The 7 Dangers of Doing Business in Iran

Since the negotiations for the JCPoA began, all of the eyes and hopes of Western businessmen were focused on reaping the profits of a booming Iranian economy after decades of sanctions. From a simple economic aspect, their hopes were legitimate since Iran’s economy was and remains vastly under-priced and it is, theoretically a huge consumer market as well as a huge basis for production.

Now that the IAEA’s probe into Tehran’s shady nuclear program has been buried and the implementation of the JCPoA is on track, sanctions are bound to gradually be lifted as early as January 2016 with hopes of a total removal of sanctions by mid-2016. That’s the good news.

The bad news is that Iran isn’t just an economy: It is, first and foremost, a regime, fueled by ideals born in the Islamic Revolution of 1979 and managed by hardliners who have built their power base during the years under sanctions. They may welcome the chance to make more money but they are worried that they might lose their power.

Here are seven specific dangers for foreign, specially Western, investors in Iran today.

 

  1. Tehran’s Notorious Red Tape:
    The Iranian bureaucracy is notorious for slowing down business development to a standstill unless money changes hands: Iran is rated 118th in the world’s economies for “ease of doing business” with an endless number of permits required for any business to move forward. Corruption, either through the IRGC or through other power bases is rampant and Western business people will have to get used to being extorted for more money in order to fulfill their dreams of hitting the Iranian jackpot.
  2. Partnering with IRGC:
    The IRGC is an integral part of the Iranian economy, just as the mafia was in Italy for decades, and it is hard to find a sector in which the IRGC isn’t active. Not only is it active in the regular economy, the IRGC is specially strong in the underground economy of smuggling, tax evasion, corruption etc… In fact, the IRGC’s power within the economy grew under sanctions and Khamenei’s “Resistance Economy” because only the IRGC had enough power to do businesses on both sides of the border of laws. The bottom line is that any foreign investor is bound to meet with the IRGC either as partners or as enemies – in both cases, more pockets to grease and the constant fear of suddenly being picked up for “interrogation”.
  3. Foreign “Infiltration” Paranoia:
    Khamenei is justifiably paranoid of allowing Western brands into Iran: It will be hard to maintain anti-US ideals while Iranians chew on their Big Macs, drive Chevrolets, communicate through facebook etc…Last week, Iran listed 227 US brands which are to be banned from the Iranian markets. For now, Khamenei’s focus is on the US brands but he is notoriously fickle and quick to anger: At any moment, he could decide to ban brands from any country depending on the political atmosphere – he has already criticized the governments of the UK, France and Germany…banning their brands is not inconceivable.
  4. Hardliner Crackdowns:
    Tehran has become a battleground for a growing rift with Rouhani on one side and Khamenei on the other. Rouhani’s camp is based on moderate pragmatism and promises for change in the nuclear program, foreign relations, the economy, human rights and freedoms etc… and is made up of Reformers, liberals and the popular vote (specially the younger voters). Khamenei’s camp is based on the IRGC, the regime, the Islamic Revolutionary ideals and the hope to maintain the status quo…it is made up of Principlists, hardliners and clerics. Western businesspeople will obviously prefer to deal with Rouhani’s base but they have to remember that Khamenei is the Supreme Leader and that crackdowns are taking place at this very moment and are sure to grow as elections in February loom closer.
  5. Moscow Gets VIP Treatment:
    It does not matter in which category your business is in, if there are Russian brands in the same category, they will be able to cut ahead of the line. The JCPoA opened the doors for Moscow and Tehran to become partners militarily, politically and economically: MoU’s are signed, deals are inked, loans are established, trading in local currencies are OK’ed…while the Western companies are circling around hesitantly, Russian companies are going straight for the kill.
  6. Snap-Back Sanctions:
    It seems a given that Iran will transgress some resolution or another – I has done so in the past as the IAEA nuclear probe proved, it is doing so in the present with missile tests, and it will continue to do so in the future if only to test the P5+1’s resolve. The chances are that the White House, for now, will not slap-back sanctions but another president and another administration may do so in the future. If sanctions are slapped back on, not only will the JCPoA be annulled but anyone doing business with Iran will find himself/herself on the US’s black list.
  7. Regional Conflicts:
    Iran and Saudi Arabia are two regional rivals who are already fighting each other in two proxy wars: One in Syria (Iran openly, Saudi Arabia covertly) and one in Yemen (Saudi Arabia overtly, Iran covertly). Tehran is also involved in subversive efforts in Bahrain, Kuwait and the UAE as well as in Iraq and Lebanon. Tehran is openly critical of Turkey and Saudi Arabia and its support of Assad in Syria has made it the enemy of all the Syrian rebels. ISIS is an open enemy of Tehran while the Taliban has now become Tehran’s ally. In short, the region is akin to a gigantic bonfire waiting for a spark. A regional war may very quickly turn into a global one as Russia, the EU and the US choose sides.

 

In short, investing in Iran at the moment may give a business an edge on those who will try to enter at a later date. But entering the Iranian economy now is a move for investors with steel nerves who are ready to walk away at any time and write off a loss.

In a recent survey by the CFA institute, 74% of the investors preferred to wait while only 26% were ready to jump in at the moment.

 

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