Does the removal of sanctions means Iran's now open for business?
The island of Kish is an ocean away from most Iranian clichés. Far from bring a sober religious outpost, the "Pearl of the Persian Gulf" is replete with shopping malls and resort hotels. It claims to be fourth-largest tourist centre in Southwest Asia after Dubai, the UAE and Sharm el-Sheikh.
This openness extends to business – or so at least is the intention. One of the country’s free-trade zones since 1989, Kish has long offered investors such goodies as visa-free entry, 20-year tax exemptions and 100 percent foreign ownership. But on that front the island has struggled to meet its market: only 20 percent of businesses based in Kish's free trade zone are currently owned by foreigners.
With US and EU sanctions in full force until now, it’s not difficult to see why. But these are due to be removed early next year – and some are now saying the island’s long-awaited boom is about to happen. Iran’s economic zones, they reckon, will serve as a stepping-stone for investors targeting the mainland's vast opportunities.
The stakes are high indeed. Iran, a country of 80 million, sits over the world’s third-largest reserves of oil and second-largest reserves of gas (the latter mostly untapped). Forecast at $430 billion for the 12 months to March 2016, its GDP is expected to double over the next seven years. Pent-up demand will boost industries from transport to tourism. And the rial, Iran's currency, is now so low that it can only go up.
Yet sanctions are hardly the only obstacle to doing business in Iran. Despite years of isolation, the country’s economy has developed, albeit more slowly and less efficiently than it would have otherwise. This has allowed local structures to grow deep roots – meaning that powerful players are already present that investors will either have compete or co-operate with.
This is all the truer as many of these structures are operated by people closely connected to religious and political powers (if not belonging to it). The Revolutionary Guards, for instance, control a significant stake of the Iranian economy through companies like Khatim Al-Anbiya, an industrial holding, and Ghorb, the country’s largest developer.
The Bonyards are another force to be reckoned with. While predating the 1979 revolution, these charitable trusts have grown more powerful by grabbing assets subsequently privatised by the government. Bonyards are said to be controlling as much as a fifth of Iran’s economy (including a third of its non-oil and gas markets).
Competing against these structures will often be foolish – but co-operating with them won’t be easy either. Breaking into sectors of the economy such as agriculture, automotive, transport and financial services, where incumbents enjoy most sway, will be hard. These will continue to secure the most lucrative deals, forcing investors to enter joint ventures with locals (under potentially unenviable terms) or fight among themselves for second-tier opportunities.
In consumer industries there may be an additional problem. Global brands coming in will find that local duplicates are already taking a lot of space: Iran's fast-food market is dominated by the likes of MashDonalds, Pizza hat and ZFC, for instance, while other clones exist for Starbucks and international clothing chains. Services businesses such as eBay or Paypal will also have to contend with powerful local interests.
That’s not to say that every avenue is blocked. Starved from capital, technologies and ideas for several decades, the Iranian economy badly needs investment. The political establishment may thus encourage foreign participation in certain segments, just as Russia did with the automotive sector through a lighter bureaucratic touch and tax incentives in provinces such as Kaluga.
In that field the energy industry is a particularly strong candidate. Undeterred by oil at $50 a barrel, the government wants to return to pre-sanction export and production levels. Negotiations with foreign majors are currently under way, and a whole new framework contract is being designed to make it happen.
Investment from certain geographies may also gather steam more quickly. Arab nations in particular stand to benefit: Iran is currently building a 37,400 hectare free trade zone on the Iraqi border in the hope to emulate Jebel Ali, a highly successful UAE hub that serves the Gulf.
Such initiatives will take time to flourish. So will tie-ups between foreigners and local players: Western firms may ascribe some reputational costs to working with organisations linked to the Revolutionary Guards. Or they may simply find it too risky, in a context where vested interests are trying to deter new entrants through intimidation (Revolutionary Guards have recently arrested several businessmen friendly to America).
Still, signs of optimism are already visible: after a decade-long lull on the conference front, Kish is to host forums on fintech, mining and energy in the coming months. It may be too early to toast over signed contracts, but a growing lot clearly thinks it’s now time to talk about them.