In late January 2016, Airbus, the giant French-based multinational civil aircraft manufacturer, announced it was in negotiations with Iran to sell it dozens of planes. But Iran’s Transportation Minister, Abbas Akhoondi, noted a possible snag: There is “no way to pay for them because of banking sanctions,” therein illustrating the opportunities Iran offers right now and the challenges businesses will have in taking advantage of those opportunities.
Businesses, of course, should be interested in Iran. The Islamic Republic is the second largest economy in the Middle East and North Africa, after Saudi Arabia, with an estimated 2014 gross domestic product of $425 billion. In 2014, it was the 28th largest economy in the world — smaller than Austria’s, larger than Thailand’s — and recent World Bank forecasts predict Iran’s economy will be growing at a rate of 6 percent a year by 2018, almost twice the projected annual aggregate rate of developing countries.
Iran also possesses a large, youthful, educated, upwardly mobile population (it is the world’s 17th most populous nation), hungry for consumer goods that could be supplied by companies ranging from Apple to General Electric. Given the fact that Iran’s oil and gas reserves are the world’s largest, oil and gas companies such as the UK’s BP and Russian natural gas giant Gazprom are eager to return to doing business in Iran.
Of course, since 2006, Iran has been operating under even heavier global sanctions — sanctions that, in part, are lifting thanks to last summer’s international agreement in which Iran acceded to limiting its nuclear program.
The damage that sanctions have inflicted on the Iranian economy over the past two decades has been close to incalculable. According to the U.S. Congressional Research Service, Iran’s economy shrank 10 percent between 2012 and 2014 (the period of heaviest sanctions), and oil exports declined by more than half between 2011 and 2013, with an economic impact exacerbated by the concurrent tumble in global oil prices.
The harm to the global economy caused by the Iranian sanctions — if rarely noted — has not been insignificant. According to a report by the National Iranian U.S. Council, a nonprofit, U.S.-based group working to promote U.S.-Iranian engagement, the U.S. sacrificed between $134.7 billion and $175.3 billion in potential export revenues to Iran from 1995 to 2012, and those lost revenues translated to between 51,000 and 66,500 estimated lost job opportunities each year in the United States. (Germany, according to the same report, lost between $23 billion and $73 billion in potential export revenues between 2010 and 2012.)
Theoretically, this damage now can be ameliorated. However, it is important to understand that not all sanctions will be lifted. Indeed, sanctions relating to Iran’s support for terrorist groups remain in place and continue to block access to the U.S. financial system, complicating the process of actually executing on business in the region — as Iran’s Transportation Minister noted with regard to the proposed Airbus deal.
Iran remains closed to most U.S. industries outside food, medicine and medical supply, and civil airplane parts. If you’re outside those verticals, you can’t do business with Iran, although your foreign subsidiaries can as long as they are in compliance with the following: 1) subsidiaries don’t source goods or services from the United States, (2) subsidiaries don’t process transactions through U.S. banks and (3) the entities in Iran with which the subsidiaries are transacting are not more than 50 percent controlled by Specially Designated Nationals — that is, people on the U.S. Office of Foreign Assets Control blacklist.
As you can see, the road to Iran is still not a smooth one.
The geopolitical situation is even more fraught with complications. Right now, worsening relations between Sunni Saudi Arabia and Shi’a Iran, exacerbated by the severing of diplomatic relations following the attack on the Saudi embassy in Tehran in January of 2016, creates new complexities and risks. Add to that U.S. partisan congressional hostility to the sanctions agreement entered into by President Obama and internal struggle between Iran’s hardliners who are opposed to the agreement and the more moderate government that formulated it, the future becomes extraordinarily difficult to read.
The opportunities and risks of doing business in and with Iran clearly remain significant. With the chance that many sanctions will not be lifted, or, once lifted, will return if Iran fails to comply, it will take extreme fortitude for businesses to invest the requisite millions in due diligence in advance of assaying deals in Iran.
For European companies, with more recent experience conducting business in the Middle Eastern region, the upside outweighs the downside. U.S. companies, however, generally have little on-the- ground knowledge and may not understand adequately that Iran’s business environment is far from transparent. For example, throughout the late 1980s and 1990s, many Iranian public utilities and companies were transferred to state pension plans, the Iranian Revolutionary Guard Corps (“IRGC”) or other government-controlled entities. So even if a company looks to be independent, there is a high probability that it is tightly controlled by the government.
And that government is fragmented. The IRGC, reporting directly to the Supreme Leader, runs its own foreign policy agenda in Syria, most notably, and in Lebanon, through Hezbollah. The IRGC became even more powerful during the sanctions period, procuring for the government everything from computers to airplane parts to armaments and ordnance. The IRGC doubtless will be involved in external business going forward, creating great reputational and operational risks for foreign businesses as the government is unlikely to support contracts in dispute with the IRGC. Indeed, some estimates suggest the IRGC currently controls as much as 25 percent of the Iranian economy. The IRGC has become adept 2 at concealing its interest through offshore front companies in various jurisdictions, including Malaysia and elsewhere, making the due diligence process fiendishly difficult. The IRGC is the single largest, most powerful economic force in Iran, and that is unlikely to change in the short- or mid-term.
Nonetheless, even with these risks, it would be a mistake for Western businesses to ignore Iran. One way or another, business in Iran will grow, and companies are advised to proceed, albeit cautiously, with as much information as they can collect to paint a clear picture of the compliance landscape and a holistic view of the challenges and risks —and opportunities —in the Islamic Republic.