If there is one country which businesses around the world are looking to enter, it has to be Iran. Touted as a once-in-a-generation opportunity, it is probably the biggest market to open up to the global economy in decades. Sanctions had shut an oil-rich economy worth $400 billion from businesses.
Though US primary sanctions and restrictions on any Iranian person or entity from conducting a transaction in USD continue, other countries are battling to crack a deal with the Iranians. But most are realising that Iran is no cakewalk.
As much as the Iranian government is trying to attract foreign direct investment, the fact remains that the country is yet to reform its age-old laws and regulations that are no longer relevant in the post-sanctions era.
Legal experts around the world are not surprised. Azadeh Meskarian, solicitor, Zaiwalla and Co LLP, says, “I consider such hurdles would be expected in case of any emerging market and Iran is no exception. Although all EU based nuclear related sanctions were lifted under the terms of the Joint Comprehensive Plan of Action (JCPOA) as of the implementation day in January 2016, many political, legal and regulatory obstacles remain in attracting foreign investors into the country.”
Among these are the sanctions imposed by the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury and sanctions related to Human Rights and Terrorism Financing allegations against Iran.
Under the JCPOA, the US president retains significant legislative authority to act on Iran’s internal matters, including censorship, surveillance, Internet monitoring, and other human rights abuses directed at its own people. These provisions authorise the president to impose targeted sanctions – such as visa restrictions and asset freezes – on Iranian individuals and entities.
An important concern for foreign investors is knowing exactly who they are dealing with in Iran. “One has to ensure that the local partner is not connected to entities and individuals who are still on the sanctions list,” says Meskarian. For instance, the Iran Revolutionary Guard Corporation wields influence in many sectors. Hence, it is important for foreign players to take the help of local qualified experts to do a thorough background check.
And, Iran does not allow trade with Israel-owned businesses.
Complicated bureaucracy is an additional burden. Foreign companies are finding it difficult to understand and adjust to the ‘different’ ways of doing business in Iran. Maryam Taghavi, senior consultant, Atieh Bahar Consulting, a member of Atieh Group, feels the tangled network of governmental and semi-governmental entities makes it hard for foreign players to come to grips with facts pertaining to the market and its immense potential.
For example, foreign nationals need a work permit to establish their businesses. But for obtaining a work permit,a person is required to not leave Iran for a month. Real estate agencies have started seeking work permits in case foreigners need to rent a place. “This causes headaches for a foreigner who has just entered Iran and needs a place to stay, or to set up an office,” says Taghavi.
But there are claims that the visa process has been speeded up.
Fixers are everywhere, but finding one with the right expertise is not easy.
“Many Iranians have launched companies claiming to offer consultancy services,” says Taghavi, adding thatit will take years to really understand the underlying and determining factors of Iran’s markets and trends. One has to develop a reliable network of experts in various layers of the government and industries.
Kunal Fabiani, business development manager, Healy Consultants Group, agrees that excessive due diligence is essential. “Clients must request invoices of the local companies and references to ascertain their worth. Without companies physically relocating to Iran to verify if they are bonafide, the best policy may be to work with non-Iranian companies, which already have existing business links with Iranian companies,” he says.
Traditional European trade partners, such as Germany, Italy and France, have recent experience of Iran’s business peculiarities but other investors have no idea where to start and who to deal with. Labour laws and equality regulations are different. Furthermore, careful consideration needs to be given both to the choice of law and the means by which disputes are resolved in any contract being entered into. For instance, under Iranian conflict of law principles, the law governing the contract is the place of execution. Hence, any contract signed within the jurisdiction of Iran is governed by Iranian law and careful consideration needs to be given to the parties’ obligations prior to formalising business relationships.
A chief executive of a UK-based FMCG company says his firm plans to enter Iran by next year but so far has not been able to gather enough confidence. “We plan to tie up with local companies to expand our footprint in the country. Though the ministries in Iran have always responded to our queries, I feel there is an air of suspicion,” says the CEO.
Existing trade partners, like China,are facing a different set of problems. It was one of the few countries to trade with Iran despite the sanctions. In March 2016, US authorities commenced an investigation into whether one of China’s largest telecommunications equipment makers violated US controls by selling American hardware and software to Telecommunication Co. of Iran, dating back to 2012.
Technically, Iran might still be some time away from overhauling its regulatory system. However, positive steps have been taken to attract investment. For instance, the proposed Iran Petroleum Contract (IPC) covers different stages of exploration, development and production and will be offered to contractors as an integrated package for an estimated duration of 15 to 20 years. It replaces the unattractive buyback deals. As per the buyback contracts, foreign companies get very limited returns on investment and were denied any right to the oil; the bulk of the profit went to the Iranian government.
“How much time Iran will take to reform its system is difficult to predict. As foreign investors queue up, the impetus on regulation overhaul will be high. Realistically, it may still take a couple of years to create an acceptable regime for foreign investment,” says Fabiani.