Iran Needs Foreign Investment. But They're Not Making It Easy.

Mobile offshore drilling unit in Turkmenistan. Wikimedia Commons/Creative Commons/dragonoil.com

Western sanctions and a paranoid government make Iran’s economy a unique challenge.

After Iran’s nuclear agreement, the Joint Comprehensive Plan of Action with six world powers (China, France, Germany, Russia, the United States and the United Kingdom), many outside businesses are enthusiastic to enter the Iranian market. Meanwhile, to boost Iran’s collapsed economy, the country’s moderate forces—a coalition of progressive politicians, intellectuals and pragmatic conservatives headed by President Hassan Rouhani, who advocates reintegrating Iran into the global market—are encouraging foreign partners and investors to invest in Iran.

But the extent of the Iranian market’s readiness for international investment has not been addressed yet. Iran’s autocratic system has unique characteristics that make it different from other autocracies in terms of dealing with foreign investors. This raises the question: how plausible is it to expect a fruitful economic relationship between Iran and foreign investors, and what are the possible uncertainties and obstacles regarding foreign investment in Iran?

While President Rouhani’s administration will not aquiesce to hard-liners, who oppose any Western presence, skepticism over foreign intentions is an age-old feature of the Iranian political psyche. After the 1979 Islamic revolution in Iran, political elites believed that Iran’s economic sovereignty should be protected by limiting foreign capital’s influence in the country as much as possible. Yet they remain in this antagonistic position due to their deep-rooted economic interests, which they believe can be jeopardized by foreign investment. These elites can be found in certain factions of the parliament, at the head of Iran’s state-run industries, and in the business enterprises of the Islamic Revolutionary Guards Corps (IRGC) and revolutionary foundations, also known as Bonyad. These interest groups’ influence is, therefore, substantial.

Iran’s economic relations with the outside world in general, and foreign investment in particular, have been affected by sanctions imposed by the international community due to its illicit nuclear activities. Sanctions have been imposed on other grounds as well, such as Iran’s sponsorship of terrorism and human-rights violations.

Although there exists virtual consensus regarding the necessity for foreign investment in Iran, it is not clear whether the environment is propitious for investment. The current debate is based on predictions with no basis in reality; identifying the real obstacles is crucial for facilitating foreign investment in Iran. Both Iran and international companies harbor doubts about economic rapprochement and foreign 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 fear 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 in these interest groups’ power and position. 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 U.S. 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, which is in the hands of the Revolutionary Guard. 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 Assaluyeh region.

Consequently, Iran has 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’s future 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. Iran’s complex political structure is one of the most serious problems for potential foreign investors. Supreme Leader Ayatollah Ali Khamenei is the ultimate decisionmaker, despite having an elected president and parliament. As Iran’s commander in chief, he controls the military and security forces, including the militarily and economically powerful Revolutionary Guards—an organization that has been known to cancel contracts or expropriate foreign investments in the name of national security.

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