Iran Lures Investors Seeing Nuclear Deal Ending Sanctions

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On a May afternoon in Tehran, a Russian in a dark suit sits in the crowded lobby cafe of the Espinas Persian Gulf International Hotel with his Farsi translator, sipping coffee with potential Iranian partners while discussing the price of soy fiber. No sooner do they vacate their armchairs than another group of besuited businessmen takes their place, this time conversing in Italian and Farsi about industrial motors.

The Espinas, one of Tehran’s few luxury hotels, opened in 2009, just as successive rounds of sanctions over Iran’s nuclear program were drawing an ever-tighter noose around the economy. With the restrictions biting, the Espinas’s lobby, adorned with pink-granite columns and faux Achaemenid sculptures, emptied out.

Today, however, amid glimmers that sanctions will be lifted, finding a room at the Espinas isn’t easy, Bloomberg Markets magazine will report in its September issue.

“All the five-star hotels are full of Western companies looking to position themselves to do business -- and also Japanese and Chinese companies,” says Sarosh Zaiwalla, a London-based lawyer who specializes in sanctions regulation and who travels frequently to Tehran.

Iran has seen a huge surge in the number of Western business delegations, says Amir Cyrus Razzaghi, the head of Ara Enterprise Group, a consulting firm in Tehran that provides market research and business intelligence to clients.

Closed Market

In February, a group representing more than 100 French companies -- including engineering group Alstom SA, telecommunications company Orange SA and carmaker Renault SA -- visited Tehran, the largest foreign-trade mission the country had ever hosted. Groups from Canada, Europe and the U.S. have also come. Companies that were once active in Iran, such as French oil giant Total SA and Luxembourg-based ArcelorMittal, the world’s largest steelmaker, have publicly expressed interest in returning.

Iran -- one of the world’s largest closed markets -- may be on the verge of opening for business after years of isolation, says Charles Robertson, chief economist at Renaissance Capital Ltd., a London-based investment firm.

“This is the last major opportunity out there in the world that can suddenly become accessible, almost overnight,” he says.

Robertson, who visited Tehran in February, compares Iran to Turkey in 2004, when that emerging market was poised for what turned out to be almost a decade of strong economic growth.

Diplomatic Breakthrough

What’s raised investor expectations about doing business there is a diplomatic breakthrough that could clear the way for sanctions to be lifted. Brokered with Iran in November by the U.S., China, Germany, France, the U.K. and Russia, the deal eased some sanctions temporarily in exchange for Iran’s commitment to curtail uranium enrichment and allow greater oversight by the International Atomic Energy Agency.

The Joint Plan of Action, or JPA, released $4.2 billion in Iranian funds frozen in foreign banks and suspended sanctions on petrochemical exports, gold trading, the sale of goods and services in the automotive industry, and the supply of parts and maintenance needed to keep Iran’s civilian aircraft flying safely.

Iran has been struggling under layers of sanctions laid down as thick as paint on an old barn by the U.S., the European Union and the United Nations over more than three decades.

Final Settlement

The U.S. measures, some of which date back to the Iranian Revolution in 1979, are the strictest. U.S. citizens are barred from doing any business with Iran without a waiver from the U.S. Treasury. Foreign companies that trade with Iran risk being fined and cut off from the U.S. market, a threat that has driven many European firms to abandon Iran in recent years.

The UN sanctions primarily target individuals and entities directly tied to Iran’s nuclear program, while EU sanctions have tightened and broadened over time to include Iranian oil sales and banking.

The November JPA set a July 20 deadline for a final settlement on Iran’s nuclear program. As the clock ticked down, that deadline was pushed out to Nov. 24. The extension freed up an additional $2.8 billion of Iranian money that had been frozen in foreign bank accounts.

Meanwhile, in July, as Israel and Iran-backed Hamas forces in Gaza exchanged missile fire in another outbreak of fighting, Israeli Prime Minister Benjamin Netanyahu warned the U.S. against doing a “bad deal” with Iran.

Oil Reserves

Other events in the region, however, have drawn Iran and the U.S. closer together. With Syria’s civil war spilling over into Iraq, the U.S. and Iran both rushed to help Iraqi forces counter the threat posed by Sunni extremists. If a conflagration disrupts Iraqi oil production, Iran’s reserves, the fourth largest in the world, will become important to world markets.

Iran has 76 million people, about the same number as Turkey. As recently as 2011, it produced twice as many cars as Turkey, according to the Paris-based International Organization of Motor Vehicle Manufacturers. It consumes more steel annually than either the U.K. or France, according to the World Steel Association. And the Tehran Stock Exchange, or TSE, has a market capitalization of about $135 billion, three times the value of the main stock market in Vietnam, with a population of 89 million.

While once-embargoed markets such as Myanmar and Libya lack developed financial markets and physical infrastructure, Iran has both, Robertson says -- presenting an opportunity that’s “just huge.”

‘Long-Term Potential’

The man who helped organize Robertson’s trip to Iran is Ramin Rabii, the managing director of Turquoise Partners Group, a Tehran-based investment firm with $200 million under management that has become the first port of call for investors.

“This is one of the most attractive markets in the world in terms of its long-term potential,” Rabii says.

Turquoise was set up in 2005 to provide an easy way for foreigners to invest in the TSE. Sanctions, however, put an end to that in 2010. Since the JPA was signed, Rabii says, he’s received half a dozen e-mails a week from investors looking for more information on the market.

Most sanctions remain in place. And if businesses eying Iran needed any reminder of the force of those measures, they got one on June 30 when BNP Paribas SA, France’s largest bank, agreed to pay a record $9 billion for violating U.S. sanctions on Iran, as well as on Sudan and Cuba.

‘Plan in Place’

Still, companies -- particularly those that sell pharmaceuticals, medical devices and consumer goods already subject to fewer restrictions -- would be foolish not to draw up contingency plans to enter the market if sanctions are lifted, says Matthew Spivack, a London-based consultant at Frontier Strategy Group.

“Not having a plan in place, not thinking about it, is what will really put you behind,” he says.

Among those that have publicly expressed interest in Iran is Canadian transportation company Bombardier Inc.

“Our role right now is to understand when sanctions could be lifted and how we could take advantage of a market we feel will be important for all of our products,” Pierre Beaudoin, Bombardier’s chief executive officer, said at a news conference after the company’s annual meeting on May 1.

Beaudoin’s bland statement belies the bounty of contracts that could await a company such as Bombardier if Iran opens up.

The Iranian government has said it’s looking to buy 400 passenger planes -- including regional jets and turboprops -- in the next 10 years to upgrade its aging fleet. (On August 10, a domestically produced Iran-140 turboprop aircraft, a copy of a Ukranian Antonov AN-140, crashed shortly after takeoff from Tehran, killing 48 people.)

Jockeying to Return

Bombardier could compete for some of that business. The Tehran government has also unveiled plans to spend $10 billion improving the capital’s public transport system during the next five years, including buying 2,300 metro-rail cars, which Bombardier also produces.

Companies based in Europe, many of which departed Iran only in the past four years as sanctions tightened, have been most conspicuous in jockeying to return -- leaving U.S. firms behind.

‘Getting Lapped’

“There is a sense that they are getting lapped by the Europeans,” says Reza Marashi, research director of the Washington-based National Iranian American Council, which represents the interests of Americans of Iranian descent in the U.S. “The Europeans didn’t sanction themselves out of influence in Iran like we did.”

Asked at a press conference about U.S. criticism of French businesses, including Total, that have held exploratory talks with Iran, Total CEO Christophe de Margerie said, “When it becomes legal to work in Iran and contractual terms are satisfactory, I don’t see why Total would deprive itself of the possibility to beat out its Anglo-Saxon competitors in Iran.”

Iran’s overtures to investors date from President Hassan Rouhani’s election in July 2013. Rouhani succeeded Mahmoud Ahmadinejad, an anti-U.S., anti-Israel populist who had accelerated Iran’s uranium enrichment efforts. Ahmadinejad bequeathed to Rouhani an economy crushed by international sanctions.

Plunging Rial

By the summer of 2013, oil production had fallen to a 20-year low of 2.5 million barrels a day, down from a peak of 4 million barrels a day in 2008.

From the start of 2012 to Rouhani’s election, the Iranian rial plunged more than 60 percent against the dollar as inflation spiraled out of control, the U.S. prohibited international banks from trading or holding rials, and Iranians rushed to buy gold and foreign currency.

Real gross domestic product fell 5.6 percent in 2012 and a further 1.7 percent in 2013. The economy is forecast to grow 1.5 percent this year, according to the World Bank.

Rouhani has cast aside the Ahmadinejad playbook. At the World Economic Forum in Davos, Switzerland, in January, Rouhani invited CEOs and financiers to “come and visit Iran to see the investment opportunities.”

‘Personally Impressed’

Martin Sorrell, CEO of WPP Plc, the world’s largest advertising and marketing services group, was among several CEOs who met privately with Rouhani at the ski resort.

“I personally was impressed,” Sorrell says. “It seems he is bent on changing Iran’s relationship with the West.”

Sorrell says WPP has begun researching Iran’s business potential.

On August 10, Rouhani lashed out at hardline critics in his country who oppose negotiations with the West over Iran’s nuclear program.

“Fear of interaction, fear of negotiation and fear of understanding is wrong,” Rouhani said, according to the Iranian Students News Agency.

David Levine, a lawyer in the Washington office of McDermott Will & Emery who specializes in U.S. sanctions law, says companies exploring business opportunities in Iran should tread carefully.

“The downside risk is severe,” he says, citing penalties including prison and big fines.

Potential Backlash

Businesses also need to be wary of U.S. political pitfalls and public opinion, says Henry Smith, a Dubai-based senior consultant and Iran analyst at Control Risks Group Holdings Ltd., a consulting firm.

Fairfield, Connecticut–based General Electric Co. was so concerned about a potential public backlash to its work repairing engines on Iran’s civilian airliners -- a transaction authorized under the JPA and for which the U.S. Treasury has granted waivers -- that it promised to donate any revenues from the work to charity. (GE says Iran’s state-owned airline has yet