Proceed with cautious optimism in Iran
Posted on 11 January 2016 by
Investing in Iran’s growing economy offers potential
After more than a decade of negotiations, 2015 proved a breakthrough year in the normalisation of relations between Iran and the international community.
An initial framework deal was announced in April, and on July 14 world powers signed the Joint Comprehensive Plan of Action (JCPOA) – an historic deal providing sanctions relief to the state. In return, Iran has committed to ensuring its nuclear activities become entirely peaceful. The deal was passed through Iran’s parliament on October 13, and in November the US also approved the sanctions waivers.
As the International Atomic Energy Agency oversees Iran’s compliance with the treaty, latest reports indicate that implementation day could be in the first quarter of this year. This will begin a step-by-step relaxation of the existing sanctions against Iran in various industries, notably in the finance and energy sectors.
Hence 2016 will almost certainly see huge opportunities for investors looking to take advantage of Iran’s economic potential. But they should beware – the risks involved are greater than they may appear to be.
Founded by Ayatollah Khomeini following the 1979 revolution, the Iranian Revolutionary Guard Corps (IRGC) has transformed itself into a business empire with interests in large swathes of Iran’s economy, including energy, construction, transportation, tourism and telecommunications.
The phased relief under the JCPOA provides that some of the sanctions – including those against the IRGC – will not be removed until the second phase of relief, which is likely to be in October 2023.
As the ultimate shareholding structure in Iranian firms is sometimes unclear, potential investors will need to conduct careful due diligence to identify the true beneficial owners of their counterparties and avoid any involvement with entities that remain on the sanctions list.
Furthermore, due to an incomplete transition to a market economy following changes to the constitution in 2004, dealings with Iran or state-owned entities are expected to be politically sensitive. Investors will therefore need to be mindful of the constraints of applicable anti-corruption laws, such as the UK Bribery Act and the US Foreign Corrupt Practices Act.
The risk of the reimposition of sanctions – known as ‘snap-back’ – is another source of uncertainty for investors. The JCPOA provides that United Nations, European Union and US sanctions may be reinstated if Iran does not comply with the terms of the treaty.
The possibility of a snap-back scenario cannot be discounted, and investors should take account of this in their deliberations and follow guidance issued by, among others, the US Office of Foreign Assets Control.
Potential investors must also consider the constraints of Iran’s regulatory environment. For instance, a licence is required to do business with Iranian entities and the rules on corporate governance are relatively new.
With an approximate $400bn (£273bn) economy and high growth prospects, there is understandably a general feeling of optimism arising from the JCPOA. That said, the investment landscape in Iran will not change overnight and significant challenges and uncertainties remain for those wishing to invest in the country.
Coupled with the country’s incomplete transition to a market economy and the specific constraints that arise from the current Iranian legal and regulatory environment, the message for those wishing to invest in Iran is to proceed with caution.
Iran has concluded a number of bilateral investment treaties (BITs) with European Union member states, including Germany and France. These international agreements afford protection to private citizens from one contracting state who invest in another contracting state.
They generally allow foreign investors to refer disputes arising under them to international arbitration, rather than having to pursue claims in the courts of the host state. Some Iranian BITs may be renegotiated in light of the JCPOA to strengthen the protection afforded to foreign investors.
But no such agreements have been concluded between Iran and the UK or the US, although it is understood that the UK may now be considering entering into a BIT as part of an overall programme of investor protection being considered by the government.
As a consequence, UK and US investors cannot rely upon the protections typically afforded to investors against the host state under BITs by being able to refer disputes to arbitration. This therefore places potential investors from the UK and US at a considerable disadvantage.
This article by Miranda Rushton was first published in FT Adviser on 11 January 2016