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Sanctions may have eased, but outsiders still face obstacles in doing business
By: Najmeh Bozorgmehr in Tehran
On the northeastern outskirts of Tehran stands a building with a blue glass façade built for Pars Online, an internet service provider run by the Fateh brothers. It was finished two years ago in the hope that the business would be scaling up with help from a foreign partner.
Like many other Iranians, Abdollah and Reza Fateh were encouraged by their country’s landmark nuclear accord, struck last year with world powers including the US, which came into force in January. The Fatehs say that their ambition to become a competitor to the national telecom company should be within reach. The path is not proving a smooth one for the US-educated businessmen, however.
“Now is the time for consolidation in data communications,” says Abdollah, the 43-year-old managing director who can chart the company’s progress from the dial-up internet access it offered in 1999 to today’s plans for fibre-optic services.
Iran’s isolation since the 1979 Islamic revolution means that challenges prevail. The untapped market of 78m people is too big to ignore and offers golden opportunities for foreign companies in areas from oil and gas to technology and financing.
Foreign investors have flocked to the country over the past year and agreed hundreds, if not thousands, of memorandums of understanding — but not one major contract has been signed. Contracts have been stuck between foreign companies’ concerns that they may risk their interests in the US by breaching America’s non-nuclear sanctions against Iran, and the tense power struggle between hardliners and moderates in Tehran itself.
The country’s agreement with the big powers lifted all nuclear-related sanctions, although about 290 Iranian individuals and entities are still under US, EU and UN restrictions, mainly because of their links to the Revolutionary Guards and Iran’s missile programme. While the accord permits banking activities, including transactions and financial messaging using services such as Swift, international banksremain wary of dealing with Iranian institutions out of fear of becoming associated accidentally withthe Guards’ affiliates, many of whom run private companies.
Domestic hurdles, too, are hampering investment. These range from poor infrastructure to the Islamic establishment’s paranoia over infiltration by western states. The regime fears foreign investors and Iranian dual-nationals, who would bring money and technology but also western culture — and perhaps plot to undermine Iran’s rulers. That fear has slowed progress in technology especially, a sector in which the country is struggling to catch up with the rest of the world.
Making connections
“Foreign companies are IT-orientated but Iran’s network infrastructure is still not reliable,” says Reza Fateh. He says Iran must scale up its telecoms sector and improve internet speeds, but he talks of cables being cut, affecting reliability and disrupting stock markets and transactions. “If the order doesn’t arrive in real time,” he complains, “its delay can affect the purchase.”
Other problems include Iran’s culture of bureaucracy and the existence of two hard currency rates. The rial, the national currency, is about 10 per cent stronger on the official market compared with the open market, which complicates matters for foreigners wanting to invest.
Michael Maltzoff is an emerging markets investor who has travelled to Tehran several times this year and — such is his enthusiasm for the country — he jokingly describes himself as “Iran’s unofficial ambassador without portfolio”. He says obstacles should not be a turn-off for “a transition economy” like Iran. Iranians are open-minded, he says, which means they are agreeable to financing concepts not widely practised in Iran yet, such as private equity funds.
Mr Maltzoff says he can do business in Iran and that corruption “is not as ugly as it is in countries I have been to where it is part of the fabric and culture, where life becomes surreal”.
Hassan Rouhani, Iran’s centrist president, has repeatedly said that economic hardships, notably a youth unemployment rate of about 26 per cent, cannot be resolved without foreign investment, underlining the intention to open up the country’s economy.
Finding partners
A European investor in the energy sector, who has been in talks with Iranian authorities for a project in the south of Iran, says the authorities are willing to engage but the most difficult aspect is negotiations themselves.
“Traditionally, Iranians are tough negotiators,” says the businessman, who does not want to be identified in case his comments affect his work. He cites the country’s long history of trade in bazaars as the reason.
It is even more difficult in a sector such as energy, where Iranians have superior expertise, he says. “They want to be in charge, which could be because of the attitude of an old empire. It wants to stand tall and does not want to feel like a beaten nation.”
Other issues for businesspeople on the move are manageable, the investor says. Hotel standards have improved and infrastructure such as internet speed is a problem but ìs resolvable. Less so traffic congestion: the jams on Tehran streets make it difficult when you have to cross the capital several times a day for meetings. “Traffic is crazy but then there are drivers who would win Formula One,” he remarks with sarcasm.
Finding offices is another complication. Tehran is a 12m-strong mega city with expensive real estate: renting retail space can cost tens of thousands of dollars a month. There is no business centre and commercial buildings have been built in scattered clusters. Modern and efficient office space is scarce.
Many foreigners admit that the country’s differences make Iran an unfamiliar market where it is best to partner with local companies. This is where businessmen like the Fatehs hope to prove attractive to investors, and they cite their western education, regular business travel abroad and experience of a five-decade-old family company with its roots in heavy infrastructure and construction.
“If we find the right investor or partner, I know the road map that needs to be followed to become the market leader in fixed communication [physical non-wireless connectivity],” says Abdollah.
To achieve its goal, Pars Online needs millions of dollars of investment. With more than 1,000 employees and 20,000 sq m of office space, it is one of Iran’s dominant family businesses. It is ranked top by the telecoms ministry for quality of service — five times better than the market average.
“Now, we will continue to grow, even if slowly, but with foreign partners, our growth can skyrocket,” says Reza. He declines to disclose the company’s turnover but says revenues have grown 30 per cent year-on-year over the past five years. He says the business could transform if a foreign partner joined them in a country with a young, internet-obsessed population. “We don’t sell internet only. We are a lifestyle enabler and enrich people’s culture.”
Law and professional services
To many foreign investors, having local partners in Iran means dealing with a lack of transparency in domestic companies’ data as well as outdated and opaque legal and auditing practices.
Western law firms — such as Germany’s CMS, Dentons Europe LLP and Python of Switzerland — have established offices in Tehran this year. They aim to address one of the big concerns of foreign investors: the need for international arbitration should they encounter legal issues locally. Major international auditing firms are also considering opening branches or finding Iranian partners.
Foreign companies are worried about entering contracts and being disadvantaged by local laws. They want their contracts to be governed by international law.
“One of the main concerns is around ensuring certainty [of] the identity of a counterparty to a transaction. Obtaining clear information can be difficult,” says Thomas Wigley, a partner at the Trowers & Hamlins LLP, a UK law firm interested in the Iranian market.
