Foreign Investors and Iran: From Enthusiasm to Doubt

Over the past two years, from the beginning of fundamental changes in the Islamic Republic's nuclear policy to the signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015, an unprecedented dynamism has enveloped the international economic relations of Iran. A country that has experienced the toughest sanctions since World War II and has practically lost most of its bridges to the international economic community suddenly became a 'promised land' for international investors with a new diplomacy led by Mohammad Javad Zarif. Numerous European media outlets described Iran, which was shedding the chains of economic sanctions, as 'El Dorado,' a mythical city in South America believed by Spanish conquerors in the 16th century to be filled with gold, for which they risked everything to possess. These same media outlets dubbed Iran, with its 80 million population, vast oil and gas reserves, rich history and culture, a modernizing middle class, and a dynamic young generation, as 'the last frontier of globalization,' a country that had turned to isolation after the 1979 Islamic Revolution and made 'self-sufficiency' its main slogan, but today is seeking 'opening' and wants to rebuild everything from scratch. Since then, the path has been cleared for dozens of economic delegations from various countries, especially reputable European and Asian powers, to enter Iran, and Iranian economic delegations, which had previously seen many borders closed to them, suddenly faced open doors. In short, many 'impossibilities' suddenly became 'possibilities,' and Iran's image in the media and a large part of global public opinion changed dramatically. Western optimism about the emergence of a significant shift in Iran's international policy peaked with Hassan Rouhani's visit to Italy and France last January, culminating in the signing of €17 billion contracts in Italy, where the Iranian president's accompanying delegation signed agreements in areas such as energy, metallurgy, and infrastructure construction, as well as important contracts in France, including with Peugeot, Total, and especially Airbus. However, this enthusiasm did not last long, and doubts in international economic circles about the conditions for a rapid and fundamental change in Iran, especially for attracting foreign investment, have been increasing over the past few weeks. Numerous prominent international media outlets, from the British 'Economist' to the French 'Le Monde,' increasingly emphasize the obstacles that hinder the establishment of normal economic relations with Iran. Can we speak of a 'cold shower' and conclude that the 'promised land' has turned to smoke and vanished? Such a conclusion would be exaggerated. There is no doubt that the JCPOA changed Iran's international conditions, pulled the country back from the brink, and opened new possibilities before it. However, it seems that following the signing of the JCPOA, enthusiasm quickly overshadowed realism, and several obstacles to normalizing Iran's position in international economic relations either remained hidden or were not taken seriously enough. These obstacles stem from both the difficulties in Iran's international situation and the complexities of the internal environment of the Islamic Republic. International difficulties Some of the JCPOA's provisions, especially the 'snapback' mechanism, increase Iran's risk level and weigh heavily on the foreign investment atmosphere in the country like the Sword of Damocles. Unlike trade, foreign investment (in its direct form) is only feasible over a relatively long period. If, in the event of a disagreement between Iran and other parties to the agreement, the case is referred back to the UN Security Council (Articles 36 and 37 of the JCPOA), what will happen to foreign investment in Iran? Of course, the JCPOA specifies that a potential return of sanctions will not be retroactive, but a European or Asian company looking to invest in Iran for a long period will naturally be concerned about the potential return of sanctions and the reactions of the Americans towards foreigners who wish to continue their activities in Iran if this occurs. Another important issue is the persistence of non-nuclear sanctions, beyond the nuclear-related sanctions that have been lifted or will be lifted in the future based on the JCPOA. In fact, a wide range of non-nuclear sanctions continue to be imposed on Iran by the U.S., and to a lesser extent by the European Union. What weighs most heavily on Iran's international economic relations in the post-JCPOA era are the sanctions imposed by the U.S. related to issues such as terrorism, human rights, and money laundering. European banks have become extremely cautious in establishing relations with Iran due to the unclear boundaries between U.S. nuclear and non-nuclear sanctions and the overwhelming complexity of non-nuclear sanctions, fearing severe financial penalties from Washington, and it can even be said that, in this regard, they behave in a way that is 'more Catholic than the Pope.' Another major problem that foreign investors face in Iran is the fear of being drawn into the activities of companies affiliated with the Islamic Revolutionary Guard Corps (IRGC) and their subsidiary enterprises. From the perspective of the U.S. Treasury, the interests of these companies are utilized to support Hezbollah in Lebanon or for military operations in Syria and Iraq. In this situation, any German or French company that seeks to invest in Iran and is somehow drawn into cooperation with IRGC-affiliated companies faces the risk of economic penalties from the Americans. Pierre Fabiani, the former head of the French company Total in Iran, advises all French companies to carefully examine their potential partners in Iran and to withdraw if that partner is affiliated with the IRGC. Internal difficulties of the Islamic Republic Given the extensive presence of IRGC-affiliated companies in various economic sectors in Iran, it is not easy for foreign investors to avoid cumbersome participation with them. It is essential to emphasize that for foreign investors, close cooperation with IRGC-affiliated companies is not an issue in itself, provided that U.S. sensitivities are not involved. Many foreign investors (including Americans) in China are tied to companies under the oligarchy affiliated with the Communist Party and even the Chinese military, and they have no qualms about it. However, in Iran, the IRGC is at the center of the geopolitical landscape of the Middle East, and foreign companies must inevitably take this reality into account. Beyond geopolitical issues, the internal economic and social deadlocks in Iran also create difficulties for foreign investors operating in Iran. From the author's perspective, when it comes to the entry of foreign investors into Iran, the very important question must first be raised: Do the major decision-making centers in Iran genuinely recognize the entry of foreign investors as necessary for the country's interests? Is there political will at the top of the power structure in Iran to attract foreign investors? China, India, Brazil, Turkey, and Indonesia have structured their development strategies in close connection with attracting foreign capital and technology and exporting goods to foreign markets. Is Iran willing to follow the same path? This is not a matter of Hassan Rouhani and his economic advisors. This question must be answered by those who hold the main power in the Islamic Republic. There is no doubt that Iran, due to its potential, has an extraordinary appeal for foreign investors. However, turning potential into actual realities does not happen overnight and spontaneously. Iran's business environment is not conducive; state and quasi-state companies, along with enterprises affiliated with foundations and the IRGC, have a tight grip on Iran. Let us hear the final word from the Iranian Foreign Ministry, which, in its report to the Islamic Consultative Assembly on the three-month anniversary of the JCPOA's implementation, states: 'The biggest problem and challenge that the JCPOA faces is a trust-building and confidence-creating environment in the country for foreign parties. The point is that almost all banks, companies, and economic enterprises that are expected to return to the pre-sanction environment and engage in economic cooperation with Iran belong to the private sector and engage in economic interactions based on economic logic, not at the behest of their own governments. In other words, it is the cost-benefit calculation that brings economic enterprises into an economic interaction, and the most important factor in this calculation is the level of confidence in this interaction and its surrounding environment.' The Foreign Ministry adds in the same report: 'If an economic enterprise does not reach the conclusion that the target market is a safe environment for investment, trade, and any kind of economic cooperation, it will certainly neither invest nor transfer technology nor engage in large projects nor involve itself in major transactions. At most, it will settle for short-term trade at a low level. In the chaotic, investment-averse Middle East and in the uncertain environment regarding the commitment of all parties to the JCPOA, it is natural that many economic enterprises will approach with caution until the parties' adherence to their commitments is proven over time. To remedy this problem, in addition to creating a sense of competition, a reassuring environment must be created for economic parties and a positive outlook for economic interaction with Iran must be drawn for all, so that fears and concerns about interaction with Iran dissipate and a desire for cooperation is fostered.' The author's views do not reflect those of Radio Farda. Fereydoun Khavand is an economist, economic analyst, and professor of economics in Paris, France.