Red tape, political risks could stall investment in Iran

DUBAI (Reuters) - A multitude of business regulations -- 182,000 by one minister’s count -- stands in the way of a rapid flow of foreign investment into Iran after the lifting of nuclear sanctions ended its long isolation from global commerce.

A money changer poses for the camera with a U.S dollar (R) and the amount being given when converting it into Iranian rials (L), at a currency exchange shop in Tehran's business district, Iran, January 20, 2016. REUTERS/Raheb Homavandi/TIMA

Other factors that could stall investment include residual sanctions, a shortage of project finance, and political risks ranging from protectionism to the potential collapse of the nuclear deal, lawyers and consultants say.

Some foreign firms have already signed letters of intent with Iran since the international sanctions imposed over its nuclear program were lifted on Saturday and many more want to trade with its market of about 80 million people.

But major foreign investment will take at least six months to arrive, experts say, as companies navigate the web of bureaucracy, opaque ownership structures and powerful Iranian lobbies that bristle at foreign competition.

“Iran has been under sanctions so a lot of international business practices are not as common there as they are in other emerging markets,” said Farhad Alavi, managing partner at Washington-based Akrivis Law Group.

President Hassan Rouhani, who championed the nuclear deal, has ordered his government to facilitate foreign investment but also warned of the “long road” to Iran’s economic integration with the world.

Rouhani said on Sunday his oil-producing country needs $30-$50 billion a year in foreign investment to meet its economic growth target of eight percent.

It attracted an average of only $1.1 billion of foreign direct investment annually between 1996 and 2004, before major economic sanctions were imposed on it, according to the United Nations Conference on Trade and Development.


Economy Minister Ali Teyyeb-Nia said on Monday the government was trying to “remove laws that obstruct business”. This will not be a small task, he said, adding that there are about 182,000 items of business regulation.

“Most of the regulation is still very much focused on local content, local companies, so it will be interesting to see how the Iranian government will navigate this influx of foreign investment,” said Sorana Parvulescu, MENA director at consultancy Control Risks.

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“We expect the government will have to balance between the interests of local business and foreign investors to make sure nobody loses out as the market opens,” she said.

The interests of foreign investors and their local partners will not always be aligned on issues such as labor, said Parham Gohari, co-founder of Frontier Partners, a Dubai-based advisory firm focusing on Iran market entry.

“Companies are overstaffed and underproductive... they don’t want people to be laid off, while foreign investors want to make sure the company is being run efficiently,” Gohari said, describing government-owned firms as particularly bloated.

As early as last August, shortly after the nuclear deal was reached, Rouhani said foreign investors would be welcome only if they hired local workers and shared their technological knowledge, showing the government’s intent to protect the interests of local businesses.


Many foreign businesses, however, are hesitant to take on long-term commitments in a market that is still fraught with political risk.

A diplomatic incident between Iran and the United States could still undermine the nuclear deal, causing sanctions to “snap back” and exposing investors. Elections due to be held soon in both countries could erode the political will protecting the agreement.

“Particularly when we have a new (president in the) White House in 2017, there is a concern in the back of (investors’) minds: how far will a new U.S. president want to safeguard this deal?” said Ellie Geranmayeh, Middle East and North Africa policy fellow at the European Council on Foreign Relations.

Republicans Ted Cruz and Marco Rubio have pledged to tear up the nuclear deal if elected. Democratic front runner Hillary Clinton supports it, but through the prism of U.S. dominance that Tehran finds deeply provocative.

Many U.S. sanctions on Iran remain in place, notably on the Islamic Revolutionary Guard Corps, an elite military force with sprawling business interests and a lot of experience in disguising its assets.

“As with other markets affected by international sanctions and having complex corporate structures, there is a requirement to do enhanced due diligence to understand whether the ultimate owners of the business are sanctioned,” Control Risks’ Parvulescu said.

Another obstacle for investors could be a measure adopted last month by the Republican-led U.S. Congress -- which opposed the nuclear deal -- preventing visa-free travel to the United States for people who have visited Iran or hold dual Iranian nationality.

Critics of the move, which also applies to Iraq, Syria and Sudan, say it will discourage business travel to Iran and cause complications for dual nationals, who are likely to be among the first attracted to doing business in Iran. A British-Iranian journalist was prevented from traveling to the United States without a visa this week because of these restrictions.


Iran’s shadow economy has been a breeding ground for corruption and nepotism, and foreign companies will be wary of approaches by local “fixers” who would pay bribes on their behalf. Under that scenario, the investor would be at fault under extra-territorial legislation such as the UK Bribery Act.

U.S. firms will still be subject to a trade embargo that will limit their ability to move into Iran. Other foreign firms are not directly affected, but the long reach of the U.S. financial system could still make them hesitate.

Banks will be especially wary of not violating the remaining sanctions because they faced hefty fines in the past, lawyers said. By extension, investors across all sectors might struggle to access the financing options needed to make significant investments.

“There can be no meaningful improvement in investment into the Iranian economy until some robust banks agree to raise their head above the parapet and finance it,” said Nigel Kushner, chief executive of W Legal and a director of the British Iranian Chamber of Commerce.

“I believe they will, but it will take time... I believe it will happen over the next six months and then there will be a domino effect,” he said.

Editing by William Maclean and Timothy Heritage