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A team at International Research Networks (IRN) organised an excellent Iran Business Symposium on Feb. 21+23, 2017, at the Renaissance Hotel in Amsterdam. It was attended by Switzerland, Germany, Turkey, Italy, and many other EU countries and beyond.
The purpose of the conference was to further create a better multilateral understanding and to serve as a platform whereby the global business and investment community could discover the latest developments and opportunities within the newly opened economy of Iran following the implementation of the Joint comprehensive Plan of Action (JCPOA), commonly called the nuclear deal. The forum was also intended to provide an opportunity for open discussion.
Mahmood Khaghani, the conference chairman and advisor to the Education & Research Institute of Iran Chamber, of Commerce, Industries, Mines & Agriculture (ICCIMA), pointed to the resilience of Iranians and outlined the priorities of the government. Khaghani said Iran needs, first and foremost, know-how and technologies. The Tehran government is also interested in joint production in Iran, export to neighbouring countries, and export oriented foreign direct investment (FDI) as well as technology partnership in petroleum/energy downstream industries. Khaghani was delighted to share the news that “since the success of JCPOA and its implementation there has been $11 billion FDI in Iran.”
It was further highlighted at the symposium that Iran’s 6th five-year economic development plan is targeting an average growth rate of 8%. To achieve this goal, $50 billion per annum investment will be needed.
The Iranian macro business environment case is defined by a “diversified economy, superbly educated workforce, a consuming population with appetite for brands, urban dwelling, and an entrepreneurial community”, according to Managing Partner of Arjan Capital, Andreas Schweitzer. A very comprehensive overview of all opportunities in each sector in Iran was supported by Dr. Afsaneh Shafiei, head of the Department for Industry and Mines Studies, Institute for Trade Studies and Research, Ministry of Industry, Trade and Mines.
The debate at the conference, effectively, demonstrated the Islamic Republic has done a great job opening itself to foreign business and explaining the opportunity set to the world. Numerous trade delegations have now visited Iran, observing that the reality is very different from what the international press has traditionally reported.
I have also witnessed the sea change in Iran to welcoming foreign business. From personal experience, as managing director of AlphaBet Capital Advisors, going to Iran many times on corporate business development initiatives, I know how important it is to visit Iran first-hand – to believe you really must see and get involved. Back as early as 2015 when I undertook my first trip, I was asked by many curious Western colleagues what it is like in Iran, as if I had been to the moon. The question that continuously cropped up was what I thought to be the most shocking there I observed on the ground. Perhaps it was the dilapidated infrastructure, oppressive religious and military themes everywhere, poor range of quality consumer goods I had encountered. To their disappointment and surprise, I had to relay that there, indeed, was not much of a dramatic difference to report for it simply was if I had entered a part of Europe – although it has been a charming adventure there really were more similarities than differences! And, given its size and proximity to Dubai, where I am based, it was an obvious case to get involved for investment. Also in agreement was the Switzerland-Iran Chamber of Commerce President, Philippe Welti. He summarised the Iranian opportunity well stating, “Iran is strategically well positioned to become the centre-point in the region serving as a hub to its neighbouring countries accessing over 450 million consumers.”
Investors can be reassured that the climate for working with foreign business is supported by the right mechanisms. According to Masood Kamali Ardakani, “Iran has put in place supportive government policies and regulation, including FIPPA (Foreign Investment Protection and Promotion Act), to facilitate entry into Iran by foreign businesses.” There are many advantages of investing through FIPPA, with the following, to name a few: no discrimination between domestic and foreign investors; all foreign investors being allowed to invest in all fields; foreign investors being able to hold 100% of the shares in an Iranian entity; the option for a free transfer of foreign capital and profits abroad. Importantly, the legislation also protects foreign investors against nationalisation and expropriation, which is obviously a main concern by foreign parties evaluating this market.
Additionally, Iran has created seven free trade zones and 19 special economic zones – introducing in these zones certain tax incentives, among other things.
To effectively assist international investors and corporates, an Investment Service Centre (www.investiniran.ir/en/investmentguide/sevicecenter) has been set up as a help desk for queries.
All in all, the symposium audience needed no further convincing on the potential of Iran as an important market - the opportunity potential was clearly understood. Given the growing enthusiasm to do business with Iran, it remains a slightly mysterious and little understood market for the international business community. The panel discussions highlighted below are the main perceived risks to mitigate.
Political risks
Planning with certainty has become more difficult for corporates given the seemingly unpredictable nature of the Trump Administration. However, according to Philippe Welti, “it does not really matter what Trump says; what matters is the reaction it causes in the international business community.” The common opinion is Europe has a vested interest to maintain the nuclear agreement and any risk of snapback is, therefore, unlikely. This fact was well defined by Professor H. Mirmohammad Sadeghi, a famous law expert and the president of ICCIMA Education & Research Institute in his inaugural speech as the symposium VIP speaker.
Head of Business Development at Boland Payeh Holding, Behzad Aminfard, highlighted the “importance of understanding the priorities of government in order to be successful in Iran.” The symposium audience voiced the importance for the Iranian government to be both vocal and consistent in planning & policy to the international business community so corporates have more certainty to support their entry into Iran.
Due diligence
Any transaction with Iran requires good preparation. Co-owner of 2FX Treasury, Kees Lakerveld outlined the steps international corporates should be taking prior to engaging with a counterparty in Iran such as (1) KYC (know your customer) and (2) transaction due diligence. There are Third Party Service Providers that can specifically assist in the screening process.
Afridi & Angell Partner, Shahram Safai, also noted that “doing due diligence on counterparties in Iran is not as hard as some businesses have been made to believe. There are websites in Iran to verify corporate filings and shareholders.” Most of these KYC checks are not specific to Iran. Internationally, parties are required to do many of these checks on any counterparty they do business with.
Transaction due diligence includes checking that there is no industry risk, no dual use (commercial and military use), and it needs to adhere to the rule that no more than 10% of the content derives from the U.S.
“The most important thing for parties is to document their due diligence in case their books get checked in the future,” said Kees Lakerveld.
Transparency at a corporate level
Many companies maintain several sets of accounts, which does not provide much comfort to international investors - there is still a significant information gap. Huge strides are being made with adoption of international accounting standards. However, Iranian corporates require further education on what is requested by the international business community in terms of information and transparency in order to enter the Iranian market. This will vary from sector to sector. With it being less of an issue in some – for example, Van Campen Liem Associate, Saman Sadeghi, highlighted “the technology sector has proven much easier in obtaining the relevant information from the entrepreneurs and is, subsequently, attracting significant foreign investment interest.”
The banking system
Kees Lakerveld, explained that “successful market entry into Iran requires a banking strategy. Ideally the corporates would like to be able to use their current bank but that is not possible in the majority of cases. The problem is not sending money out of Iran; the issue is on the receiving end. Not all banks are currently ready to do business with Iran and receiving funds that come from Iran, directly or indirectly.” However, banks with little or no U.S. exposure currently seem to be most open to doing business with Iran. “In practice, you need to be either an existing client of the bank or commercially interesting enough for a bank to be willing to take what they perceive as high risks of doing business with Iran,” said Kees Lakerveld.
Philip Sidney Partner, Joost Mellis, further detailed “there is a wall of fear and no ‘front running ambitions’ with the people in charge at the banks. Political risks play a role, legacy of mega penalties and those with large U.S. exposure are nervous about putting their current or future business in the U.S. at risk. It’s not just the Iranian banks that have their set of problems. Many of the banks internationally too are grappling with their own business issues, which makes them reluctant to take on more risk. Some banks have been pulling out of emerging markets in general to focus on their home market.”
The Iranians have been very eager to learn about compliance. Great progress has been made on the side of Iranian banks to establish an international compliance framework. They will next have to convey the improvements to the system in order to allay international banks so that they feel comfortable that their KYCs are now being done on their clients to the international standards expected, reducing the perceived risks in the mind of the international banks. The Iranian banks should continue face-to-face meetings, not just in Tehran but also abroad. Cross-border discussions between compliance departments would naturally be the next phase.
Regarding the settlement of currencies, the USD may still not be used for any transaction with Iran. Of all alternative currencies, the Euro was highlighted as the clear favored currency as the clearing happens through one centralized clearing system, Target2.
Legal issues and negotiating agreements
Only a year ago, the law firms were the main culprits in warning investors of all the risks. Arguably, they may have gone overboard at the time and scared off a number of investors. Issues that used to centre on the agenda a year ago, such as snapback, no longer feature prominently in discussions. Kees Lakerveld clarified “that even if there was a snapback it wouldn’t have a retroactive effect.”
The firms presenting were positively focused on how to structure the business and discussed practicalities regarding agreements with counterparts in order to get the business closed
Andreas Schweitzer highlighted: “negotiating agreements in Iran requires a lot of patience.” Shahram Safai, shared some tips on the matter: “keep contracts short, focus on debt and equity only (not many people in Iran are familiar with warrants), take a team approach in negotiations, arbitration clauses are enforceable through the Iranian Courts, expect to have to explain every clause including the general clauses that are standard in international business agreements, sign agreements outside of Iran and importantly agreements in English are accepted.”
Sovereign guarantees
Some international investors look for additional guarantees. By way of an example, in one of the renewable sector workshops of the symposium, a participant highlighted that international project owners would like the payments by SUNA (the Renewable Energy Organisation of Iran) to have a sovereign guaranteed (in case of non-payment by SUNA), as this would greatly facilitate financing from the credit agencies in their home countries.
Next steps
After having opened the doors to the international business community and having explained the real Iran of today that “Iran Means Business”, it is now time for Iranian private companies, as Khaghani referred to on the basis of “Economic-B2B Diplomacy” to actively travel and meet their counterparties in their respective home countries in order to help close the gap in information, understanding and expectations.
Future for Iran-Netherlands business
Head of Productivity and Organizational Improvement Research Department, Institute for Trade Studies and Research (ITSR), Ministry of Industry, Trade and Mines, Masood Kamali Ardakani, said that “Iran’s population of 80 million and 400+ million, including its neighbouring markets (versus 17 million in the Netherlands) is a promising market for Dutch companies.”
Currently, approximately half of exports to Iran are related to the medical and pharmaceutical industries. Holland has a lot more to offer and in terms of know-how and technology is not limited only to the oil & gas sector, agriculture and water. There are countless other areas to be explored and acted upon by Dutch companies. Iran is keen to cooperate with The Netherlands in areas such as port infrastructure, renewable energy, construction of greenhouses, water technologies, agro food industries pharmaceuticals and tourism as The Netherlands is considered one of the top destinations in Europe. And not to forget downstream petroleum and energy industries that Mahmood Khaghani explained as the chairman of the symposium and during roundtable discussions the advantages of ECO-Caspian Energy Grid for converting regional gas to power and exporting electricity to regional markets, the EU and beyond.
The Netherlands’ gross national product and its high purchasing power, make it an overall attractive market for high quality Iranian goods. At present, half of the exports of Iranian products to Holland are relatively low value edible fruits and nuts. Iran has much more to offer to Holland in terms of higher value goods. The speakers highlighted the importance of bilateral agreements - as of yet, a bilateral agreement between The Netherlands and Iran does not yet exist.
In keeping with the positive spirit of the symposium an appropriate Dutch proverb to conclude with: ‘waar een wil is, is een weg’ (translated as ‘where there is a will, there is a way’), which I have been told, is identical to the Iranian’s own proverb: ‘Khastan, Tavanestan ast = When there is a will, There is a way.”
*Managing Director of AlphaBet Capital Advisors