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Want to make a deal in Iran? Beware of these 3 caveats

Investing in the Islamic republic can have its shortcomings

Paul Crompton

Published: Updated:

As foreign business delegations flock to Iran on an almost weekly basis since the country signed a nuclear accord with world powers in July, drawing a close to years of sanctions, setting up shop in the Islamic Republic’s once-closed off market is becoming the latest business trend.

With large oil deposits, a population of close to 80 million, and a growing consumer market, Iran could one of the last remaining places “short of Mars and the moon, where there is significant opportunity,” as one UK-based executive put it.

But investing in the Islamic republic can have its shortcomings - risk and lack of knowledge of rules and regulations, not to mention understanding the business culture - are usually some ones to watch out for.

So, let’s get started:

Beware of hype

Tehran’s stock exchange immediately jumped following the initial announcement of the deal in July, but contrary to expectations, has been on a downward course ever since.

“A lot of hype was attached to the nuclear agreement and the participation, so we’re not seeing what was supposed to take place. There’s not a lot of clear answers in terms of what is happening,” said Mehrdad Parhizkar, a partner at business advisory Frontier Partners.

Despite an initial flurry of interest from Western businesses, many are wary of holding back until clearer deadlines for the lifting of some sanctions emerge.

The decline in stock market value has also mirrored sales of Iran’s crude oil, amid a general global supply glut and low prices worldwide.

Sanctions are unlikely to be officially relaxed until next year.

“Most of them [foreign firms] are waiting for a full listing of the sanctions. They don’t really want to get involved until they know one hundred percent they’re safe,” said Parhizkar.

Some investors are also worried that if Iran defaults on its agreement, the sanctions will be snapped back, as per the terms set by the July accord.

The cooling mood has also changed appetites from the Iranian side, he added.

“The Iranian mentality is: I expected a lot more from this, why hasn’t it happened? So they become worried and they become much more conservative in their approach.”

Beware of banking risks

Iran is eagerly awaiting foreign investment – these include sectors such as oil and gas, petrochemicals, and transportation.

Yet foreign investment is also necessary to shore up Iran’s ailing economy. State-owned Iranian banks are “more or less bankrupt,” according Parhizkar. Much of this is down to the large number of non-compliant loans that have built up over the years – particularly under former President Mahmoud Ahmadinejad’s administration, he added.

“What they’re looking at is some injection of capital into them and they’re looking at basically the unfreezing of assets that is due to take place in the short to medium term, so that the Iranian government can actually bale them out,” he said.

Yet international banks and most insurers are likely to avoid dealing with Iran for some time, fearing they could face more fines from U.S. regulators despite the nuclear deal, Reuters reported back in July.

One lender that notoriously fell foul of regulations was UK-based bank Standard Chartered, which has paid close to $1bn in fines to U.S. regulators and law enforcement agencies for sanction breaches and compliance failures over the past nine year, the Financial Times reported.

Currently, large UK and European banks are seeking more information from Iranian authorities on sanctions being lifted before considering investment the head of a recent U.K. delegation to Iran told Bloomberg.

“We are stuck in a situation where we need somebody to untangle this mess. Without any sort of tangible outcome as we expected, we haven’t seen anything concrete at the moment,” said Parhizkar.

Beware of red tape

Despite an annual output of some $400 billion, Iran’s economy, regulations and market situation can be tough to understand.

A study conducted by the World Bank ranks Iran in 130th place on its global “ease of doing business” list – nestled in between Tanzania and Lesotho.

“Most of the Iranian economy is controlled by the government, so by definition you are looking at a bureaucratic process,” said Parhizkar.

“Decision making is notoriously slow, regulations are constantly being reviewed and updated there’s not a lot of proper and effective communication in terms of what the latest regulations are, [and] regulations are usually vague in terms of interpretation.”

“These are the sort of things you actually come across on a daily basis.”

The process of registering a business – and owning immovable property - can also be complex.

As an individual equipped with a residency permit, property can be owned.

But once your residency permit has been taken away from you and you want to leave the country, within a period of six months, you have to return the property or sell it, according to the advisor.

However, the situation may not be as bad as it seems.

Iran has lowered risks for foreign investors through the introduction of the Foreign Investment Promotion and Protection Act (FIPPA), which allows for repatriation of foreign capital and profits generated in the Islamic Republic.

FIPPA also protects against any loss as a result of direct action by the government that could disrupt business.

Aside from regulations, potential investors should also keep cultural caveats in mind. “Iran has been isolated for a number of years, and it’s not used to actually doing business with foreigners,” said Parhizkar.