Iran welcomed its first wave of international business deals as the lifting of numerous economic sanctions went into effect on January 16, 2016. Iranian president, Hassan Rouhani, told press that so far 150 companies from 50 countries have visited Iran for investment discussions.
Already, Iran has signed a $10bn deal with French aircraft manufacturer Airbus to purchase 114 new aeroplanes to revamp Iran’s ageing transport sector, as well as a memorandum of understanding with German automotive company Daimler, which will return its business to Iran after a six-year hiatus. The first major international law firm to enter Iran, CMS Legal, has already opened its offices in Tehran in the Navak Tower, which is also home to the German Chamber of Foreign Trade.
“This will enable us to provide local support for our clients and investors on projects in Iran,” said Hubertus Kolster, managing partner of CMS Germany. Its client base will comprise international and Iranian multinationals and small and medium-sized enterprises. CMS has already advised on the co-operation agreement signed between Daimler and local vehicle manufacturer, Iran Khodro Diesel SSA, the firm reported.
Germany, France and Italy lead the way as the EU looks to more than treble trade with Iran from a current $8.3bn to the pre-sanctions level of roughly $31bn. Major sectors of interest for FDI include transport and logistics, construction and pharmaceuticals. Iran’s banks have also reconnected to Europe’s financial system through the Society for Worldwide Interbank Financial Telecommunication, enabling international transactions that were not previously possible.
Tehran plans to increase its oil exports to 500,000 barrels a day – from approximately 280,000 a day in 2015 – with a particular focus on India. Its expansion plans will have further implications for global oil prices, which are already at a record low. Petroleum represents 30% of Iran’s annual government revenue. The World Bank has projected gross domestic product growth of 5.8% in 2016, and increased natural gas production plus the release of Iran’s frozen assets – estimated to be between $50bn and $100bn – is expected to be transformative to Iran's long-anaemic economy.
Nonetheless, analysts expect it may take decades before the economic benefits are felt by ordinary Iranians. Mr Rouhani is seeking up to $50bn in foreign investment per year and a tax increase of 15%, and estimates put the country’s infrastructure investment needs at up to $1000bn before it is able to make a full economic recovery.
While multinationals hone in on opportunities to expand into the Middle East’s second-largest market by population, caution is advised. Experts say that business ventures into the country are still very high-risk despite the potential for high returns. Corruption is endemic; Iran ranks 136 out of 175 countries in Transparency International’s Corruption Perception Index.
“Corruption, financing risks and the need for due diligence are going to be especially relevant in the Iranian context,” said Nicholas Wade, Middle East and north Africa programme director at London-based consultancy Menas Associates. “International companies don’t want to fall foul of any US sanctions, they will struggle to get credit because banks are very conservative with regard to Iran, and much of the ownership structure within the Iranian economy presents the risk of dealing with sanctionable entities, such as the Revolutionary Guard Corps [a branch of the military].”
International economic sanctions were lifted on Iran following the implementation of the country’s landmark nuclear deal in mid-2015. Imposed in 2011, the wave of sanctions over the country’s nuclear programme shrank Iran’s economy by 9%, leading to 45% inflation and a devaluation of the Iranian rial by more than two thirds over the following two years. They included UN sanctions, an EU embargo on oil imports and unilateral US sanctions penalising banks for doing business with Iran.
US sanctions relating to human rights abuses and support for terrorism remain in place, including those on doing business with entities linked to Iran’s Revolutionary Guard Corps (IRGC). Companies will therefore need to be very wary of who their local partners are, as the IRGC still control a substantial portion of Iran’s economy in sectors ranging from energy and construction to telecoms and finance.