Journal of Political Risk, Vol. 1, No. 7, November 2013.

By Reza Yeganehshakib

Despite a tumultuous recent political history that includes revolution, war and sanctions, relations between Iran and the West are improving and Western investors are increasingly interested. But, Iran’s politics cause sanctions, and the economy suffers from inflation. Protectionist laws are on the books, and in some cases economic crimes are punishable by death. Regardless of warming relations with the West, Iran has in the past reneged on its agreements, and war is still a risk with non-Western bordering countries and regional powers. The Iranian Revolutionary Guard Corps (IRGC) has nationalized foreign investments in the recent past, and the politically powerful revolutionary foundations known as Bonyads control large segments of the most lucrative investment sectors.

Iran has experienced long-run increases in foreign direct investment interest since the 1980s, with major investors coming from Europe, Canada, Singapore, United Arab Emirates, and South Korea. The end of the Iran- Iraq war and the beginning of the era of reconstruction in 1988 opened the way. Foreign investments financed 485 projects worth US$ 34.6 billion from 1992 to 2009. Foreign direct investment in Iran increased 14-17% since 2011, about 70% of which went to Iran’s oil and gas industries.

During the last three years, as a result of intensified sanctions and failed domestic financial policies, especially subsidy reforms, Iranian currency lost about two-thirds of its value. Iran’s “flexible exchange rate” is highly fluctuating, which causes instability and severe insecurity for foreign investors. Because of their potential willingness to flaunt sanctions, Iran has increasingly approached Russia, China, and India to increase foreign investment.

Iran’s complex political structure is among the issues faced by potential foreign investors. The supreme leader is the ultimate decision maker, despite the country having an elected president and parliament. As the commander in chief, the supreme leader controls all security and military forces, including the militarily and economically powerful IRGC. The history of the IRGC has shown that they have the ability to expropriate foreign investments or cancel contracts in the name of national security. The IRGC and its economic empire do not answer to the government, but report directly to the supreme leader.

The supreme leader also supervises the economic activities of the revolutionary foundations and institutions know as Bonyads or Setads. There are several Bonyads that are active in numerous industrial sectors of the country such as oil and gas, auto manufacturing, shipbuilding, food production, and agriculture. Since they control massive industries in Iran, any foreign investor needs to be aware of their areas of influence, monopolies, and market sensitivities before investing.

Iran has passed several laws to promote and protect foreign investment. The biggest problem with these laws is their focus on encouraging rather than protecting investment. The laws allow the government to expropriate the investment, cancel the contracts, or even stop foreign investors from post-project repatriation of capital investments and accumulated profits. Iranian law typically recognizes national courts as the final decision maker in the case of disputes between the Iranian government and a foreign investor. Even if the investor goes to an international court, there are few if any procedures available to enforce the decision in Iran.

International sanctions since 2006, in general, and the United States unilateral sanctions against Iran since 1987, in particular, are among the most important obstacles for foreign investors. There are limited ways to cooperate and invest in Iran, while there are severe penalties for parties that break the sanctions. However, based on recent developments in US-Iran negotiations, particularly around resolving the nuclear issue, there are hopes in the political risk and investor communities that sanctions will be lifted in the near future. Many are developing contingency plans for Iran investments should the opportunity arise.

The danger of war is the other major political risk for foreign investors. Following Iran’s ambitious nuclear plans, there have been threats and the possibility of a military confrontation between Iran and the United States or Israel. However, based on cost-benefit calculations and analysis, a US-sanctioned military strike on Iran is improbable because of the likely impact on the world energy market.

Based on this analysis, it can be recommended to the Iranian government to maintain a fixed exchange rate and at the same time control inflation to create a safe and predictable environment for foreign investors. The Iranian government should also increase efforts to improve their relationship with the West, particularly with the United States, to facilitate the lifting of sanctions. The Iranian government should change investment laws such that regulations provide security for the future of investments, rather than merely encouraging investments. It is advisable that Iran starts enforcing international courts’ decisions and laws to provide a sense of security for foreign investors in case of difficulties with the Iranian government. The government should also restrict the IRGC and Bonyads’ involvement in economic affairs to establish an environment of equal opportunity for all investors.

Foreign investors should fully understand the political context of their investments in Iran, including Iran’s political structure and pillars of power, to ensure they negotiate with the right parties to maximize the safety of their investments. Investors must acquire precise knowledge of the sanctions against Iran to minimize the risk of legal consequences. Due to the value depreciation of the Iranian Rial, investing in exportable products is recommended.

Iran’s Economic Capacities

In recent history, foreigners have invested in Iran since the beginning of the so-called “era of reconstruction” after the Iran-Iraq war in 1988. Foreign investors have largely targed  oil and gas, petrochemicals, vehicle manufacturing, copper mining, food production, and pharmaceuticals. Foreign investments financed 485 projects worth US$ 34.6 billion from 1992 to 2009. The United States share of the total investment in this period was $1,040,344,000 while Europe’s share was $9,077,046,000.[1] According to statistics published by the Iranian government, foreign investment increased by 12% in May 2012 as compared to May 2011.[2] From March 19, 2012 to March 19, 2013, foreign investment increased by 17% and reached  $4,850,000,000.[3] Still, this amount is much lower than foreign investments in Iran’s neighboring countries. For comparison, Saudi Arabia attracted $12 billion, Turkey $12.4 billion, and the United Arab Emirates $9.6 billion of foreign investment in this same time frame (Figure 1).[4]

The oil and gas, petrochemical, and mining industries attracted 76% of the total foreign investment in Iran in 2012, with the oil industry alone attracting 70% of this amount.[5] According to United Nations Conference on Trade and Development (UNCTAD) statistics, Iran’s inward and outward foreign direct investment stock shows a 15% increase from 2011 to 2012, while the foreign direct investment flows show a 17% increase for the same period (Figure 2).[6]

Foreign Investors in Iran

The Iranian government shows minimum transparency in revealing the identities of foreign investors in the country. There are no concrete quantitative descriptions of foreign investments made in Iran. This might be due to the Iranian authorities’ fear from revealing the details of controversial contracts with foreign companies as well as foreign companies preference not to disclose any information about their deals with Iran due to the political sensitivity of the matter.[8] The only available data includes a general description of foreign investor countries published in different domestic newspapers in Iran. As of November 2009, European countries were the largest foreign direct investors in Iran. Their direct investments went into 130 projects, for a total of $5,273,305,000. This made up 61% of the total foreign investment in Iran. The biggest share among European countries belonged to Germany, which invested in 40 projects for the total of $2,237,922,000, the Netherlands, which invested in 5 projects for the total of $1,968,013,000, and France, which invested in 12 projects for the total of $451,334,000. The smallest European share belonged to Austria, which invested $264,000. After Europe, the next largest set of foreign investments belongs to Asian countries, which invested in 52 projects for the total of $1,855,416,000 (or about 27% of the total foreign investment in Iran). The largest Asian investors were Singapore, which invested in 3 projects for a total of $837,028,000, the United Arab Emirates, which invested in 5 projects for a total of $468,440,000, and South Korea, which invested in 3 projects for a total of $186,906,000. The smallest Asian investment belonged to the Republic of Azerbaijan, which invested in 2 projects for a total of $973,000. After European and Asian investors, North and South American countries were the next largest set of foreign investors in Iran. These countries invested in 7 projects for a total of $1,028,961,000. Canada is the biggest investor among them, and invested in 5 projects for a total of $1,007,181,000, which is 98% of the total investment by the countries in this group (Figure 3).[9]

In recent years, particularly after the intensification of sanctions, Iran has approached Eastern countries for foreign investment at an unprecedented pace. This trade policy has been known as the “Easternization” or “Asianization” of the Iranian economy.[11] There is also a revival in Build-Operate-Transfer (BOT) contracts with foreign countries. The Iranian government has plans to organize several conferences in different countries to encourage foreign investment in Iran, and upcoming events are supposed to take place in China, Russia, India, Japan, Turkey and South Africa.[12]

Exports, Energy, Subsidies, and Inflation

Shortcomings in the Iranian economy have intensified in recent years. The country has recently experienced a decline in its main export, crude oil.[13] Due to the intensification of United States sanctions against Iran, the country’s oil output decreased from 2,525,614 barrels per day to 1,828,978 barrels per day since the end of 2010.[14] Yet, this did not shock the world energy market, as the loss of 696,635 barrels per day of Iranian oil was offset by growth in United States production, the recovery in Libyan production, and increases in production in Saudi Arabia and elsewhere in OPEC.[15]

Iran has one of the world’s largest gas reserves. The Iranian natural gas reserve (at the end of 2012) was 1,187 Trillion Cubic Feet (Tcf). In comparison, the entire Russian Federation’s reserve is 1,162 Tcf.[16] In 2012, Iran’s natural gas production increased by 5.4% over that of the previous year. However, Iran’s share in the global gas trade market was only 4.8%, ranking 66th.[17]

Nuclear energy in Iran makes up a mere 0.3% of the country’s total energy supply. However, the country’s heavy investments in building nuclear power plants have yielded some dividends, and Iran’s consumption of nuclear energy increased by 1252.0% from 2011 to 2012.[18]

One of the Iranian economy’s biggest issues has been inflation (Figure 4). Inflation soon turned to hyperinflation after the former Iranian President, Mahmoud Ahmadinejad, embarked upon a set of subsidy reforms. Based on these reforms, the government eliminated subsidies on goods, and instead started to pay cash subsidies directly to individuals. The inflationary impacts of these reforms on the Iranian economy were catastrophic.[19] The cumulative impact of the sanctions and domestic economic decisions of President Ahmadinejad contributed to the constant increase of domestic inflation as well as a loss for the Iranian currency of two thirds of its value as compared to reserve currencies.[20] The annual inflation for the period ending on March 20, 2013 was 32.3%, and is quickly approaching 40%.[21]

As should be clear from the preceding, political risk to investments from inflation in Iran is very high.  As will be presented in more detail below, investors in Iran should have a deep understanding of how the state works, the practical application of laws and regulations, and the influence of government and other power holders in order to mitigate risk to investments vulnerable to inflation.

Foreign Currency Exchange Rates

Perhaps one of the most important factors that foreign investors must consider prior to investing in Iran is the instability and discrepancies of exchange rates. Iran has at least two exchange rate systems: there is the official rate provided by the Central Bank, and a flexible exchange rate. The latter is the major source of foreign currency in the Iranian market. For example, the Central Bank of Iran sells one US dollar for about 25,000 Rials, while its market value is about 30,500 Rials. The dramatic fluctuation in the exchange rate in Iran, often within a single day, has been one of the issues that foreign investors, importers, and exporters face in their economic activities.[23] These fluctuations create insecurity, particularly for the foreign investors since these instabilities make it difficult or impossible to plan, calculate profit, and estimate turnover rates.

Political Structure and Influence

The Islamic Republic of Iran has a complex political structure. Iran is not an absolute theocracy like the Afghan state of the 1990s under the Taliban. Neither is it a tribal or clan-based Islamic monarchy like Saudi Arabia. It is not a liberal democratic state such as the United States or the Republic of France.[24] The “supreme leader” is the ultimate authority in Iran and is elected by the “Assembly of Experts of Iran.” Clerics with high degrees in Islamic statute are the members of this council that elect the supreme leader from the highest-ranked Shi’ite clerics and experts in Islamic law.[25]  This system of electing a cleric leader is called the governance of the jurist, or Vilayat-e Faqih in Shi’ite law. However, the governance of the jurist, as it is practiced in the Islamic Republic of Iran, is totalitarian and absolutist (Velayat-e Motlaqheh). It has not been approved by numerous high-ranking Shi’ite clerics  (Mujtahids), including Seyyed Hassan Imami, Seeyed Kazem Shariatmadari, Hosein-Ali Montazeri, Seyed Hassan Tabatabaee-Qomi, Seyyed Ali Sistani, and Mar’ashi Najafi.[26]

Iran has a president that is elected by the direct vote of the people. The president is the head of the government, and chooses the ministers in his cabinet.[27] All nominees for election in Iran that require the direct vote of the public must be approved by the Guardian Council. This council consists of twelve members: six lawyers elected by the Consultative Assembly and six jurists (Faqih) directly assigned by the supreme leader. The Guardian Council reviews the Islamic Consultative Assembly’s legislation to ensure compliance with the Iranian Constitution and Islamic law. Bills can only become law after receiving council approval. [28]

The legislative branch of the ruling system in Iran consists of the Islamic Consultative Assembly or the Islamic Parliament of Iran and the Expediency Discernment Council. The Consultative Assembly members are elected by the direct vote of the people and their function is similar to the members of parliament or the House of Representatives in the West.[29] The supreme leader assigns the members of the Expediency Discernment Council. They are normally selected from a pool of Iranian officials and experts in various fields such as economics, law, defense, and public health. The council’s major responsibilities include providing the supreme leader with advice, preparing the general policies of the state, presenting them to the supreme leader to be signed into law, and mediating any conflict between Parliament and the Guardian Council. In case of disagreement, the Expediency Discernment Council has ultimate decision-making power.[30]

The supreme leader assigns the chief of the judicial branch of the state in Iran. The supreme leader chooses him from among the highest-ranked clerics specializing in Islamic jurisprudence. The chief of the judicial system oversees the activity of all the judges and the courts, including those that accept the cases of government officials, parliament members, police, military, intelligence personnel, journalists, and political activists.[31] As mentioned previously, one of the Iranian courts’ responsibilities is to resolve any conflicts between foreign investors and the Iranian government. Since the supreme leader chooses the chief of the judicial branch who chooses the judges, the head of the intelligence, and chiefs of the security forces that do the investigations for any case, it can be inferred that no court would likely make a decision that contradicts the understood intentions of the supreme leader. Foreign investors who establish and maintain a good relationship with those close to the office of the supreme leader will likely enjoy a competitive advantage.

As mentioned earlier, the supreme leader directly choses the six clerics who sit on the Guardian Council, while the other six members of the Council are lawyers and chosen by the parliament. However, since candidates for parliamentary election must pass the Guardian Council’s investigation before running for election, it can be inferred that the supreme leader (who is also the commander-in-chief of all the armed forces) indirectly chooses the candidates in any election. In the recent Iranian presidential election, the only non-hardliner candidate was Hassan Rohani. Particularly after eight years of Ahmadinejad’s presidency, everyone in Iran was aware of the popularity of a moderate candidate and his high chance of winning votes.[32] If the supreme leader let a moderate presidential candidate pass through the Guardian Council filter and allowed his election via a relatively fair election, it may be an indication that the leader’s intention may include any of the following: improving Iran’s relationship with the United States and Europe, resolving the nuclear issue, arranging for the lifting of sanctions, and encouraging foreign investment. However, false or aborted Iranian openings to the West have been common over the past 30 years, and the latest may be no different.

Understanding the complex structure of the state in Iran is crucial for foreign investors. Negotiating with the right authorities may boost the sustainability of investments and accumulated profits. A successful foreign investor is one that has a good understanding of the pillars of power in Iran, so as to protect the future of the investment.

Iran’s Revolutionary Guard Corps (IRGC)

One of the potential challenges faced by foreign investors is the involvement of the Iranian Revolutionary Guard Corps (IRGC) in economic affairs.[33] Since its establishment on April 22, 1979, the IRGC has played a significant and active role in guarding the Islamic Revolution and its interests.[34] Particularly after the end of the Iran-Iraq war in 1988 and Iran’s entry into  reconstruction, the IRGC diverted a significant portion of its expertise, manpower, and wealth to rebuild the post-war country.

The history of the IRGC’s engagement in economic affairs demonstrates that the IRGC has always pursued an active role in the Iranian economy. The most important arm of the IRGC in economic affairs is Khatam- al-Anbiya’ Reconstruction Headquarters (Gharargah e Sazandegi e Khatam al-Anbiya’). Over the last 22 years, the headquarters have taken part in several important and large-scale projects in numerous fields, such as constructing dams, the metro, tunnels, mines, massive irrigation systems, and oil and gas infrastructure.[35] The headquarters are very important and its commanders are highly experienced in economic affairs. President Mahmoud Ahmadinejad even appointed Brigadier General Rostam Ghasemi, the commander of Khatam al-Anbia’ troops, as Iran’s Minister of Oil on August 3, 2011. An overwhelming majority of the Iranian parliament approved Brigadier General Ghasemi as the Minister of Oil, with 216 voting yes, 22 voting no, and 7 abstaining. [36] Moreover, several massive oil and gas projects were given to IRGC contractors. The most important and the largest of these projects is the expansion of phases 13, 14, 19, 22, 23, and 24 of the South Pars Gas fields. Khatam al-Anbia’ Headquarters contractors replaced Turkish companies that were reported by the Iranian press as unable to fulfill a 2008 contract.[37]

Replacing foreign companies in the South Pars Gas Fields project was not the only instance of the IRGC taking over a foreign company’s contract. IRGC troops occupied Imam Khomeini International Airport on May 15, 2004 to prevent the Turkish-Austrian Company TAV (Turkish Tepe and Akfen, and Austrian Vie companies) from operating the airport. Although then-president Mohammad Khatami and the speaker of parliament opposed the IRGC action, they could not overcome the power of the IRGC, and as a result, the foreign companies were forced out of the country. This incident caused the Iranian parliament to ask for the Minister of Transportation’s removal from office. As of today, the airport is operating under the direct security supervision of the IRGC, and is managed by the Iranians. There are frequent complaints about poor management and customer service.[38]

Moreover, an IRGC consortium, Towse’e E’temad-e Mobin, purchased one of the largest government-owned companies, the Telecommunication Company of Iran (TCI), in the largest deal in the history of the Iranian stock market. The company sold for $7.8 billion.[39] The purchasing consortium consisted of three companies: Sarmay-e Gozari-e Towse’e E’temad Company, Shahriar-e Mahestan Company, and Sherkat-e Gostaresh-e Electronic e Mobin Iran. The first two companies are owned by the IRGC Cooperation Foundation (Bonyad-e ta’avon-e Sepah), and the last is owned by The Execution of Imam Khomeini’s Order Foundation (Setad-e Ejrayee-e Framan-e Hazrat-e Imam).[40] Since September 28, 2009, the consortium is the owner of 51% of the TCI; IRGC has been both the owner and operator of the company.[41] As a result of this deal, all foreign companies that intend to invest in Iran’s telecommunication industry must obtain the IRGC’s approval and work under their supervision.

The IRGC has been accused of illegal activities in the Iranian ports are their management. There are allegations against IRGC troops of attempting to benefit from the  illegal trafficking of goods. The claims are sufficiently public as to make the commander of the IRGC, General Mohamad-Ali Ja’fari, feel that it was necessary to publically disclaim his troops’ involvement in smuggling.[42]

According to sources close to the IRGC, in spite of the hopes for the IRGC to play a smaller role in the Iranian economy after electing moderate Hasan Rohani as the president, the IRGC is determined to play a more active and influential part in the country’s economy as well as in other arenas like culture, politics, and the military.[43] Any foreign investor who has the intention of investing in Iran should be aware of the IRGC’s power and ability to take over contracts. Therefore, investments for which approval was obtained from the IRGC or its commander in chief, the supreme leader of the Islamic Republic of Iran, will likely be more secure than investments without such approvals.

Revolutionary Foundations (Bonyads)

There are several foundations in Iran whose economic activities are not controlled by the government. Instead, and similarly to the IRGC, they report directly to the Supreme Leader. Government and the Parliament do not have any control over the businesses owned by these foundations, and they are not audited. They rarely if everrelease information about their revenues and taxes. These foundations typically own several corporations and are active in different sectors such as agriculture, food production, oil, gas, and housing.[44] Unlike the IRGC and in contrast to their earlier activities in the first few years after the Islamic Revolution of 1979, these foundations are incapable of taking over contracts and investments of foreign investors. However, due to their possession of several giant corporations in Iran, foreign investors, depending on which sector they want to invest in, may have to deal with these entities instead of the Iranian government. The largest and most influential foundations are Bonyad-e Mostazafan, Bonyad-e Barakat, Bonyad-e Shahid, Astan-e Quds-e Razavi, Bonyad-e Banzdah-e Khordad, Setad-e Ejraee Farman-e Hazrat-e Emam, and Komiteh Emdad-e Emam.

Iranian Law and Regulation Relevant to Foreign Direct Investment

Most Iranian lawmakers are torn between providing privileges to domestic business constituencies, and facilitating investment more broadly by providing for a secure legal and contractual environment for all investors.[45] The Iranian government provides domestic investors with incentives such as providing foreign currencies at “the official rate” and banning the import of goods already manufactured in Iran. These protectionist measures advantage domestic producers, make foreign investment in Iran insecure, eliminate a competitive economic environment, encourage people with links to the authorities to use subsidized foreign currencies to import goods, and incentivize fake investment proposals.

While domestic business interests seek and achieve advantages in Iranian law and practice, many officials have bucked this trend to encourage foreign investment in the country. After the Iran-Iraq war ended in 1988, foreign investment was seen as key to rebuilding the country’s economy because the Iranian government under President Hashemi Rafsanjani had several ambitious construction and development plans such as building new dams, refineries, petrochemical plants, railroads, and factories. All these massive projects required several billion dollars of investment that the Iranian government could not afford alone.[46]

Iran’s government has passed several laws and regulations to facilitate foreign investment. The most important of these laws is the Foreign Investment Promotion and Protection Act (FIPPA), including 25 Articles and 2 Notes, and enacted by the Islamic Consultative Assembly in its March 10, 2002 session. The initial part of Articles (1) and (2), Paragraph (c) and (d) of Article (2), Paragraph (b) of Article (3), and Note (2) of Article (17), were approved by the Expediency Council in its meeting on May 25, 2002.[47]

While this act facilitates the process of investing in Iran, it has some obscurities that may cause insecurity for the future of foreign investments. According to Article (2) Paragraph (b) of FIPPA, foreign investment is allowed as long as it “does not threaten the national security and public benefits, and deteriorate the environment; does not distort the country’s economy and impose unfair implications on products based on local investments.”[48] However, there is no strong and precise definition of “national security” or what may impose a threat to it in Iranian law. As a matter of fact, “threatening national security” is vague, and has been used by the Iranian judicial system to suppress nonconformist voices in Iran, and could be used against foreign business as well.[49] For instance, based on the Islamic Penal Code of the Islamic Republic of Iran, Chapter 9, Article 286, revised on April 21, 2013, whoever commits a crime against national security or causes tribulation to the economic system of the country is the “destructor on Earth” (Mofsid fi al-Arz) and “should be executed.”[50] However, the definition of “tribulation to the economic system” is not clear in the law. It seems that as this law has been used to confiscate corporations’ property and capital in the past, it is probable that it can be used for the same purpose against foreign investment in the future. [51]

Based on the same Article of FIPPA, Article (2), Paragraph (b), foreign investments are forbidden if they “impose unfair implications on products based on local investments.” This is clearly protectionist and will likely create problems for foreign capital invested in the manufacturing and production sectors. Consider a scenario in which a foreign investor started manufacturing a machine in Iran. Manufacturing such a machine may require importing several parts, such as parts A and B.  If an Iranian company starts manufacturing the same or relatively similar parts to part A, Iranian law could require the foreign company to stop importing part A, while they could continue importing part B. This may cause problems between the foreign investor who already had contracts with a foreign supplier for importing part A, or force the investor to buy inferior Iranian parts from a price or quality standpoint.

Article (9) of FIPPA opens the door for the Iranian government to expropriate or nationalize foreign investments. According to this Article:

“Foreign Investments shall not be subjected to expropriation or nationalization, unless for public purposes, in accordance with due law, in a non-discriminatory manner, and upon payment of appropriate compensation on the basis of the real value of the investment immediately before the expropriation.”[52]

As it is described in this section, if the authorities come to the conclusion that a particular foreign investment should be expropriated or nationalized for the benefit of the public, the law does not stop them. The law also has provisions to compensate damages to the investor caused by expropriation or nationalization. Note (2) of this Article denotes “the settlement of disputes”:

“Article (19): Disputes arising between the Government and the foreign investors in respect of the mutual obligations within the framework of investments under this Law, if not settled through negotiations, shall be referred to domestic courts, unless another method for settlement of disputes has been agreed under the Law for Bilateral Investment Agreement with the respective Government of the foreign investor.”[53]

This Article considers “domestic courts” as the final reference for the settlement of disputes, including disagreements arising as a result of expropriation or nationalization. Will the Iranian courts’ decisions be based on local Iranian interests, Iranian laws that protect and benefit the public, or on an unbiased decision that guarantees fair compensation grounded in international market prices? These are some of the insecurities that this law creates for foreign investors.

Of course, a foreign investor can take their complaint to an international court. According to Steven Goldberg, a Los Angeles-based trial attorney specializing in commercial litigation and international law, foreign investors can file a complaint in an international court; however, if an international court makes a decision or issues a verdict, there are no grounds to enforce it in Iran.[54] This may explain why the strength of Iran’s investor protection index is much lower than the regional average in the Middle East and North Africa.[55]

Article (13) of FIPPA defines the restrictions of transferring capital investments and accumulated profits of foreign investments abroad:

“Article (13): The original foreign capital and the accrued profits, or the balance of capital remaining in the country subject to a three month prior notice, after fulfillment of all obligations and payment of legal deductions, and upon confirmation by the Minister of Economic Affairs and Finance, shall be transferable abroad.”

According to this Article, the transfer of capital investment and its profits abroad is not possible without the approval of the Iranian Minister of Economic Affairs and Finance. The criteria for the minister to make a decision are ambiguous. This may impose a risk to foreign investors who wish to transfer revenue investments abroad. For instance, if a war were to break out, and a foreign investor decided to transfer capital investment and accumulated profits abroad, he or she cannot proceed until authorized to do so by the Minister of Economic Affairs and Finance. Foreign investors should be wary of how long this process may take before considering investment in Iran.

Although there are issues in FIPPA in terms of providing security for the future of foreign investments, this law facilitates the process of investment in Iran. There are several tax incentives that have been created to attract foreign investors. For instance, 80% of the revenue of production units and mining industry in developed areas are exempt from taxation for four years. Likewise, 100% of the revenue of production units and mining industry in underdeveloped areas are exempt from taxation for ten years.[56] The law also states that the income derived from all agricultural and horticultural activities, animal rearing, fish farming, beekeeping, poultry husbandry, sericulture, hunting and fishing, and revival of pastures and forests, are exempt from paying tax.[57] Moreover, FIPPA obliges different organizations and governmental bodies to cooperate with foreign investors to provide them with fast services such as issuing visas, transferring funds, assessing blueprints, and broadening the area and types of investment, including Direct, Buyback and BOT.[58]

International Sanctions

It is no surprise that sanctions are among the most perilous threats to foreign investment in Iran. These sanctions are nothing new in the Iranian economy. Since 1979, Iran has been subjected to different types of sanctions. The types, extent, and limits of sanctions have fluctuated, depending on the state of Iran’s relationship with the West.[59] For instance, the sanctions on exporting some communications equipment and software, such as laptops and mobile phones, to Iran have been lifted by the United States government, while there are talks about the West allowing Iran to resume the use of Society for Worldwide Interbank Financial Telecommunication (SWIFT) services in the near future.[60]

Sanctions contribute to inflation and Rial devaluation since the embargo raised the cost of goods, especially imported materials for Iranian industries, manufacturers and producers. The supply of goods decreased as a result of sanctions; this increased the cost, and thus, increased inflation.

There are unilateral sanctions imposed by individual countries such as the United States or England, as well as sanctions imposed by international bodies such as the United Nations Security Council or the European Union. The United States imposes the most comprehensive and toughest unilateral sanctions. According to Erich Ferrari, a Washington D.C.-based lawyer specializing in United States trade sanction law and the author of the Iranian Transactions Regulations Practice Guide:

“From a U.S. Perspective, pursuant to Executive Orders 12957, 12959, and 13059, no investment is allowed in Iran. The Iranian Transactions and Sanctions Regulations codify those prohibitions in Subpart B of 31 CFR Part 560. In particular, 31 CFR 560.207 prohibits any investment after 1995 in Iran. In addition to these prohibitions, there are secondary sanctions that can be imposed by the United States upon parties in other countries who have certain dealings with certain parties in Iran. These secondary sanctions are primarily focused on those providing support or processing significant transactions on behalf of designated parties in Iran (designated pursuant to Executive Order 13382), or in relation to a variety of industries including Iran’s Energy, Shipbuilding, and Shipping Sectors, trade in certain precious and other types of metals, insurance sector, and Iran’s automotive sector. These sanctions are primarily found in the Iran Threat Reduction and Syria Human Rights Act of 2012, the Iran Freedom and Counter-Proliferation Act, Section 1245 of the National Defense Authorization Act of 2012, and the Comprehensive Iran Sanctions Accountability, Divestment Act of 2010.”[61]

One should keep in mind that not all of the sanctions are due to Iran’s nuclear program. There are several other sanctions, such as those imposed by the United States Congress and the European Union, that are the result of allegations of Iran’s violation of human rights.[62]

Fear of the United States persecuting companies and individuals for non-compliance with US-imposed sanctions are one of the main obstacles to foreign investment in Iran. In theory, United States investors may ask the Office of Foreign Assets Control (OFAC) in the United States Treasury Department to issue a permit for investing in some restricted fields in Iran. However, until now, OFAC has issued permits limited to the shipment of aircraft parts for United States-manufactured civilian aircraft in Iran to ensure the safety of such aircraft. Based on OFAC regulations, the main areas of authorized trade include food; medicine; medical devices; and hardware, software, and services relating to personal communications.[63] Yet, based on recent developments in Iran’s negotiations with the United States as a result of Hasan Rohani’s visit to New York in September 2013, there is the possibility of eventually lifting these sanctions.[64]

Military Confrontation

The danger of war between Iran and the West or Israel is another potential threat to foreign investment. Even if relations between Iran and the West improve, this may have the second-order effect of causing or lifting a constraint on the Iranian military against other potential foes. As global alliances shift and regional powers rise, military tensions between Iran and neighbors or regional powers, including Saudi Arabia, Iraq, Pakistan, Russia, China, or India, is not inconceivable in the near or distant future.

Israel has threatened to attack Iran if negotiations drag on for too long or fail to end Iran’s nuclear program. President Obama has also mentioned that “all options are on the table.”[65] It appears “all options” signifies that the United States has a firm plan to attack Iran’s nuclear facilities with conventional weapons, especially recently-improved bunker-buster bombs, while preparing a plan that includes using tactical nuclear weapons against Iranian military and nuclear sites.[66] A military confrontation may significantly raise oil prices and stop the flow of capital and goods in the entire region, particularly around the Persian Gulf and Strait of Hormuz.[67]

Conclusion and Recommendations

The major political risks for foreign investors in Iran include conflicts of interest with huge economic empires in Iran like IRGC corporations, Revolutionary Foundations or Institutions, and expropriation as a result of being considered a threat to Iran’s National Security. The danger of a war appears to be less probable, but definitely more catastrophic, considering the negative impacts of the conflict on the regional and global economies. Sanctions remain a real blockage and threat to foreign investment, and even if removed, could be reimposed for a multitude of reasons, including abuse of human rights. Foreign investors are highly encouraged to become familiar with the political structure of Iran to ensure negotiation with the right parties and improved security and sustainability of investments. Investors should consider different categories of sanctions, likelihoods of change to these sanctions in the future, and operations of OFAC.[68] Despite all of these potential difficulties, investment in Iran is still possible and lucrative for certain countries and certain products.

Iran would benefit economically if it improved its attractiveness to foreign investors. Some measures it can take are:

1-Practice a fixed exchange rate system similar to that of China.[69] The flexible exchange rate, as it is practiced in Iran today, is too voluble. The fluctuations and instability in the flexible exchange rate in Iran over the last three years have discouraged foreign investors. The implementation of a fixed exchange rate policy would put a lot of pressure on the Central Bank, since it has to inject an abundant amount of foreign currency into the market. However, since Iran has oil revenue and considerable foreign currencies in reserve, it is possible for the Central Bank to afford such a policy.[70] The fixed exchange rate may initially cause the creation of a black market for foreign currencies, but soon, this will vanish if the government continues the supply of foreign currencies to decrease the demand. In other words, to raise the Rial’s value, the Iranian government can create a demand for it by imposing a fixed exchange rate and injecting ample foreign currencies into the market for Rials.

2- At the same time, the Iranian government must take measures to decrease inflation, because inflation makes it harder for the Central Bank to keep the Rial’s value above that of foreign currencies. The lower the Rial’s value due to high inflation, the harder for the Central Bank to balance the Rial against the value of foreign currency. Iran’s Central Bank should also print Iranian currency at the rate of economic growth, and not more. There is already too much Iranian currency chasing too few goods in the Iranian market, and that dramatically decreases the Rial’s value.[71] Subsidy reforms initiated by President Ahmadinejad made the Rial plentiful in a market with low demand. Since demand pulls and supply pushes inflation, huge supplies of Rials through cash subsidies increased inflation and lowered the value of the Rial.

3- Iran must resolve the sanction issue to enable lucrative trade with the West. Iran can resolve the nuclear issue, especially with the United States, through direct talks that yield tangible results. It is necessary to make compromises, particularly by promising and then fulfilling promises to cease 20% uranium enrichment and allowing international inspectors to visit suspicious sites such as Fordo and Parchin.

4- Iran should change investment laws in a way that provides security for foreign investors and unbiased enforcement of contracts. Currently, the laws provide several incentives while ignoring the security and sustainability of foreign investments.

5- The Iranian government must provide appropriate legal grounds for the enforcement of international courts’ decisions so that foreign investors believe they will receive fair compensation in case of nationalization, expropriation, or cancellation of contracts.

6- The rulers in Iran must restrict the economic power of the IRGC and Bonyads, and end their monopolies. This will create an environment of equal opportunity in a competitive market suitable for foreign investment.

There are also several ways that foreign investors can increase the security of their investments in Iran:

1- Foreign investors should have a good understanding of Iran’s pillars of power. Before transferring capital to Iran, foreign investors should ensure that they negotiate with the right people who have real power to make decisions and guarantee the return of invested capital.

2- Foreign investors should ensure that they meticulously comply with the sanctions against Iran, receive necessary permits, and find lawful and secure channels to transfer funds before making any investment.

3- Based on current trends of Rial devaluation, it appears that investing in Iranian industries where final products will be exported abroad is a good option. Since the value of the Rial is low, the investor’s capital has good value in Iran’s market. Stabilizing exchange rates creates the predictability that investors need.

Reza Yeganehshakib  is a Ph.D. candidate specializing in World and Middle Eastern history at the University of California, Irvine (UCI). He received a B.S. degree in Chemical Engineering from Iran Azad University, and an M.A. in history from UCI, where he serves as a Research Associate at the Samuel Jordan Center for Persian Studies. Mr. Yeganehshakib is a member of the Middle East Studies Association and the International Society for Iranian Studies. He has affiliated with the Persian Language Institute at California State University, Fullerton, and interned at the National Iranian Oil Company. Dr. Anders Corr provided editorial oversight for this article.

JPR Status: Working Paper.

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