atmosphere for our business and work. Foreign investment will create more cooperation and these investors can add value to what we do.”
Majid Ghassemi, president at Bank Pasargad, is in full agreement and adds that the financial liberalisation will create more competition in a market that badly needs it. He says he will continue to push the Majlis for more relaxation of the regulations, such as those on interest payments and Islamic banking. As he sees it, the country’s banking system is still very much restriction-oriented, not market-oriented.
These reforms are all laudable efforts to bring investment to Iran, but the elephant in the room is clearly the new round of sanctions. UN Security Council Resolution 1929, approved in June, bans countries from participating in any activities related to Iranian ballistic missiles.
The resolution restricts countries from providing any training, financing or assistance that could be connected to Iran’s arms or nuclear programmes, a restriction that could be loosely applied to many groups and organisations.
There are several other non-binding recommendations, but overall the resolution will make it more difficult for Iranian businesses, even those not involved in weapons or nuclear activities, to access and be accessed by foreign markets.
Carry on regardless
But Mr Alishiri is undeterred. He says he will press ahead with his policies and, as with previous sanctions, Iran will still manage to win foreign investment. He also declares that any company that is not satisfied with its investment or with doing business in Iran can speak to him directly, and he vows to resolve any issues personally within 15 days.
He says: “The fact that they [the EU, UN and US] have imposed [new] sanctions on us proves that the previous sanctions didn’t have any effect. Look at the indicators. Our private sector paid no attention to these sanctions.”
Perhaps Mr Behbehani sums up the Iranian response best in saying: “We don’t appreciate the sanctions. And they won’t be forgotten. The sanctions will have an impact, no doubt, but we should not exaggerate their effect. We have the ability to survive and we will.”
Yet for all Iran’s jingoism and determination to resist the sanctions, one cannot help but wonder how much better things would be for the country if the trade restrictions were lifted. Iran is undoubtedly a potentially vastly rich country, but getting it to the economic place where it belongs has been a riddle that has beset Iranians and foreigners for decades.