Need to Address Concerns of foreign Investors

EghtesadOnline: Many countries have dispatched economic delegations to explore the Iranian market after Iran’s nuclear agreement with world powers.

News ID: ۷۷۴۳۴۷

04 March 2017

Iran’s moderate forces—a coalition of progressive politicians, intellectuals and pragmatic conservatives, headed by President Hassan Rouhani, which advocates reintegrating Iran into the global market—are encouraging foreign partners and investors to invest in Iran, reads a report published by American bimonthly magazine The National Interest. Excerpts follow:

Both Iran and international companies harbor doubts about economic rapprochement and foreign direct investment. Although similar concerns exist in economic relations between investors and investees in any other country, they have unique characteristics in Iran.

First, interest groups that control the pulse of Iran’s economy are wary of foreign investment. They believe that, when foreign investment occurs, foreign businesses will access capital, rivals will be excluded and, given the weakness of domestic competition, foreign investors may achieve a local monopoly, consequently leading to a loss of these interest groups’ power and position, Financial Tribune reported.

In other words, they argue that giving more access to foreign firms will lead to a loss in terms of both their economic independence and their political power.

Secondly, interest groups fear that foreign investors may pull out in times of crisis, leaving the country vulnerable. A clear example of this was when countries and individual companies recently steered clear of business with Iran after a threat of US sanctions. As a result, a stream of major international corporations announced a departure from the Iranian market.

For instance, the French company Total withdrew from developing the South Pars Gas Field. China National Petroleum Corporation replaced the French company. However, after two years of delays in starting development at South Pars, CNPC pulled out as well, and withdrew all its experts and workers from Iran’s Asaluyeh region.

Consequently, Iran lost $11 billion due to delays in gas extraction from South Pars. Other instances are Vitol and Trafigura, two key global oil brokers, as well as Total, Shell and British Petroleum, which stopped delivering refined gasoline to Iran. To many inside Iran, these examples confirm that Iran cannot rely on foreign investors.

On the other hand, foreign investors have their own fears and uncertainties. Although there are always risks when investors enter host countries, Iran poses unique risks.

First, foreign investors do not know who they are dealing with. They are uncertain whether they are negotiating with a trustworthy party—to maximize the safety of their investments—or a faulty one.

Second, as some economic analysts suggest, investing in a country with Iran’s political and economic system is not as simple as doing so in a western country. The Iranian economy is riddled with conflicting interests, they say, and those in power are typically interested in obtaining foreign capital without giving up power.

Third, the prospect of new sanctions could also scare off foreign investors. Even if the United States were to waive nuclear-related sanctions, which is unthinkable under US President Donald Trump, non-American companies that seek to do business in Iran run the risk of incurring significant penalties if they inadvertently violate other US sanctions (such as sanctions for ballistic-missile tests,) that remain in effect.

Companies that deal with Iranian designated entities could be cut off from US banks, or would be barred from doing business in the United States—a significant risk to international firms whose investment Tehran hopes to attract.

Moreover, Iran has started working on replacing the traditional “buyback contract” scheme, which offered international companies investment opportunities in the energy sector over short periods in return for a fixed amount of production, with the new “integrated petroleum contract” model, which would entitle foreign investor to a percentage share of oil production.

Economic analysts doubt whether this approach would attract foreign investors, because if the price of oil falls, investors’ losses will be huge.

Last but not least is Iran’s foreign-investment law. Attracting foreign investment, like all other economic activities, entails regulations to facilitate entry and retention. For example, Qatar offers loans of up to 50% without interest for foreign investors, while Turkey offers tax cuts for foreign investors.

In Iran, however, there is no exemption for foreign investors in excess of what is already given to domestic business. Even Iran’s Constitution stipulates that foreigners cannot receive more concessions than locals. The country has passed several laws to protect international investment.

Due to its rich natural resources and growing consumer market, Iran is a very tempting country for foreign investors.

However, as institutional theory points out, “companies make their strategic choices based on the interaction between institutions and the organization itself, and attempt to obtain institutional legitimacy in terms of the host country’s rules and regulations”.

To minimize obstacles on the road to foreign investment in Iran, a joint effort is needed to remove causes of mutual concerns.