By Asa Fitch And Nicolas Parasie
DUBAI--In a sanctions-free Iran, Western energy companies would
likely be the biggest foreign first-movers: Iran has the world's
fourth-largest proven oil reserves and second-largest natural gas
reserves.
But those big-ticket investments overshadow what some investors
and consultants say could be a more enticing natural resource:
Iran's 80 million people, who have been all but cut off from global
trade and transactions in recent years.
"Iranians love to eat, consume and shop, and they have continued
to surprise domestic and international brands with their
resilience," said Ali Borhani, the founder of Incubeemea, a
Dubai-based advisory firm that works with multinationals looking at
Iran. "In a post-sanctions world, on the back of a multifaceted
economy beyond hydrocarbons and oil and gas, Iran can be the most
exciting frontier market."
European companies may have an edge on U.S. competitors at
first, lawyers say, because the European Union sanctions regime
hasn't been as restrictive, and U.S. companies tend to be more
wary.
But Mr. Borhani said Iranians are nostalgic for American
products, which may give U.S. multinationals an edge in the longer
term. Many Iranians remember driving Chevys, Cadillacs, Buicks and
Mustangs before the 1979 Islamic revolution.
"Tissues still in Iran are called Kleenex after 37 years," he
said, referring to the brand manufactured by the Irving,
Texas-based Kimberly-Clark. "There's a tremendous amount of brand
loyalty."
Adding to the potential, Iranian consumers have very little
debt, Mr. Borhani said. Some wealthier people have debit cards, but
there is no MasterCard, Visa or American Express in Iran and few
foreign banks are active there.
If foreign banks get back into Iran--a process expected to be
slow, given the billions of dollars in fines levied for sanctions
violations--consumer borrowing and spending could spur economic
growth that foreign investors could tap into.
Even under sanctions, Iranians spent $77 billion on food, $22
billion on clothes and $18.5 billion on outbound tourism in 2012,
Mr. Borhani said.
Despite the economic potential of a sanctions-free Iran,
lawyers, consultants and investors say they are looking at the
country with a dose of skepticism.
Under Thursday's framework deal, the parties have until June 30
to agree on the details. European Union, U.S. and United Nations
sanctions would then be withdrawn only if Iran meets its
transparency and nuclear-production commitments--and could snap
back into place if it doesn't. That means legal risks of doing
business in Iran will remain.
"Your investment becomes less valuable if Iran fails to hit
those targets or achieve those milestones," said Patrick Murphy, a
lawyer at Clyde & Co. in Dubai who has worked with traders and
companies dealing with Iran. "The worst-case is if sanctions are
reimposed because of noncompliance. You could run a risk
there."
Some foreign companies not involved in industries subject to
sanctions--especially European consumer-goods firms--have continued
operating in Iran despite growing sanctions pressure. Many have
been successful.
Paris-listed Groupe Danone S.A., for example, has a
long-standing joint venture that produces Damavand mineral water,
Iran's biggest bottled water brand. Danone increased its stake in
that venture to 70% from 40% in 2010. Danone didn't respond to a
request for comment.
Yet even for such companies, sanctions that effectively excised
Iran from the global financial system three years ago have caused
problems.
The Swiss food and beverage company Nestlé S.A. had to scale
back in Iran two years ago when it had trouble moving money out of
the country, Iranian traders and a banker told The Wall Street
Journal at the time. A Nestlé spokeswoman said the company had
around 530 employees in Iran and was there to invest for the long
term.
South African mobile phone operator MTN Group took a 49% stake
in Irancell in 2005, but weakness in the Iranian rial has hurt its
profit, and it has had difficulty repatriating hundreds of millions
of dollars of earnings there. MTN Group didn't return a request for
comment.
Etihad Airways recently said it would increase the frequency of
flights between Abu Dhabi and Tehran from three times a week to
daily.
The decision appeared to be an attempt to take advantage of
greater Iran-U.S. travel, in anticipation that sanctions would end.
Daily flights would give Iranians more direct access to dozens of
major U.S. cities, said Kevin Knight, Etihad's chief strategy and
planning officer.
U.S. sanctions are stricter than those imposed by Europe,
curtailing almost all dealings with the country. But even some U.S.
companies have started to scope it out.
Iranian companies in Dubai have received draft contracts to be
official resellers of Hewlett-Packard laptops in Iran, according to
Iranian businessmen. And late last year, Dubai-based managers of
Hewlett-Packard Development Company L.P. traveled to Tehran to
prospect the market and meet Iranian distributors, they said.
HP would be allowed to sell laptops to Iran under a U.S.
exemption for consumer electronics decided two years ago, but a
thaw between Iran and the West could ease the endeavor. HP declined
to comment.
In the event of a final nuclear agreement, lawyers and company
executives say the most likely scenario is a gradual but
significant inflow of foreign investment. Outsiders not already in
Iran will need time to research the market, find local partners and
understand the legal environment.
Iran is set up legally for foreign direct investment. Foreigners
are allowed to own 100% of their ventures and there are laws to
protect them, but the system hasn't been tested much during the
sanctions era.
"There is nothing we can do for the moment and nothing we intend
to do before the sanctions are lifted because we don't want to be
in breach of any sanctions," Albert Momdjian, the founder and chief
executive of SOKOTRA Capital Ltd., a Dubai-based private investment
firm focused on frontier markets, said Monday. "We're purely
scouting, doing our desktop due diligence in order to better
understand and feel the market without investing there yet."
Mr. Momdjian said the hospitality, tourism, logistics, food and
mining sectors in Iran looked particularly attractive.
"Everything needs to be developed," he said. "The question is to
remain focused and have the right local partners."
Benoît Faucon contributed reporting from London.
Write to Asa Fitch at asa.fitch@wsj.com and Nicolas Parasie at
nicolas.parasie@wsj.com
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