Transparency key to Iran attracting foreign investment - specialist

02 August 2016 13:30 Source:ICIS News

LONDON (ICIS)--Iran should introduce legal requirements to enforce transparency across its economic sectors if it is serious about attracting foreign investments and building a reputation as a trustworthy place to do business, according to a London-based international sanctions specialist.

Following the lifting of EU sanctions in January, European firms are now allowed to do business in Iran, providing their dealings do not involve any person or entity linked to the Iranian Revolutionary Guards (IRGC), a paramilitary elite unit and ideological custodian of the Islamic Revolution.

Sanctions also remain in place with regards to human rights, or entities/persons included on an EU asset freeze list.

In an interview with ICIS, Azadeh Meskarian, a solicitor working for London-based Zaiwalla & Co, a law firm currently contesting the legality of EU sanctions against two of Iran’s largest banks, said European companies expecting to do business in Iran were required to perform thorough due diligence if they wished to establish a legal presence in the Middle Eastern country.

However, she conceded that the difficulties of accessing accurate information about Iranian counterparties were high, given the absence of transparency rules in Iran.

“There is a need for a legal framework that would enforce transparency and help to build trust,” she said.

European companies have been attracted by Iran’s market potential and significant oil and gas reserves. Iran sits on 34,000bn cubic metres of natural gas – the world’s largest reserves – and 157bn barrels of oil.

Additionally, Iranian petrochemical producers have been expressing interest in entering the European market for some time, with some producers looking to allocate significant volumes of products such as polypropylene (PP) and polyethylene (PE) to Europe.

Transparency in how to do business with Iranian companies may well encourage European business to seek out potential new partnerships.

Nevertheless, bank reluctance to offer credit or process transactions involving Iranian counterparties as well as the retention of US sanctions against Iran has raised significant obstacles for would-be investors.

Meskarian explained that despite the fact that most EU sanctions had been lifted, US restrictions remain in place.

This means that any transactions in US dollars or involving US citizens or entities would have to be cleared via the US’s Office of Foreign Assets Contract (OFAC).

OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes.

After 20 years of underinvestment caused by sanctions imposed in response to human rights concerns, or, more recently, against its alleged nuclear weapons programme, Iran, too is keen to see investors return to its markets.

According to Meskarian, the tightening of U.S. sanctions and the blanket sanctions of European Union in 2012 on the Iranian banking and oil and gas sector also led to a loss of $17.1 billion in export revenue from 2012 to 2014, which is the equivalent of 4.5 percent of Iran’s GDP.

“Reports show the sanctions resulted in roughly $56bn of frozen Iranian funds [however…] it is difficult to quantify the damage which will require a careful, multisector expert analysis,” she said.

However, in order to access the assets, and attract new capital, Iran would have to introduce and cultivate a transparent environment. She said in order to achieve such an environment, Iran would have to work with European firms which could help establish good practice.

There are encouraging steps already being taken by Iranian companies in the energy and petrochemicals sectors, as well as financial institutions in the country.

An increasing number of Iranian banks have now signed up to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) sanctions, the global system used by banks to facilitate international payments, which should make paying for Iranian products more straightforward.

Iranian petrochemical suppliers are also now in the process of re-applying for their Registration, Evaluation, Authorisation and restriction of Chemicals (REACH) certificates to facilitate trade with Europe, according to an Iranian trader.

The REACH programme, introduced in June 2007, is an EU regulation requiring chemical manufacturers to evaluate the health, safety and environmental aspects of their products.

REACH accreditation of most Iranian suppliers had expired after being out of the market since 2011, when EU and US sanctions were tightened on Iran, industry sources said.

At a higher level, the Organisation for Investment Economic and Technical Assistance of Iran works to encourage and protect foreign investment in the country under the Foreign Investment Promotion and Protection Act (FIPPA). Positive steps like these by the Iranian government should help encourage and embolden European companies to look into investing in Iran and tapping into the country’s substantial energy and petrochemical potential.

Focus article by Aura Sabadus and Matt Tudball

Additional reporting by Muhamad Fadhil and Will Beacham

Image source: REX Features/Shutterstock

By Matt Tudball