Country Profile: Iran in from the cold

IF there is a seat left in business class on a flight to Tehran, you might be hard pushed to find it. Ever since Iran signed its nuclear accord in January lifting long-standing sanctions, business people of every kind have been making their way to the West’s former bete noire in the hope of clinching a deal.

Iran’s main industries have suffered from under investment, its consumers have been starved of choice and billions frozen in overseas accounts are in the process of being released. Iran’s reintegration with the international community is well underway and with it comes a drive to return the country’s business activity to a state of normality, whether it be the strategic industries like oil and gas, or consumer retail.

Jan Ward, chief executive of Corrotherm International, a former exporter of specialist piping to the energy sector in Iran, tells Financial Director: “I’ve been waiting for them to remove the sanctions… I absolutely love going there.”

Under starter’s orders
From news reports however, it’s obvious that many companies did not wait for the ink to dry on the final settlement. In anticipation of an agreement many had clearly been in Iran to negotiate well ahead of the diplomats. Within days of the agreement being signed Airbus finalised the sale of 118 planes to Iran Air worth $27bn (£18.9bn). Though conditional on obtaining US export licences (10% of Airbus parts are made in the US), the deal will see Airbus build 73 wide-body jets and 45 narrow-body planes for Iran, which will also take delivery of several A380s, the world’s largest jet aircraft. More importantly though for Airbus, they have beaten Boeing to the line in helping Iran rebuild its raging passenger aircraft fleet.

Elsewhere, President Rouhani forged a deal with Italian metals producer Danieli, reportedly worth $5.7bn, to produce steel and aluminium for machines and equipment.

A few days later Japan and Iran sealed an ‘investment pact’ intended to give Japanese investors the edge when it comes to providing capital for Iranian projects.

In fact, so unseemly did the rush appear as company after company announced deals in the immediate wake of the sanctions being lifted, Iran’s hardliners were provoked into warning that the country’s resources were in danger of being ‘looted’ by foreign corporates.

President Rouhani’s allies and supporters may have weakened the position of hardliners after making important gains in recent elections, but according to Sanam Vakil, associate fellow at international affairs think tank Chatham House, long-standing tensions with the West presents one of the main risks to restoring normal relations.

“There is lingering sentiment at governmental level that the return of international companies will result in more interference in local politics bringing about social and political changes that is unwanted in Iran,” she says.

For British exporters however, there’s one important point to note. None of the high-profile deals announced were with British companies.

“The big thing is to get out there and meet the people. You’ve got to find a partner. The Germans, French and Italians are out there in their hordes,” says Ward.

Reasons
And why wouldn’t they be? Iran is a country of about 78.5 million people with a GDP of $406.3bn, making it the second largest economy in the Middle East. President Rouhani’s reforms have also seen the country turn a corner after two years of recession: 2014, according to the World Bank, saw the economy grow by 3%, with many, including the Institute of International Finance, expecting 2015 to see growth of about 6%. The World Bank reckons on 5.8% this year, and 6.7% for 2017. These figures though are predicated on transformation once the sanctions are lifted.

Inflation is also down from an eye-watering 45% in 2012 to 15.6% as of July last year. Unemployment however, has proved difficult to budge and remains around 11% (though the rate for women is much higher at 20%; for men it is at just 8%).

In September last year the World Bank wrote: “Reforms to the business environment to promote competition, rationalise licensing and authorisation requirements, reduce the imprint of state-owned enterprises in the economy, and improve the health of the financial and banking sector are needed to accelerate growth and private-sector led job creation.”

Yes, there is a job of work to be but the population is well educated and young, with some estimates placing 65% under 35.

Banking
Sanam Vakil has some good news for UK businesses. She says no one country is going to monopolise business in Iran, as the deals publicised so far have proved.

“It’s been much easier to do deals with the Italians, French and Germans who have longer standing relations and remained active in the region regardless of sanctions,” she says. But she adds the “onus” is on the British to move things forward more quickly. Vakil observes the British embassy has been slow to re-open in Tehran, though she says that may be no surprise given the uncertainty currently surrounding Iranian politics.

However, the British have moved swiftly in one area – Iranian banking. An essential issue for exporters.

The whole sector is one where many outstanding issues need to be resolved, according to Vakil. However, three UK subsidiaries of Iranian banks – Persia International Bank, Melli Bank and Bank Sepal International – have already received regulatory approval to go back to work after being helped by the start-up banking unit of the Prudential Regulatory Authority.

This is timely, because a report from professional services firm Mazars published in January highlighted key areas for improvement following a survey of financial reporting at nine Iranian banks.

Mazars concluded the sanctions had left “deep scars”. Iranian banks are yet to adopt Basel I and II, “let alone Basel III”, says the report. IT and cyber security “are in their infancy. Corporate governance needs revision to meet international best practice,” says the report, and “international-accepted accounting and reporting standards need to be implemented”.

Greg Simpson, head of UK banking audit at Mazars, says IFRS will become applicable for listed Iranian banks from 2016, though not all banks are listed. He insists, however, that there is a “strong willingness” to adopt greater transparency. The fact that UK subsidiaries have been reactivated by regulators demonstrates they have “adequate capital and liquidity to satisfy regulatory requirements”, according to Simpson.

He adds: “One of the main impediments to resuming normal trading is establishing correspondent relationships with international banks. However, recent announcements by Dr Valiollah Seif, the governor of the Central Bank of Iran, indicate there is an increasing desire by international counterparts to facilitate trade relations.”

Frontiers
Strong institutions will be essential to the reform and reintegration of Iran, and the country is not short of them. In fact, Sanam Vakil notes the country may have so many that decision-making on issues like petroleum contracts are slow and uncertain. It’s a point echoed by Dr Hassan Hakimian, director of the London Middle East Institute at SOAS, who recently wrote that Iran’s “complex post-revolutionary institutional architecture, which is beset by a labyrinth of decision-making entities interlaced with yet more bodies and agencies created to ensure compliance with Islamic tenets and revolutionary standards,” is one of the key challenges in reforming the country.

That said, Dr Hakimian is optimistic that trade can be done, referring to Iran as a “frontier market”.

“When you think about it, Iran is one of the few countries where you don’t face a big US competitor,” he tells Financial Director. There are opportunities in consumer goods, the energy sector and in replacing the country’s infra structure, he adds.

According to Dr Hakimian, the big risk in Iran is President Rouhani’s ability to deliver on expectations of economic improvement, the basis on which he was elected and the reason for recent success in parliamentary polling. He faces presidential elections in 2017 with victory critical if Iran is to maintain certainty around its current path. But, according to Dr Hakimian, hardliners may become more entrenched over the intervening period in response. Internal risk will not disappear altogether for Rouhani and the economy.

“The election results are interesting and a double-edged sword,” he says. “While recording a victory, he [Rouhani] has also brought closer the deadline for being seen to be meeting expectations.” He is quick to point out the Iranian population has, en masse, rejected the hardliner camp, but concludes: “There’s no market with no risk whatsoever.”