Written by Saeed Soheily, a corporate finance adviser at accountancy and advisory firm BDO
TEHRAN, the capital of Iran, is an amazing city. Despite being an unknown city to many business people, there is a real sense of vibrancy and modernity about it and an exciting feeling of it being open for business.
I’m not alone in thinking this. Since the lifting of international sanctions at the start of the year, hotels in Tehran have been booked out by a conveyor belt of international business people visiting Iran to see it for themselves.
Like me, I’m sure they found Tehran to be a pretty relaxed city albeit chaotic, busy and polluted. Dealings with the local people, client, hotel staff or others met were with a friendly attitude, hospitable, courteous and polite. There was a real willingness to engage and no hostility whatsoever. There was a clear warmness and a real willingness to do business.
But when thinking about Iran as a potential market it’s important to go in with open eyes. This means being aware of some of the myths as well as being clear on the challenges.
So, let’s explode some of the myths first.
With the world’s fourth largest oil reserves and the second largest stocks of natural gas it’s easy to think of Iran as another Middle Eastern petrochemical economy. The reality is different. Iran is perhaps the region’s most diverse economy with oil and gas accounting for 23% of the GDP compared to 45% in Saudi Arabia. It has an established capital market, a well-developed industrial base and a large population that generates a significant demand for telecoms and financial services.
A second myth is that Iran is not used to trading with the outside world. Just before the start of the sanctions in 2008, Iran had over $40bn of trade with Europe. At the peak of the sanctions in 2013, there was still over $8bn of trade with the EU.
Another myth is that Iran has failed to move with the times. Despite economic isolation for almost a decade, the lifestyle in Iran is more westernised than you would expect. Even though internet censorship blocks websites such as Facebook, social media is still widely used and is playing a major role in bringing the society up to speed with latest fashion, technology and international developments.
BDO’s New Economy report – which looks at how the UK’s mid-market can thrive – makes it clear that emerging markets will be vital to the success of British entrepreneurial businesses so we are all looking at Iran to see what happens next.
All that said, there are still significant challenges with doing business in Iran.
There are still risks relating to the sanctions. A number of Iranian entities and individuals still remain on the EU sanctions list, and sanctions could be imposed again by the international community.
There’s also another complication. If the US Congress continues with its own sanctions on Iran, it will be increasingly difficult for Western companies to restore business links with Iran without the potential consequences of repercussions from the US and their own future trade opportunities with the US.
As ever, since state-controlled economies frequently create less competitive markets and a higher level of bureaucracy, a foreign company may find it more difficult to compete profitably in that market. Many of the economic sectors are often directly or indirectly owned by the Iranian government and their legal trade frameworks and restricted labour laws could discourage businesses.
Notwithstanding all of this, Iran is starting again, as it has before, to offer compelling reasons to foreign businesses to do business there. But companies should do so with their eyes open, aware of the risks, having researched their potential customers, supply chain, and explored whether to go it alone or in a local joint venture.