Even when sanctions are lifted, cultural and legal hurdles will remain
Despite the euphoria inside Iran over an end to sanctions, the country remains a place where Apple Inc. won’t sell the iPhone, oil giant Eni SpA is quarreling over past outlays, and Boeing Co. hasn’t sold spare parts because of pricing disagreements.
The Islamic Republic has a lingering reputation as a difficult place for outsiders to do business. Even with Tuesday’s Vienna accord, foreign businesses looking for new markets would find Iran a country that ranks a lowly 130th on the World Bank’s ease-of-doing business list, and a place where bureaucracy, episodic corruption and political interference have long been encountered.
“This is a market where you are going to need to do a lot of homework,” said Peter Harrell, a former deputy assistant secretary for counter threat finance and sanctions at the U.S. State Department.
Iranian officials say they are trying to address those issues in hopes that foreign companies see it as a huge potential market and not a legal and regulatory morass. Oil contract terms that would allow for greater profit are being drawn up, officials said, and efforts at transparency and corruption-busting are being unveiled.
“We want less bureaucracy,” Mehdi Hosseini, a top adviser to Iran’s oil ministry, said in an interview.
On paper, the country’s allure is undeniable. Its nearly 80 million residents—60% of whom are under 30 years old—already have an affinity for Western brands, especially American ones like Coca-Cola and Chevrolet. Some shops in affluent urban areas, particularly the nation’s capital, are stocked with everything from Western-made sunglasses and designer jeans to laptops.
Its population is tech-savvy. Internet penetration is 53% across the population and 77% in Tehran, according to government data. About 11 million Iranians have mobile Internet access. Many of the country’s senior businesspeople—or their parents—were educated in the U.S. and still prize American engineering.
Iran’s market for technology products and services is roughly $4 billion a year, estimates Forrester Research. If sanctions are lifted, said analyst Andrew Bartels, the market could grow to $16 billion annually, roughly comparable to Saudi Arabia.
Overall consumer expenditures are projected to be about $176.4 billion this year, with annual disposable income pegged at about $287 billion, according to researcher Euromonitor.
Some of the world’s largest companies—from oil giant Chevron Corp. to networking specialist Cisco Systems Inc. to industrial conglomerate General Electric Co.—are examining how the agreement affects their ability to do business in Iran.
“Chevron is reviewing the agreement to fully understand its implications for the energy industry and the company,” the company said in an email.
GE already distributes medical equipment like MRI machines and CT scanners in Iran under humanitarian exemptions. The company operates “in full compliance with governing sanctions laws,” a spokeswoman said in an email on Tuesday. “We look forward to reviewing the details of the agreement reached and will watch the regulatory landscape that may unfold.”
The restrictions don’t end right away. American and European businesses can move in only after Iran implements the deal. That sets up an uncertain timeline for the actual lifting of sanctions, stretching out perhaps until the end of the year, or beyond, say analysts.
For oil companies like Chevron, it isn’t clear when they could return even after Tuesday’s deal. In 1996, they were banned from investing in Iran’s oil industry by a U.S. law separate from the nuclear sanctions.
The agreement also calls for a “snap back” of sanctions if Iran doesn’t live up to its side of the bargain. George Booth, an oil and gas partner at law firm Pinsent Masons LLP, said foreign energy firms in particular should “temper enthusiasm until the complex web of sanctions [is] fully unwound over the coming months.”
Beyond sanctions, challenges faced by new entries range from cultural to legal and bureaucratic.
Apple last year took a hard look at selling iPhones and other products in Iran, people familiar with the matter said then. Those plans have been put on hold for now, though, largely because the company felt Iran’s commercial laws governing user agreements are too restrictive, the people said.
Apple declined to comment.
Boeing also ran into difficulties last year. The aircraft giant had been allowed to sell aircraft spare parts to Iranian airlines, including state-owned Iran Air, since early 2014. But business talks stalled, largely over prices Tehran deemed too high, according to people familiar with the matter.
Iran’s energy industry has a long history of frustrating Western oil companies. Eni has unresolved contractual issues that illustrate the hurdles oil companies may face when entering the country.
Oil ministry adviser Mr. Hosseini said Eni claims Iran owes the company money for overruns at oil-and-gas projects it was operating before sanctions were imposed. The disputed sum, which he declined to specify, stems from old deals that, unlike most oil-company contracts around the world, wouldn’t pay for cost overruns.
Eni declined to comment. Chief Executive Claudio Descalzi said last month his company wouldn’t return if contract terms remained largely the same.
Mr. Hosseini said Iran is changing the old contracts to be more flexible and allow for longer-term deals. He also wants to cut the number of steps foreign companies take to get approved by the National Iranian Oil Co.
“An organization’s death or survival depends on anticorruption [efforts,]” said Mansour Moazami, Iran’s deputy oil minister for planning. “In Iran’s petroleum industry, that’s our rule.”
It could be a slow process to modernize Iran’s business environment. Though it has had business and political relations with Europe, the Islamic ideology of Iran’s leadership has always kept Western countries at arm’s length.
In recent years, hard-liners have come to play a key role in some of the country’s biggest industries, like energy and telecommunications. The Revolutionary Guard, the arm of Iran’s military charged with protecting its Islamic system, is likely to remain under sanctions for alleged terrorism and human-rights violations.
That could pose a risk for companies eager to enter businesses where local partners, or even conducting standard transactions, could trigger scrutiny from Washington or European capitals.
“The hard work is just beginning,” said Esfandyar Batmanghelidj, the organizer of the second Europe-Iran Forum, an event on Iran’s business opportunities in Geneva in September.
Other companies have long histories of doing business in Iran that could ease re-entry.
Coca-Cola Co., for instance, already sells its products in Iran, operating for nearly two decades under a license from the U.S. government’s Office of Foreign Assets Control. It is allowed to sell concentrate to an independent bottler, but the Atlanta-based beverage giant doesn’t have any ownership interest in the Iranian bottler or tangible assets in the country.
A Coke spokeswoman declined to comment on how Tuesday’s deal could affect its business plans.
“In my experience, Iranians value loyalty,” said Nigel Kushner, chief executive of law firm W Legal Ltd. and a specialist in international trade and sanctions. “Those Western companies who retained a close relationship during the sanctions regime will likely be the first to reap the benefits,”- http://www.wsj.com.