Iran Lures Investors Seeing Nuclear Deal Ending Sanctions-Bloomberg News

Iran Lures Investors Seeing Nuclear Deal Ending Sanctions-Bloomberg News ... 18/08/2014 Economy

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By Jeremy Kahn August 17, 2014
On a May afternoon in Tehran, a Russian in a dark suit sits in the crowded lobby cafe of the Espinas Persian Gulf International Hotel with his Farsi translator, sipping coffee with potential Iranian partners while discussing the price of soy fiber. No sooner do they vacate their armchairs than another group of besuited businessmen takes their place, this time conversing in Italian and Farsi about industrial motors.
The Espinas, one of Tehran’s few luxury hotels, opened in 2009, just as successive rounds of sanctions over Iran’s nuclear program were drawing an ever-tighter noose around the economy. With the restrictions biting, the Espinas’s lobby, adorned with pink-granite columns and faux Achaemenid sculptures, emptied out.
Today, however, amid glimmers that sanctions will be lifted, finding a room at the Espinas isn’t easy, Bloomberg Markets magazine will report in its September issue.
“All the five-star hotels are full of Western companies looking to position themselves to do business -- and also Japanese and Chinese companies,” says Sarosh Zaiwalla, a London-based lawyer who specializes in sanctions regulation and who travels frequently to Tehran.
Iran has seen a huge surge in the number of Western business delegations, says Amir Cyrus Razzaghi, the head of Ara Enterprise Group, a consulting firm in Tehran that provides market research and business intelligence to clients.
Closed Market
In February, a group representing more than 100 French companies -- including engineering group Alstom SA (ALO), telecommunications company Orange SA (ORA) and carmaker Renault SA (RNO) -- visited Tehran, the largest foreign-trade mission the country had ever hosted. Groups from Canada, Europe and the U.S. have also come. Companies that were once active in Iran, such as French oil giant Total SA (FP) and Luxembourg-based ArcelorMittal (MT), the world’s largest steelmaker, have publicly expressed interest in returning.
Iran -- one of the world’s largest closed markets -- may be on the verge of opening for business after years of isolation, says Charles Robertson, chief economist at Renaissance Capital Ltd., a London-based investment firm.
“This is the last major opportunity out there in the world that can suddenly become accessible, almost overnight,” he says.
Robertson, who visited Tehran in February, compares Iran to Turkey in 2004, when that emerging market was poised for what turned out to be almost a decade of strong economic growth.
Diplomatic Breakthrough
What’s raised investor expectations about doing business there is a diplomatic breakthrough that could clear the way for sanctions to be lifted. Brokered with Iran in November by the U.S., China, Germany, France, the U.K. and Russia, the deal eased some sanctions temporarily in exchange for Iran’s commitment to curtail uranium enrichment and allow greater oversight by the International Atomic Energy Agency.
The Joint Plan of Action, or JPA, released $4.2 billion in Iranian funds frozen in foreign banks and suspended sanctions on petrochemical exports, gold trading, the sale of goods and services in the automotive industry, and the supply of parts and maintenance needed to keep Iran’s civilian aircraft flying safely.
Iran has been struggling under layers of sanctions laid down as thick as paint on an old barn by the U.S., the European Union and the United Nations over more than three decades.
Final Settlement
The U.S. measures, some of which date back to the Iranian Revolution in 1979, are the strictest. U.S. citizens are barred from doing any business with Iran without a waiver from the U.S. Treasury. Foreign companies that trade with Iran risk being fined and cut off from the U.S. market, a threat that has driven many European firms to abandon Iran in recent years.
The UN sanctions primarily target individuals and entities directly tied to Iran’s nuclear program, while EU sanctions have tightened and broadened over time to include Iranian oil sales and banking.
The November JPA set a July 20 deadline for a final settlement on Iran’s nuclear program. As the clock ticked down, that deadline was pushed out to Nov. 24. The extension freed up an additional $2.8 billion of Iranian money that had been frozen in foreign bank accounts.
Meanwhile, in July, as Israel and Iran-backed Hamas forces in Gaza exchanged missile fire in another outbreak of fighting, Israeli Prime Minister Benjamin Netanyahu warned the U.S. against doing a “bad deal” with Iran.
Oil Reserves
Other events in the region, however, have drawn Iran and the U.S. closer together. With Syria’s civil war spilling over into Iraq, the U.S. and Iran both rushed to help Iraqi forces counter the threat posed by Sunni extremists. If a conflagration disrupts Iraqi oil production, Iran’s reserves, the fourth largest in the world, will become important to world markets.
Iran has 76 million people, about the same number as Turkey. As recently as 2011, it produced twice as many cars as Turkey, according to the Paris-based International Organization of Motor Vehicle Manufacturers. It consumes more steel annually than either the U.K. or France, according to the World Steel Association. And the Tehran Stock Exchange, or TSE, has a market capitalization of about $135 billion, three times the value of the main stock market in Vietnam, with a population of 89 million.
While once-embargoed markets such as Myanmar and Libya lack developed financial markets and physical infrastructure, Iran has both, Robertson says -- presenting an opportunity that’s “just huge.”
‘Long-Term Potential’
The man who helped organize Robertson’s trip to Iran is Ramin Rabii, the managing director of Turquoise Partners Group, a Tehran-based investment firm with $200 million under management that has become the first port of call for investors.
“This is one of the most attractive markets in the world in terms of its long-term potential,” Rabii says.
Turquoise was set up in 2005 to provide an easy way for foreigners to invest in the TSE. Sanctions, however, put an end to that in 2010. Since the JPA was signed, Rabii says, he’s received half a dozen e-mails a week from investors looking for more information on the market.
Most sanctions remain in place. And if businesses eying Iran needed any reminder of the force of those measures, they got one on June 30 when BNP Paribas SA (BNP), France’s largest bank, agreed to pay a record $9 billion for violating U.S. sanctions on Iran, as well as on Sudan and Cuba.
‘Plan in Place’
Still, companies -- particularly those that sell pharmaceuticals, medical devices and consumer goods already subject to fewer restrictions -- would be foolish not to draw up contingency plans to enter the market if sanctions are lifted, says Matthew Spivack, a London-based consultant at Frontier Strategy Group.
“Not having a plan in place, not thinking about it, is what will really put you behind,” he says.
Among those that have publicly expressed interest in Iran is Canadian transportation company Bombardier (BBD/B) Inc.
“Our role right now is to understand when sanctions could be lifted and how we could take advantage of a market we feel will be important for all of our products,” Pierre Beaudoin, Bombardier’s chief executive officer, said at a news conference after the company’s annual meeting on May 1.
Beaudoin’s bland statement belies the bounty of contracts that could await a company such as Bombardier if Iran opens up.
The Iranian government has said it’s looking to buy 400 passenger planes -- including regional jets and turboprops -- in the next 10 years to upgrade its aging fleet. (On August 10, a domestically produced Iran-140 turboprop aircraft, a copy of a Ukranian Antonov AN-140, crashed shortly after takeoff from Tehran, killing 48 people.)
Jockeying to Return
Bombardier could compete for some of that business. The Tehran government has also unveiled plans to spend $10 billion improving the capital’s public transport system during the next five years, including buying 2,300 metro-rail cars, which Bombardier also produces.
Companies based in Europe, many of which departed Iran only in the past four years as sanctions tightened, have been most conspicuous in jockeying to return -- leaving U.S. firms behind.
‘Getting Lapped’
“There is a sense that they are getting lapped by the Europeans,” says Reza Marashi, research director of the Washington-based National Iranian American Council, which represents the interests of Americans of Iranian descent in the U.S. “The Europeans didn’t sanction themselves out of influence in Iran like we did.”
Asked at a press conference about U.S. criticism of French businesses, including Total, that have held exploratory talks with Iran, Total CEO Christophe de Margerie said, “When it becomes legal to work in Iran and contractual terms are satisfactory, I don’t see why Total would deprive itself of the possibility to beat out its Anglo-Saxon competitors in Iran.”
Iran’s overtures to investors date from President Hassan Rouhani’s election in July 2013. Rouhani succeeded Mahmoud Ahmadinejad, an anti-U.S., anti-Israel populist who had accelerated Iran’s uranium enrichment efforts. Ahmadinejad bequeathed to Rouhani an economy crushed by international sanctions.
Plunging Rial
By the summer of 2013, oil production had fallen to a 20-year low of 2.5 million barrels a day, down from a peak of 4 million barrels a day in 2008.
From the start of 2012 to Rouhani’s election, the Iranian rial plunged more than 60 percent against the dollar as inflation spiraled out of control, the U.S. prohibited international banks from trading or holding rials, and Iranians rushed to buy gold and foreign currency.
Real gross domestic product fell 5.6 percent in 2012 and a further 1.7 percent in 2013. The economy is forecast to grow 1.5 percent this year, according to the World Bank.
Rouhani has cast aside the Ahmadinejad playbook. At the World Economic Forum in Davos, Switzerland, in January, Rouhani invited CEOs and financiers to “come and visit Iran to see the investment opportunities.”
‘Personally Impressed’
Martin Sorrell, CEO of WPP Plc, the world’s largest advertising and marketing services group, was among several CEOs who met privately with Rouhani at the ski resort.
“I personally was impressed,” Sorrell says. “It seems he is bent on changing Iran’s relationship with the West.”
Sorrell says WPP has begun researching Iran’s business potential.
On August 10, Rouhani lashed out at hardline critics in his country who oppose negotiations with the West over Iran’s nuclear program.
“Fear of interaction, fear of negotiation and fear of understanding is wrong,” Rouhani said, according to the Iranian Students News Agency.
David Levine, a lawyer in the Washington office of McDermott Will & Emery who specializes in U.S. sanctions law, says companies exploring business opportunities in Iran should tread carefully.
“The downside risk is severe,” he says, citing penalties including prison and big fines.
Potential Backlash
Businesses also need to be wary of U.S. political pitfalls and public opinion, says Henry Smith, a Dubai-based senior consultant and Iran analyst at Control Risks Group Holdings Ltd., a consulting firm.
Fairfield, Connecticut–based General Electric Co. was so concerned about a potential public backlash to its work repairing engines on Iran’s civilian airliners -- a transaction authorized under the JPA and for which the U.S. Treasury has granted waivers -- that it promised to donate any revenues from the work to charity. (GE says Iran’s state-owned airline has yet to contact the company to start these engine repairs.)
Then there’s United Against Nuclear Iran, a New York–based group that pressures companies to cease doing business with Iran.
“This is a regime that sponsors terrorism and supports entities that maim and kill U.S. troops around the world,” says David Ibsen, executive director of UANI.
The biggest prize for Western companies is likely to be Iran’s energy industry. The government plans $100 billion in oil and gas projects over the next four years.
Energy Projects
Iran will need outside expertise to boost crude production significantly, says Robin Mills, head of consulting at Dubai-based Manaar Energy who traveled frequently to Iran as a Royal Dutch Shell Plc geologist in the 1990s.
Within weeks of the JPA announcement in November, Iranian Oil Minister Bijan Zanganeh met in Vienna with the chief executives of two oil and gas companies, Italy’s Eni SpA (ENI) and Austria’s OMV AG. In addition, Eni and Total have sent representatives to Tehran to discuss energy projects, says Akbar Nematollahi, the Ministry of Petroleum’s spokesman.
“Approximately every week, we have meetings with the delegations of these companies,” he says. “There have even been negotiations with some American companies. They are ready too.”
Nematollahi declined to name the U.S. firms.
In May, some 1,800 exhibitors crowded Tehran’s sprawling International Permanent Fairground for Iran’s annual International Oil, Gas, Refining and Petrochemical Exhibition. The petroleum ministry said 600 foreign companies attended, although many were small Chinese and South Korean firms.
Auto Companies
Jerome Budin, an international manager at Rotork Controls Ltd. (ROR), an electric valve–making subsidiary of Rotork Plc, a company based in Bath, England, was among the few Europeans staffing an exhibitor’s booth. Budin says Rotork has attended the fair for 12 years and sold products to Iranian petroleum, water and power companies after securing the necessary licenses.
“It’s quite a big market for us,” Budin says. “Obviously, we are looking forward to an easing of the sanctions.”
Western auto companies are also revving their engines over Iran. In 2013, even though U.S. sanctions on the auto industry were still firmly in place, Iranians bought more than half a million new vehicles, according to the International Organization of Motor Vehicle Manufacturers; most of those were domestic models manufactured by Iran Khodro Co. and Saipa Automotive Manufacturing Group.
Iranian Partners
In January, Renault CEO Carlos Ghosn told Bloomberg Television that this figure could increase threefold if sanctions were fully lifted. The JPA temporarily removed sanctions on the auto industry, and Renault, Europe’s third-largest automaker, has resumed shipping kits that its Iranian partners, Iran Khodro and Pars Khodro, assemble into vehicles. Renault had abandoned the market in 2012 because of sanctions.
Fellow French automaker Peugeot SA had been Iran’s leading car supplier, with a 30 percent market share, before it too withdrew in 2012. In the spring, Peugeot executives traveled to Iran to talk about coming back, spokesman Pierre-Olivier Salmon says.
The JPA’s temporary nature, along with continued banking restrictions, has kept the brakes on big business deals. Furthermore, despite the deadline extension, the two sides remain far apart on restrictions to Iran’s uranium enrichment capacity, and a final deal might prove elusive.
Uncertain Process
Even in the event of a deal, Control Risks’ Smith says, sanctions wouldn’t vanish overnight; they would probably be eased in phases tied to Iranian compliance. In the U.K. and U.S., for example, some sanctions can be lifted only if legislatures change the law, a time-consuming and uncertain process.
Many U.S. laws restricting trade with Iran predate concerns about Iran’s nuclear program and are related to Iran’s alleged sponsorship of terrorism and human rights abuses. Anti-Iran hawks in Congress may seek to keep restrictions in place—and lifting all U.S. sanctions is not under discussion, Smith says.
Mark Dubowitz, executive director of the Washington-based Foundation for Defense of Democracies, which advocates that Washington take a hard line on Iran, says he’s against allowing Iranian banks to participate in global finance too quickly, on grounds they have funded terrorism and laundered money.
“These are bad banks,” he says. “These banks should have to go through a long rehabilitation process where they demonstrate they are no longer a threat.”
Little Uplift
As for international banks seeking to do business in Iran, any eventual settlement will have to spell out what’s permissible.
In Tehran, for all the buzz in the Espinas lobby, the JPA has provided little economic uplift. Daily life for most of the capital’s 7.2 million people grows ever more difficult as food and fuel prices continue to rise. Iranians have little choice but to cling to the notion that things will get better, Ara Enterprise’s Razzaghi says.
“Very little concrete new business is being generated,” he says. “So, yes, people live in hope -- if only because the alternative is too terrible to contemplate.”
To contact the reporter on this story: Jeremy Kahn in London at
To contact the editors responsible for this story: Stryker McGuire at Jonathan Neumann

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