Concerns remain amid Iran's post-sanctions gold rush

03 February 2016

Rouhani oversees $40bn of contracts on tour of Italy and France

International companies have been quick to announce investments in Iran following the suspension of international sanctions against the Middle East country on 16 January.

President Hassan Rouhani rubberstamped over $45bn worth of agreements during his five-day tour of Italy and France, including a $25bn deal with Airbus to supply 118 aircraft to Iran’s beleaguered aviation industry, but there are still major concerns facing companies looking to establish a long-term presence in the Islamic Republic. 

The agreements, many of which are early-stage memorandums of understanding (MoU), are the fruits of negotiations with the Tehran government and Iranian companies in the run-up to the 16 January Implementation Day.

Investments in the aviation and automotive industry were long-predicted in the eventuality of sanctions being suspended, but long-term agreements in larger sectors such as oil and gas could take longer to materialise.

With US individuals and companies still subject to the remaining US-backed sanctions, European companies appear to have a significant advantage in re-entering the Middle East’s second largest economy.

But European and other investors will remain cautious on investing in Iran and it will take time to build confidence in the Iranian government and potential business partners.

The biggest risk for investors is in selecting the right local business partner and the relative weakness of the legal structure to handle disputes, according to London-based lawyer and Iran specialist Sarosh Zaiwalla.

“There is a new law in Iran that starting up any project requires a local partner. The legal structure is still not strong in Iran so, if there is a dispute, foreign companies will be reluctant to go to the Iranian courts,” Zaiwalla told MEED.

“Iran must now [push through reforms to] make sure it agrees to international arbitration in a neutral country. You won’t find an investor willing to invest $100m or more if his investment is not assured in a dispute,” he added.

Major deals announced since Implementation Day have largely been limited to companies based in Italy and France, which Rouhani visited in the first official European trip by an Iranian president since 1999.

The largest deal, worth an estimated $25bn, was signed with France-based aircraft manufacturer Airbus on 29 January. Iran Air agreed to buy 118 aircraft including 12 double-deck, wide-body Airbus A380s.

In addition, Airbus has signed an agreement with Iran’s Minister of Roads & Urban Development Abbas Akhondi to support the “development of air navigation services (ATM), airport and aircraft operations, regulatory harmonisation, technical and academic training, maintenance, repair and industrial cooperation”.

“The deal with Airbus is one of the largest foreign contracts ever signed in the history of the Islamic Republic,” Akhondi told reporters after the deal was announced. “We’d like to restructure Iran Air and bring it back to the market, [where] it can compete with other airlines in the region. Certainly we can do this within five to seven years.”

France’s Vinci Airports has signed a memorandum of understanding (MoU) with the Iranian government to expand and operate two international airports in Iran – Mashhad International and Isfahan International. The expansion of the two airports is part of Iran’s Roads and Urban Development Ministry projects, which were announced in October 2015.

Meanwhile Aeroports de Paris and Bouygues have agreed to assist in the construction of a new terminal at Tehran’s main Imam Khomeini International airport (IKIA). In October, MEED reported that the ministry was accepting letters of interest (LoIs) from major firms, including both French companies, for the $2.8bn construction of a second terminal at IKIA.

Peugeot returns

France’s Peugeot Citroen has signed an agreement with Iranian car manufacturer Iran Khodro to form a joint venture to produce vehicles in the Middle Eastern country.

The agreement marks Citroen Peugeot’s return to Iran after exiting the country in 2012 due to new sanctions. The company sold nearly half a million cars in Iran in 2011.

The second-largest deal signed during Rouhani’s visit to Europe came in the steel sector. Italy’s Danieli has signed agreements with a value of about €5.7bn ($6.2bn) for the supply of plants and machinery for steel production in the Islamic Republic.

It was also reported that South Korean steelmaker Posco plans to buy a $1.6bn stake in a steel project in Iran. The development reported by Reuters, has yet to be confirmed by Posco or the Iranian government,

Meanwhile, Iran is hoping to attract significant overseas interest in its oil and gas sector, which has suffered from underinvestment and a lack of modern technology since international oil companies (IOCs) left the country.

Comprehensive agreements to develop Iranian oil assets are likely to be slower to get off the ground than aviation, automotive and industrial manufacturing as Minister of Petroleum Bijan Zangeneh has yet to launch the details of the new Iranian Petroleum contract (IPC).

Italian oil and gas contractor Saipem has entered into two MoUs with Iran to discuss potential work on refineries and gas pipelines. The agreement includes revamping and upgrading the Pars Shiraz and Tabriz refineries, and cooperating on pipeline projects including IGAT (Iran gas trunk line) 9 and IGAT-11.

Meanwhile French oil major Total signed a contract with National Iranian Oil Company (NIOC) to buy as much as 200,000 barrels a day (b/d) of crude, according to CEO Patrick Pouyanne.

The new IPC structure if set to replace the unpopular ‘buy-back’ contracts which the Petroleum Ministry introduced in the 1990s to allow IOCs to develop oil fields. IPCs will allow IOCs to participate in the oil-production phase of the project rather than hand over the asset to National Iranian Oil Company (NIOC) execution.

The contracts were set to be launched at a conference in London on 22-24 February but this has now been cancelled with reports citing issues for Iranians in obtaining UK visas. International investments in the Iranian oil and gas industry – which could potentially eclipse all other sectors – are likely to be slower to get off the ground until the terms of the new contracts are revealed.

Further investments across industry sectors in Iran will be announced by European, as well as Asian companies over the coming months.

“The companies are rushing in because in Europe there is a practical recession and Iran is now an opportunity,” says Zaiwalla. “Many international companies have already started building contacts foreseeing that sanctions would be lifted.”

The real test will come when these agreements progress beyond MoUs and develop into long-term joint venture agreements with Iranian partners.

Major challenges remain for companies looking to invest in Iran, not least the reluctance of European banks to handle Iranian payments. The US-backed sanctions then remain still carry large penalties for banks dealing with sanctioned companies and individuals in Iran.

There is no doubt that Iran offers significant opportunities for those willing to risk long-term investments. Investors must be wary of the legal obstacles but, at the same time, Tehran needs to do its part to build up confidence and trust that business interests will be protected.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.