GETTING TO KNOW IRAN BETTER

Posted on Posted in Business Guidelines

Iran’s economy has suffered in recent years, largely because of sanctions and the low price of the oil on which its finances rely, but it is well positioned to take advantage of the openings the JCPOA offers.
In addition to oil and gas, Hormats describes the Iranian economy as featuring a highly developed services sector, tourism, good telecommunications infrastructure, automobile and bus manufacturing, a pharmaceutical industry, and steel and other metal production.
Iran’s economy boasts several features that will be attractive to international investors. Hormats identifies a young, highly educated workforce with skills in mathematics, science, information technology, engineering, and medicine, and a general population with strong desire to end isolation, and a tendency toward entrepreneurialism.
West Sands highlights the wealth of natural resources in Iran and the country’s strong investment in science. “The country is one of the Middle East’s largest investors in scientific research,” they note. “Iran’s engineering and medical research institutes feature among the best worldwide, especially in the high-tech industry and stem cell research.”
However, the Iranian economy does have weaknesses, and isolation from the global environment has created transparency and corporate governance issues.
Even with optimism about the nuclear deal, Iran’s economy worsened in 2015. West Sands Advisory reports that the drop of global oil prices hurt the country, both private and government investment has dropped, and economic stagnation has forced thousands of factories to close. However, the IMF predicts a rebound of 5.5 percent growth in 2016-2017.
Hormats notes a litany of problem areas: high inflation, high unemployment, instability caused by low oil prices, the mismanagement of large government-controlled oil companies, little transparency across all sections of the economy, corruption, bureaucratic obstacles to doing business, and a need for modernization in financial and business regulations and corporate governance due to isolation from the global economy.
West Sands Advisory adds that major structural reforms will be needed in order to increase bureaucratic and financial transparency.
The Iranian government and government-affiliated organizations control significant stakes in major sectors of the economy. Companies wishing to do business in those sectors run the risk of running afoul of Western sanctions by partnering with the wrong individual or organization, or of bureaucratic obstacles that aim to help protect those domestic organizations. However, there are economic opportunities for those willing to navigate those risks.
Iran’s theocratic national government holds controlling interest over major parts of the national economy. This is especially true in the oil, gas, and petrochemical sector, the products of which comprise 78 percent of Iran’s exports. Keller estimates that, between the petrochemical industry and state-run economic conglomerates, the government controls 90 percent of Iran’s economy.
International investors operating in Iran are advised to be aware of nominally charitable organizations called bonyads that control significant for-profit holdings across a range of sectors in the Iranian economy. These tax-exempt organizations are controlled by clerics who answer to the Supreme Leader and hold significant economic assets. Hormats describes them as reluctant to disclose political relationships, show transparency in bookkeeping, or give any decision-making power to foreign partners. Keller notes that businessmen have complained about bonyads using political connections to create bureaucratic obstacles for competing international firms.
The Iranian government’s control of the economy does allow it to direct investment priorities. Citing senior Iranian officials, Hormats advises that the main targets for foreign investment are mining, energy, automotive production, steel manufacturing, and technology. “Iranian officials emphasize to foreigners,” he adds, “that investment will not only enable companies to sell to the Iranian population, but also to use Iran as an economic ‘gateway’ to Central Asia.”
Arrests of foreigners by the Iranian government, nominally over intelligence activities, have occurred in the past. However, several Americans were recently released, and improvements in the relationship between Iran and the West may bring an end to (or at least limit) the practice. Keller believes that the threat of violence and kidnap attempts against foreign businessmen is extremely low, and there is a lack of the “terrifying fusion of state security agencies melded with untouchable organized crime groups” that threaten foreign businesses and individuals in Russia. Even the IRGC, which controls significant economic holdings, typically fights competition only by creating bureaucratic hurdles.

FAR law firm

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