Three ways to do business with Iran

Three ways to do business with Iran

Iran has re-entered 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 everyday 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 re-entry 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 jump-start 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.

Be bold

Iran and its moderate leader – President Hassan Rouhani – were right out of the gate in January, signing investment deals with France and Italy just ten 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 re-engaging 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-sanction 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. Peugeot also announced plans to open a factory in Tehran with the aim to produce 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, as well as constructing 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 in order to avoid Washington’s wrath.

The end of sanctions has seen China quickly seek to re-establish its prominent role, with both governments agreeing to a 25 year cooperation plan which 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 1st. Seoul and Tehran signed upwards of $10 billion in agreements, with a particular 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 for Iran prior to international sanctions. Since January, Iran has quadrupled energy exports to 400,000 barrels a day to South Korea. While bilateral currently stands at $6 billion, it was $17 billion in 2011. Consequently, both sides have pledged to increase trade to $30 billion in the future.

Be 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 oil field – 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 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.

Given Japan’s interactions with another pariah state – North Korea – and the potential for future reinstatement of sanctions, Japan does not wish to be on the losing side again and jeopardize its vital trading relationship with the U.S.

Be absent

One would image that given the prominent role played by President Obama in negotiating the Iranian nuclear deal and end of sanctions, that 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 acts as a strong disincentive. Another concern for U.S businesses is the patchwork American approach to Iran. While the Obama administration supported the lifting of (nuclear program dependent) international sanctions, it maintains sanctions on Iran on humanitarian grounds.

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 U.S election has resulted in American firms staying away from Iran.

The result of this reluctance has been a failure by to re-establish 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, as well as a host of its allies, are already in Iran. Whether Washington joins in remains to be seen.

About Author

Jeremy Luedi

Jeremy Luedi is the editor of Asia by Africa, a publication highlighting under reported stories in Asia and Africa, as well as special features on how the two regions interact. His writing has been featured in Business Insider, Huffington Post, Yahoo Finance, The Japan Times, FACTA Magazine, and Seeking Alpha, among others.