Long-term business opportunities and risks in Iran
'Contrasts (1) in Tabriz's bazaar'. (Credit: Gaël POINAS/Flickr, licensed under CC BY-NC-ND 2.0) (via: bit.ly)

An executive workshop on business opportunities in Iran took place at the DOC Research Institute in September 2017. Participants explored the business practices, opportunities, and approaches required to create safe and profitable business strategies for Iran.

The event was introduced by Pooran Chandra Pandey CEO of the DOC Research Institute, with an overview of Iran’s achievements of the last two years. In summary, Iran is one of the most rapidly growing economies in the world and exported about $91.99 billion worth of goods in 2017, making it the 38th largest export economy in the world. It also imported $70.53 billion worth of goods and services. Pandey emphasised the opportunities Iran offered investors in terms of location, market potential, labour privileges, a large pool of trained and efficient workers, low utility and production costs, abundant natural resources, and a large pool of consumers.

Christopher de Bellaigue, an international scholar working on Iran, presented the development of the Iranian economy and politics since the 19th century. Outlining its history and waning influence from the Napoleonic era on, he described how the country became one of the main stages on which ‘the great game’ of political and diplomatic confrontation between the British and Russian Empires played out – to the detriment of Iran.

An emerging national consciousness later gave rise to Iranian nationalism, which was expressed in a series of movements against the British and the Russians. At the beginning of the 20th century, a constitutional revolution for a parliamentary system of government occurred, but after a few short years, monarch Mohammad Ali Shah got rid of the first Iranian parliament in 1908. De Bellaigue stressed that the desire for a democratic system of government has been present in Iran since at least the turn of the 20th century.

The country’s fate was further complicated by the discovery of oil in the early 20th century. At that time, shortly after the beginning of the First World War, the British Royal Navy switched to oil for greater speed, which provided a strategical advantage over the German Navy. As Britain had no oil resources, the British government became involved in developing the strategically important Iranian oilfields.

After the war, Mohammad Mossadegh nationalised the oil industry. In response, Britain and the Central Intelligence Agency from the United States toppled Mohammad Mossadegh in a coup. However, his replacement, Shah Mohammad, was an autocrat and his rule culminated in the 1979 revolution, an uprising that had a religious component but also a strong nationalist character.

The next important period was under the government of Ayatollah Khomeini, but Iranian development halted during the Iran-Iraq War of 1980-1988. After the war, the influence of the ideologues waned and the country started to open to the world. With a booming population, the following years were characterised by increasing consumption. As an example, Kia Pride, a subcompact car developed by Kia Motors for the Japanese and South Korean markets in the 1980s, entered Iran in 1993 and became a symbol of prosperity. Meanwhile, the Iranian middle class grew.

The champion of that middle-class society was President Akbar Hashemi Rafsanjani (1989-1997), who tried to liberalise the economy in a controlled way. He was caught between two competing pressures. Hardliners wanted to limit liberalisation, preferring to keep the revolutionary fervour aflame, while others wanted to see liberalisation progress even faster.

As Iran moved away from an Islamic and socialist system of government, it offered a substantial oil deal to the American company Conoco. This was a chance for a new beginning after the tensions with the West caused by hostage crisis of 1979-1981 and Iran’s support for groups like Hezbollah in Lebanon. However, President Bill Clinton decided that the deal ran contrary to American national security and the following year passed the Iran and Libya Sanctions Act.

Under President Mohammad Khatami (1997-2005), Iran was reintegrated into the world economy and banking system to a degree not seen since the revolution. He opened the oil sector to foreign companies and Western investment. Khatami was followed by the economically disastrous term of President Mahmoud Ahmadinejad (2005-2013) whose government squandered the massive oil royalties the country received.

President Hassan Rouhani (2013- ) has since sought to stabilise Iran economically. He negotiated an international deal concerning its nuclear program, lifting sanctions as a way to allow Iran to return to the international fold. The finalised negotiations saw European companies start to return to Iran, joining Russian firms which had been active there throughout the period of sanctions, as well as the increasing presence of China as part of its One Road One Belt initiative. Yet, by the end of his first term, Rouhani had not achieved his ambitions as America was continuing to apply sanctions. Promises to redouble his efforts to liberalise the country saw him, however, re-elected for a new term.

De Bellaigue explained that the current situation is fraught with uncertainty because the Trump Administration must certify that Iran is in compliance with the terms of the nuclear deal every 90 days. This is a legacy of the deal hammered out because of the Obama Administration’s inability to get the treaty ratified by Congress and this certification is being used by Nikki Haley, the United States representative at the United Nations, to broaden the demands being made on Iran. The threat is that new sanctions will be imposed against Iran.

Vladimir Korovkin, the head of Growth and Innovation Research at SKOLKOVO IEMS, spoke about the growth of the Iranian economy between 2012 to 2017. GDP per capita in this period represented one-third of that of the European Union. If this pace of growth can be sustained, Iran could be in the world’s top 15 economies within the next 25 years.

Currently, Iran’s GDP places the country above the global average. If the current situation in Iran is compared to China 10 years ago, then it is remarkably similar, which means the local currency is undervalued. Korovkin also explained that the slow growth of the Iranian economy since 2011 was caused by an economic crisis induced by international sanctions. However, the crisis is over and the country is back to a normal pace of growth.

Korovkin also discussed a variety of different indexes indicating the ease of doing business in Iran, including competitiveness and global entrepreneurship, innovation, human development, and the ease of doing business index where Iran is positioned close to Brazil, Ecuador, and Barbados. The main strengths of Iran are in enforcing contracts, providing construction permits, and starting business, while weaknesses include paying taxes, resolving insolvency, protection for minority investors, and trading across borders.

The trends that will drive the Iranian economy in the coming years include diversification, modernisation, and privatisation. The main point about diversification is that Iran is shifting away from oil dependency and becoming a multi-dimensional economy. Iran is in the top ten countries dependent on oil revenue, but it is diversifying, particularly in terms of agriculture. Presently, Iran is among the leading agricultural exporters in the world. Another area of diversification is heavy industry development.

Modernisation is about developing infrastructure, industrial assets, and a digital economy. As Iran was under heavy sanctions, its access to industrial equipment was restricted, so the country was unable to produce modern parts and replacements, a prevalent problem in every industry. However, after the Joint Comprehensive Plan of Action (the JCPOA, known as the Iran nuclear deal) on 14 July 2015, Iran had access to equipment from countries like Germany. Iran needs a massive overhaul of its assets. This is one major opportunity for German businesses. Another point mentioned by Korovkin is the number of STEM (science/technology/engineering/mathematics) students who will help modernise the country and develop e-commerce. E-commerce is booming and represents 2.5% of GDP. Currently, the country’s biggest digital platform, DigiKala, is valued at $150 million.

The final trend, privatisation, is about gradually decreasing the role of the government in the market in favour of the private sector. This action has boosted the consumer market and despite sanctions there was a sharp rise in consumer spending. Some 60% of consumers are under 30 years old, which means growth will be sustained for decades. Private healthcare, education, and housing are the most rapidly expanding sectors. Along with that, foreign brands are entering the market, there being demand for them despite ideological tensions.

Underdeveloped areas that provide a good opportunity for international business include insurance. The share of insurance premiums is low in Iran, but the cultural habit of saving in gold and cash offers potential for life insurance providers. Another area is the retail sector, which lacks the malls, supermarkets, and fast food chains prevalent elsewhere in the world.

IT consulting and services also offer opportunities, as the overhaul of the industry requires implementation of modern IT management, yet leading international vendors have limited opportunities to enter the market directly. While there are enough qualified programmers in the country, few have experience of complex business-oriented deployment.

The last area for development is the stock market. The market cap to GDP ratio is 27%, considerably lower than for many regional peers: Qatar – 88%, India – 76%, Jordan – 71%. The average price-earnings ratio of public Iranian companies is six-to-three times lower than for an average company listed on the New York Stock Exchange, indicating potential for up trade. On average, Iranian companies have a net profit margin of 13%, two times higher than a Fortune 500 company, but they are massively undervalued.

Amir Alizadeh from the German-Iranian Chamber of Commerce talked about the Iran-Germany relationship. Alizadeh was a founding member of the revived joint business commission, established ten years ago. He stressed that Iran offers a huge growth opportunity of about $1 trillion until 2035. McKinsey see six core strengths of Iran, which are economic diversification, scientific education, a growing consumer class, the highly urbanised population, entrepreneurial culture, and its strategic location.

The first is vital. Iran has tried for many years to escape oil dependency and diversify its economy. Iran offers opportunities for industrial business not only in Tehran, but throughout the country, where natural resources are abundant in places like  Mashhad and Tabriz.

Alizadeh also mentioned trade relations between Iran and Germany before, during, and after sanctions. Before sanctions were imposed, the overall volume of trade was €5 billion, which is the target for the next three years. After 2010, exports to Iran decreased and reached their lowest point in 2013. However, this situation was caused not only by sanctions, but also by the fall of oil prices and taxation. After the sanctions were lifted in the first half of 2017, Germany increased exports to Iran. Primarily, Germany exports machinery, medical equipment, pharmaceutical products, and chemical products to Iran, while Iran primarily exports oil and petroleum products.

German companies have strong prospects in Iran because of their reputation. German companies and funding helped build Iran’s first national training schools, as well as many factories and the railway network. Another opportunity for German companies is diversifying industry. There is an urgent need for modernisation and new machinery and industrial equipment are essential for this. Opportunities exist in energy, the automotive sector, infrastructure, health, and education industries. Daimler is planning to relaunch Mercedes-Benz production in Iran and has also established a joint venture with Iran Khodro. Porsche is bumping up its business and cooperation in the pharma sector is also expanding. These all indicate the localisation of products for Iran, which should be to the benefit of all.

The German-Iranian Chamber of Industry and Commerce  is an official representative of German Industry and Trade and acts as a service provider for German and Iranian companies and its member organisations. The German Chamber of Commerce Abroad (AHK) provides German companies with market entry advice, legal and tax information, professional education, accounting, PR, and many other forms of service and advice.

Prof. Abbas Maleki, the vice chancellor of the Sharif University and ex-deputy in the Iranian Ministry of Foreign Affairs highlighted the role of energy resources for social and economic well-being. This is the main factor relieving poverty, improving humane welfare, and raising living standards.

The historical development of Iran’s energy started from an unprecedented concession granted by Nāṣer-al-Din Shah, the Shah of Iran, in 1872 to Paul Julius Reuter, a British entrepreneur. The concession covered the entire territory of Persia and gave Reuter the exclusive rights to exploit all the mineral resources in Iran for 70 years. The next concession, for petroleum, was signed in 1901 between William Knox D’Arcy and Mozzafar al-Din Shah, giving D’Arcy exclusive rights to prospect for oil in Persia. Shortly before giving up, D’Arcy struck large commercial quantities of oil in 1908.

The Anglo-Persian Oil Company (APOC) took over the concession in 1909. APOC was a British company founded in 1908 following the discovery of a large oil field in Masjed Soleiman, Iran. APOC, the first company to extract petroleum from Iran, was renamed the Anglo-Iranian Oil Company (AIOC) in 1935, and then in 1954 renamed as the British Petroleum Company (BP). The main events for the Iranian energy market in the following years were:

  • 1909: Establishment of APOC concession, a 14% net profit for Iran
  • 1933: Contract revision, 16% net profit for Iran
  • 1951: Nationalisation of the Iranian oil industry
  • 1953: Contract with consortium, concession, 50% net profit
  • 1979: Islamic Revolution and the rejection of the concession in Iran’s constitution
  • 1979-2015: Age of contract services and buyback agreements
  • 2016: New Iran Petroleum Contract (IPC); Caspian: Production Sharing Agreement (PSA).

Looking briefly at Iran today, Prof. Maleki said the country has 10% of proven crude oil reserves, 17% of proven natural gas reserves, the world’s 12th largest electrical capacity (75 000 MWatts), the world’s 11th best refinery capacity (1.9 million barrel per day), is the 9th largest gasoline producer (104 million litres per day), is the 13th  best diesel producer (67 million l/d), the 3rd largest producer of fuel oil (123 million l/d), and has the 5th greatest volume of oil pipelines (9,207 km).

Prof. Maleki then discussed changes in the geopolitical role and position of Iran. According to his view, Iran is going through a shift towards an Asian identity. In general, Asia is producing, trading, and consuming a growing proportion of the world’s energy. In terms of consumption, the economic growth of East and South Asian economies will translate into a massive increase in demand for energy. China’s consumption of oil will increase by 156% by 2025. India’s oil consumption will rise by 152% over the same period. The proportion of oil and gas in the total energy mix of Asia’s developing economies is projected to rise, and most major economies in North, Southeast and South Asia will rely on imports of oil and gas.

As result, cooperation between West and Central Asia will be critical to meet the growing demand of East Asia for an increasing proportion of global oil and gas production, especially as reserve estimates predict that other sources will run out sooner and will be unable to provide surplus capacity. As result, West Asia will be ‘natural supplier’ to Pacific Asia. In numbers, this could amount to 60% of West Asia’s oil and gas production and amounting to 66% of its exports. Pacific Asia could import up to 80% of its oil from West Asia. At the same time, new types of international cooperation projects such as the One Belt One Road and the North-South Corridor will boost this process.

Dr. Mohsen Pakparvar, an economist and the director of the Central Asia and Caucasus Study Group of the Institute for Political and International Studies (IPIS, Iran), talked about the automotive industry in Iran. He mentioned that 38 countries are active in the industry and 90% of all production belongs to 22 countries, Iran being one of them. In 2014, Iran was ranked 18th, globally, in terms of its volume of vehicle production. The share of the automotive industry in Iran’s economy is 3.5%, which also represents 19% of Iran’s total industry and 12% of total employment in the country.

However, sanctions heavily affected this industry and Iran Khodro and Saipa, two major car producers, faced financial difficulties. They are now planning to improve their position and reach a high volume of exports by 2025. They have signed an agreement and will start joint production and collaboration on spare parts.

Until 2025, the quantitative goal is to produce 3 million vehicles with 1 million of these being exported. Some 50% of production is to be conducted by domestic brands, $6 billion of spare parts exported, and an increase of the auto industry’ share of GDP to 4% is expected. Iran is also planning to increase the share of the sector in the economy to 20%. Dr. Pakparvar also mentioned qualitative goals, working the improvement and enhancement of quality and after-sell service, as well as the reduction of pollution and fuel consumption.

Several EU companies have signed contracts and MoUs with Iranian companies for new production lines, including Renault, Citroen, VW, and Peugeot. Along with EU companies, Chinese companies are also active in car manufacturing and hoping to reach 10% of the Iranian market.

Dr. Mohammad Reza Bakhtiari, the deputy for International Affairs at the Tehran Chamber of Commerce & Industries, spoke about the organisation’s main activities of TCCIMA, which include promoting the growth and development of the private sector, promoting trade and co-operation amongst members and counterparts, providing advocacy services to members and constituents, identifying issues and obstacles affecting the Iranian private sector, and striving to rectify all those problems. The chamber also assists the government in formulating policies and promotion for transparency, accountability, and sustainable economic growth. It has close collaboration with legislatures for drafting laws favourable to the private sector which lead to improvements in the ‘ease of doing business’ index. It also provides training and consultancy services to members on various commercial and legal topics.

To attract new investors, TCCIMA provides a platform for members to network with potential investors and it acts as a consultant to potential investors. It also provides general market data and guidance and acts as a facilitator and coordinator. To address possible issues, TCCIMA accepts petitions from business clients based on internationally accepted level of arbitration standards.

Koorosh Taherfar, a senior adviser to the president of the Investment Organization of Iran (OIETAI), presented the investment portion of the workshop. He provided reasoning as to why investors should be interested in Iran. Firstly, Iran is the world’s 18th largest country and has a large population, which makes it an ideal location for heavy industry such as car manufacturing, steel mills, and agribusiness projects. It also has a large domestic market. Along with that, the average age is under 35 and families have relatively high levels of income, which means there is a ready market for consumer products such as home appliances, electronic devices, fashion and clothing, and entertainment.

Iran also has large reserves of natural resources like oil, gas, metal, and non-metal and also has a comparative advantage in terms of extraction, refineries, and big petrochemical complexes. In addition, developing infrastructure in transportation, telecommunications, and energy will be an important factor in Iran’s future prosperity, which offers opportunities for investment and development.

The strategic location of Iran in the Persian Gulf, with its access to the Indian Ocean and the Caspian Sea, as well as its long coastline, makes the country perfect for shipbuilding, shipyard investments, port development, and maritime transportation projects. Some 20% of world oil trade passes through the Persian Gulf.

However, the Iranian Government has imposed restrictions on foreign funding: no more than $30 billion of foreign credit, $15 billion of foreign direct credit, and $20 billion of PPP contracts. Currently, European companies are the main investors in Iran with Germany leading the way. German companies are involved in 71 projects and have invested more than $1 billion. France and Italy are also heavily present. The biggest foreign companies in Iran include Nestle, Coca-Cola, Kia, and MTN.

Koorosh also discussed the changes that have occurred in the economy after the JCPOA. Before the agreement, Iran suffered under heavy sanctions for years, which increased the risks associated with the Iranian economy, so investors remained cautious about Iran to avoid unwanted risks and penalties. Iran had limited correspondent banking and no bank transfer channels to service debt. Iran did not have credit lines from industrial countries and had a negative GDP growth rate along with a diminished credit rating.

The JCPOA changed the situation dramatically. Correspondent banking has become normal and overdue loans with foreign banks can be settled promptly. Iran now has $40 billion in credit lines with European countries, GDP has a positive growth rate, and its credit rating has improved. What is also important is that the number of foreign investors in the capital market has tripled and industries such as aviation, oil, and automotive, which were under heavy sanctions, are improving due to deals with international giants.

Koorosh also mentioned incentives that Iran provides to investors. Legislation treats foreign investors the same as national investors. While all areas where private sector activity is permitted are available for foreign investors, investment made by foreign governments needs parliamentary approval. Foreign investment is guaranteed against nationalisation and expropriation, unless for public interest. Also, the capital can be invested in different forms, not only in hard currency but also in the form of machinery, equipment, raw materials, and know-how with no limits on the volume of investment. There are no limits applied to foreign shareholding. Other incentives include land acquisition, the employment of expatriates, tax incentives (a flat 25% rate), and a wide range of tax holidays.

The investment process, including technology transfers, job creation, and export promotion through the attraction of relevant investment, is facilitated by the Organization for Investment, Economic and Technical Assistance of Iran (OIETAI).

Zahra Jazayeri, the general director for International Affairs at Bank Hekmat, gave an overview of the Iranian banking system. Currently, the system is 100 percent Sharia compliant with 30 banks and five financial credit institutions active. This amounts to 2.5% of GDP. Twenty Iranian banks have been listed on the Tehran Stock Exchange. The overall financial picture of Iran is improving, resulting in the inflation rate declining from 11% to 9.5% since the middle of 2016. Currently, the government is encouraging the expansion of online banking and the modernisation of the banking system. She also mentioned that before the JCPOA, Iranian banks had no corresponding relations with other banks.

However, the situation has improved and 238 bank branches now have correspondent banking relations. Iran has also taken decisive steps to improve the professionalism of the banking system and establish a trust-based system by straightening out anti-money laundering provisions, combating the financing of terrorism, and applying an international financial reporting system. She also pointed out that after JCPOA, many banks joined Swift. While major international banks were reluctant to have correspondent banking relations with Iranian banks, many Iranian banks are building successful relations with other banks, such as with the Exim Bank of Korea or the Bank of Austria. However, the hesitation of foreign banks is still a problem and is caused by the uncertainty concerning compliance with international standards.

Amin Reza Khaleghian, the general director of International Affairs of Pardis Technology Park, looked at the high-tech industry in Iran. He pointed to the growing number of technological parks and high-tech companies located in Iran. Supported by a large and well-educated workforce and government, this sector will ensure great levels of innovation and development.

The two most important high-tech industries are biotechnology and nanotechnology. More than 700 companies are busy in these fields, developing medicines to control AIDS and products like atomic force microscopes with many products exported around the world. The growing number of companies is supported by increasing numbers of experts. Currently, about 33,000 experts are working in the industry.

The export-oriented character of Paradis Techno Park encourages and supports high-tech companies to develop their businesses. The location of the park provides companies with good access to infrastructure like airports and industrial zones via railways. It also has a good global network inside the park with many countries present, as well as links to other technology parks, research centres and organisations like WIPO and UNESCO.

Along with that, financial incentives provided to companies inside the park include tax exemptions, as well as loans and funding. Funding in the form of investments is done directly by the private sector and by government through the support of infrastructure.

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Andrey Filippov

Executive Director, DOC Moscow office, RU

Andrey Filippov coordinates the planning and implementation of the Dialogue of Civilizations Research Institute's programs in education and research. With more than 11 years of experience in the organisation of international events and projects, today he oversees student exchange programs, seminars, and lectures held by the DOC Research Institute around the globe, and facilitates the research projects, 'Policies, Institution and Progress for Global Inclusive Development' and 'Infrastructure as the Backbone of Global Inclusive Development'.Andrey Filippov graduated in Radio Physics and Electronics from Moscow Technical University of Communications and Informatics, and has completed online courses in International Organizations Management, from the University of Geneva, and in Design Thinking Action Lab, from Stanford University. Combining a world-class engineering education with fresh knowledge of the world's best management practices, he is constantly continuing his professional development and is currently taking a Financing and Investing in Infrastructure course from Bocconi University.His research interests include: Intercultural Education, Global Policies and Institutions, Transnational Infrastructure, Chinese Studies, International Organizations Management, Digital Economy, Sharing Economy, Communication Science, and Social and Technology Entrepreneurship.Links: LinkedIn profile: https://linkedin.com/in/andreyfilippov ResearchGate: https://www.researchgate.net/profile/Andrey_Filippov5 https://independent.academia.edu/AndreyFilippov https://istina.msu.ru/profile/andreyfilippov/