Awaiting the gold rush

THE currency traders plying the half-empty arrivals hall of Tehran’s international airport have a simple view of the nuclear talks that Iran’s government is conducting with assorted foreign powers. If a deal is made, one says, “the planes will come in from everywhere.”

Hopes are high among businesspeople, in Iran and abroad, that the country may soon cease to be a commercial pariah. After decades of ever more stringent sanctions, imposed mostly by Western countries to prevent Iran from building a nuclear bomb, they are licking their lips in anticipation. America’s chief negotiator, Wendy Sherman, heightened excitement recently when she said, “I have to tell you, as soon as we suspend our major sanctions—which will happen very early in the agreement—the world will flood into Iran.” And in a small taste of things to come, on October 22nd Boeing said it had made its first sale to Iran since the Islamic Revolution in 1979: $120,000-worth of aircraft manuals and other data.

Officials in Tehran have started receiving foreign business delegations, hoping to win allies in the battle against sanctions. A waiter at a luxury hotel shows off a wallet full of tips from around the world. Local lawyers, consultants and bankers are peddling their services in what one calls “the last major closed market in the world”. Familiar faces have returned, such as managers from Peugeot, a French carmaker which had a 30% market share in Iran before pulling out in 2012.

The opportunities in a post-deal Iran would be vast. Sanctions have depressed its GDP by 25% in the past three years, according to the American government; but it is still $1.2 trillion at purchasing-power parity, making Iran the world’s 18th-largest economy. The population of 80m is well-educated; the country’s oil and gas reserves are huge. The Tehran stock exchange is the second-biggest in the Middle East, with a capitalisation of about $150 billion, according to Turquoise Partners, the first foreign investment fund dedicated to Iran. But foreigners own only 0.1% of listed companies’ shares, compared with 50% on Turkey’s main exchange in Istanbul.

The Tehran stockmarket is pretty well run. Its operator and its regulator have been separated and live market data are available online. About 8m Iranians own shares and 500,000 trade actively. Last year the market rose by 130%. Local pension funds are keen to sell some of their holdings. This presents an opportunity for foreign investors to buy into and revamp inefficient and potentially undervalued companies with good links to the regime.

Among the most attractive sectors for foreign investors is manufacturing. Iran’s motor industry used to account for 10% of GDP, and until sanctions bit a few years ago it was employing 1m people. Retail is another promising sector. Downtown Tehran is full of fake Apple shops; consumers would be delighted to buy the real thing.

The industry that perhaps most needs foreign expertise and capital is banking. But a thicket of regulation and a legacy of bad debt are deterrents. Last year Parviz Aghili, a veteran of American finance, opened what is in effect the only privately owned bank, Middle East Bank. It took him two years to get his licence, although he says he is hopeful for the future.

Foreign miners might find it easier to enter Iran, since much of the industry is already privatised. Iran has the world’s 9th largest copper reserves and the 11th in iron ore. And of course there is oil—of which it has the fourth-largest reserves. New oil contracts for foreigners are already being written by officials awaiting the big day. President Hassan Rouhani met foreign energy bosses at the Davos conference earlier this year and made welcoming noises. In the longer term, gas is an even more promising prospect for foreign investment: Iran’s reserves are the world’s largest, yet it has only a 1% share of the world market.

Persia requires perseverance

So the prospects are mouth-watering but even if sanctions are lifted completely, foreign businesses and investors will not find the going easy. For a start, the gold rush will be tempered by Iran’s limited capacity to absorb foreign capital. The labour market, banking system and government are thick with red tape. “Expect logjams,” is the advice of a Western diplomat in Tehran.

For the rehabilitation of the Iranian economy, privatisation and economic reform are even more important than the lifting of sanctions, argues Suzanne Maloney of the Brookings Institution, an American think-tank. Since Mr Rouhani was elected last year the government has cut subsidies and talked of boosting the puny private sector. But the state is still involved in every part of the economy. Even where firms have been privatised, they are often still subject to price controls.

For businesses undeterred by such challenges, there is then the question of finding business partners in Iran. Many important fiefs in the economy are occupied by unsavoury entities connected to the Revolutionary Guard, part guerrilla army and part intelligence agency. It has expanded its presence in business greatly in recent years. Western firms will be wary of going anywhere near companies like Khatam ol-Anbia (Seal of the Prophets), which claims to have $50 billion in government engineering contracts, says Patrick Clawson of the Washington Institute for Near East Policy, a think-tank and lobby group.

Given the decades of isolation and propaganda, some Iranians will remain suspicious of outsiders, no matter what their government says. Nationalists could easily stir up antagonism against foreign businesses. The sanctions regime will take time and effort to unpick, even if American negotiators sometimes claim otherwise. And it could all too easily be reimposed were Iran to breach the terms of any nuclear deal. In all, Iran offers foreign businesses a wealth of potential rewards—but also more than its fair share of risks.