Iran: what now?

Iran: what now?
Hassan Rouhani presents a good, benign face of the Iranian system to the West.
By Aleksandra Jarosiewicz in Tehran and Warsaw April 27, 2016

After the headlines (“Iran Opens for Business”: New York Times), the excitement (“No bears in
Iran: Tehran stocks are up 25%”: CNN) and the wishful thinking (“How a Nuclear Deal Could Bring Democracy to Iran”: The Atlantic), comes the cold, hard reality.

The opening up of Iran after two decades as sanctions are gradually lifted is certainly a huge opportunity for investors looking for the next, and probably one of the last, big emerging market plays. With its 75mn mostly young, well-educated population, already functioning capitalist institutions, well-developed industrial and manufacturing sectors, topped off with vast oil and gas reserves (and the world’s best freshly baked bread), it is no surprise that Tehran is currently inundated by groups of visiting politicians, business people, bankers, investors and assorted opportunists all looking to get in on the ground floor. But the reality will almost certainly turn out to be much more complicated than these pioneers are hoping.

The ongoing row between the country’s president, Hassan Rouhani (pictured), and the Supreme Leader Sayyed Ali Hosseini Khamenei – illustrated by a somewhat bizarre (at least to Western ears) verbal spat in March over who is
a revolutionary and who isn’t – shows deep divisions at the top over how far and how fast the country should open up to the world. This will not make the road for investors smooth, easy or quick.

The other challenges stem from Iranian specifics. It may surprise many, but Iran achieved a great deal during its long period of isolation under sanctions. The country retained its theocratic political system, and managed to show how decisive and effective it can be when dealing with the region’s numerous conflicts. It is a past master of dealing with international intrigues and managing the tricky balancing act of playing the competing powers off against each other (it is 200 years since the “Great Game” between the British and Russian Empires battled for supremacy in Central Asia and Persia). Iran is aware of its strength and grudgingly suspicious of outsiders after bitter memories of generations of British, Russian and American interference in its political, social and religious affairs. While its companies might be starved of cash, the business owners are well aware of the value of their assets and have no intention of selling them off for a song – if ever.

Iran, therefore, should not be seen as just another emerging market, dead set on convergence with the West by unshackling market forces through neoliberal economic policies and slavishly willing to adhere to the rules invented by the West. Iran will plough its own furrow as it marches toward becoming the dominant political and most likely economic power in the Middle East.

Strange success story

The unexpected side-effect of the country’s isolation by the West is that Iran came closer to its utopian, centuries-long vision of autarchy. Iran became nearly self-sufficient in many areas of the economy, such as essential agricultural products as well as packaged food production and industrial machinery, to name a few.

Progress continued despite the sanctions, to the extent that today Iran is considered “a developed country”. It was the 16th largest car producer in the world in 2015, overtaking Turkey and Indonesia – although what it produces desperately needs innovation and investment. The country also has surprisingly decent infrastructure: Iranians can drive on over 15,000km of freeways and highways. In addition, the country’s railways now connect to Eurasia’s other major hubs to the north, east and west.

The country’s progress even during the sanctions period is reflected in its ranking of 69th spot on the UN’s Human Development Index, which puts it ahead of all its neighbours, including Turkey. It is a common practice in Azerbaijan and Turkmenistan to go for medical treatment to Iran, where health care is cheaper and of better quality; Tehran has become known as the ‘nose-job capital of Asia’ with thousands of specialists focusing on it.

The most surprising thing about these achievements is that they arose amidst 
a highly corrupted, unpredictable and non-transparent bureaucratic machine, an over zealous central-command system, and in the atmosphere of fierce competition over the country’s resources by different interest groups.

What this all means is that most Iranians, regardless of their political allegiance, can easily find reasons to believe in the country’s success. They believe their country is exceptional and deserves special treatment, and shouldn’t be forced to conform to what the West, China or Russia expects of it. From ancient times, Iranians have found their success in being apart from outsiders. As the ancient saying about Iran’s former capital goes: “Esfahan is neither East nor West”.

King of troublemakers

The Iranian theocratic elite seems to think that the world needs Iran more than Iran needs the world. They justify this attitude by pointing to the country’s effective foreign policy in managing the various disputes in its troubled neighbourhood.

Iran has had a hand, in one way or another, in many of the conflicts that have troubled the region in recent years. At the top of the list is Syria, where Iran supports President Bashar al-Assad. In Yemen, Tehran voices support for the Shia Muslim Houthis in the civil war against the Sanaa regime, pitting it against Saudi Arabia, which is militarily helping the government of President Abd Rabbuh Mansur Hadi. In Bahrain, Iran has historical links with that country's majority Shia population and indirectly supported protests against the Saudi-backed Al Khalifa monarchy. It has demanded Saudi Arabia stop arbitrarily executing, arresting and beating Shia clergy in the Shia-populated Eastern Province of Saudi Arabia. The Iraqi central government in Baghdad is Shia-dominated and relies heavily on Iranian help in its fight against the so-called Islamic State. Even the Kurdistan Regional Government in northern Iraq
is currently looking towards Tehran to help export Kurdish oil via Iranian territory, as Turkey has blocked routes to the north. In Lebanon, Iran remains committed to its creation, Hezbollah, even going so far as to build entire towns for that country’s militia just north of Israel.

Such a strong presence of Iran in the Middle East is certainly against the interests of the US and its regional ally Saudi Arabia. Iran’s enmity with the Sunni kingdom of Saudi Arabia exploded into the headlines at the beginning of this year after the Saudis executed a dissident Shia cleric, Sheikh Nimr al-Nimr, prompting Iran’s supreme leader, Ayatollah Ali Khamenei, to warn that Saudi Arabia would face “divine revenge” for the execution, which ultimately led to youth wings of the Iranian paramilitary Basij association ransacking the Saudi mission in the leafy suburbs of north Tehran.

“The conflict between Saudi Arabia and Iran is much deeper than any recent geopolitical shifts; it has its origin in the split within Islam after the death of the Prophet. They hate each other and see the other as an abomination. Cooperation on any issue is impossible... The best one can hope for is that a third party (probably non-Muslim state, but not the US or the EU) may occasionally engineer some pragmatic deals,” says Chris Weafer, a founding partner at Macro-Advisory. “Recall that in one of [Grand Ayatollah] Khomenei’s first speeches after 1979 he said that Shia either would gain control of the two holy places or he would ‘turn the desert to glass’.”

The conclusion is clear: Iran is a crucial player in the Middle East with a strong desire to establish its hegemony over the region. Iran is becoming an indispensable part of any new regional order and its position is likely to strengthen further as the lifting of sanctions bolsters the country’s capacity to assist its clients and friendly entities across the region. There’s a sound basis for the traditional Iranian pride.

Clash of visions

Any foreign investor interested in doing business in Iran cannot ignore the clash of visions held by the various factions in power, which signals the difficult trajectory that the country’s opening up will take.

Hassan Rouhani presents a good, benign face of the Iranian system to the West; he is the elected president and one of the men, along with Foreign Minister Javad Zarif, credited with reaching the nuclear deal with the West that came into force in January. Yet the most powerful person in this theocratic country is Supreme Leader Ali Khamenei: he is the representative of the most conservative section of the elite and a guardian of the revolutionary values. Rouhani served as Khamenei’s representative to the National Security Council for many years, which calls into question to what extent he can and will oppose his former master. The two have already clashed publicly since the nuclear deal was signed over whether the agreement conflicts with those revolutionary values, though it’s unclear to what extent such incidents represent a rift between Rouhani and the hardliners. Another major player is the Revolutionary Guard, which over time has transformed itself into the largest business conglomerate in the country, bar none.

The apparent disagreement between Rouhani and Khamenei shows that the direction and pace of Iran’s further development is still an open question amongst the elite. Supreme Leader Khamenei could be trying to put limits on the country’s opening up, by warning against further rapprochement with the West and urging a greater focus on developing the country’s economic and military strength. For the supreme leader, the risk is obvious: any new large-scale investment creates new power centres that could pose a threat to the existing political and social order.

Evidence of this can be seen across the capital Tehran, where religious forces have stepped up operations to clampdown on any sign of “Westoxification”, as the previous supreme leader, Ayatollah Khomeini, so memorably once described American influence in the country. In April alone, 7,000 new ‘morality police’ signed up to arrest women who don't wear the Islamic hijab correctly. In another instance, English shop signs across Tehran have been pulled down, with only Persian script being allowed in many places.

Thus, behind all the headlines, it’s clear that the country’s centuries-long suspicious approach to the outside world has not fundamentally changed, meaning there remain numerous question marks hanging over its future development. For the investors lining up to do business there, remember: when engaging with Iran, expect challenges and confusion. But the ‘bread’ could make it all worthwhile. 

Reasons to be careful

1: Transparency: Iran remains one of the most opaque countries in the global marketplace. Its governmental structure is such that transparency is difficult to find, while competing power centres in the upper echelons of the Islamic Republic push many needed resources from front and centre into the background.

2: Cultural: like many Asian cultures, doing business in Iran 
is anything but straightforward. First of all, Iranians take pride in their “bazaar” skills when trading – that is, always having the upper hand in them. While negotiating a deal, for example, your Iranian opposite number will not often understand making a deal for a deal’s sake, but will instead look for an underlying motive as to why you have said/done something. Quid pro quo doesn’t exist in the Iranian mindset, and you cannot build goodwill for goodwill’s sake, as the Iranian client will misunderstand your motives.

3: Societal: although gender equality is much more advanced than in, say, countries like Saudi Arabia, strict social guidelines must be adhered to, including the mandatory hijab for women. Overall, doing business in Iran is a much more comfortable affair than in other regional countries, but foreign business people must know well who their partner is before entering into any agreement.

4: Intelligence: as with any prospective country, doing business in Iran requires large amounts of due diligence. Companies that might seem watertight on first appearance could have serious fundamental flaws that renders any drawn-out negotiation process useless in the long run. Foreign business intelligence firms often hit brick walls when researching Iranian companies, as none have local representatives; and many of the ones that do, often have to use multiple sources which may provide conflicting information.

5: Connectivity: Iran has its own working week and shows no sign of conforming to Western norms. The Iranian weekend is on Thursday and Friday, with the week running from Saturday to Wednesday. The outcome of this is a loss of around 221 working days a year on average. The net cost to doing business for both Iranian companies and foreign enterprises from this runs into the hundreds of millions of dollars.

6: Religious: Iran is a deeply Islamic country with the current supreme leader and president of the country both being Muslim clerics; much of the senior ranks of government officials are actively religious people too. In addition, the state and mosque are deeply intertwined, with clerics having great control over the decisions of the populous. The recent municipal elections in the country reflect this, with large numbers of both the educated urban elite as well as the rural poor voting for specific religious factions over secular representatives. When doing business, one must be aware of the religious connotations of certain levers of power and to avoid running into problems with them.

7: Corruption: in Iran graft remains rife due to years of successive sanctions levied by several US administrations on the country, with each new round of sanctions forcing more previously lawful money underground. The net outcome of this is a siege mentality in Tehran, where large state and private businesses move money around in non-traditional ways, thus creating the conditions for corruption, which peaked during the time of high oil prices prior to 2014. During the former administration of president Mahmoud Ahmadinejad, corruption became so acute that many government officials began to publicly express concern about shows of lavish lifestyles in the Iranian capital, including the purchase of luxury vehicles by children of the ruling elite. It is widely reported that many business dealings with Iranian officials and private business- men involve a certain percentage of the final transaction having to go through a “third-channel”. This is not always the case, but has been a prominent feature of some deals, according to some foreign business people working
in the country.

8: Lack of standardisation: due to the ad-hoc nature of Iranian society over the past four decades, many people in the country have acted with what could be described as a laissez-faire attitude with regards to planning – everything from building construction to human resources do not act in what might be considered the proper way. Much like other developing countries, Iran enacts many regulations needed to meet international norms, though it fails to enforce the rules in most instances.

9: Banking: currently it is permissible to transfer money to Iranian banks, however, as the head of the Central Bank of Iran told the Council on Foreign Relations, Iran has struggled to develop new banking relations with Europe due to the latter fearing a backlash from American regulators. The US is still keeping its primary sanctions on Iran, which bar US nationals and companies from engaging in business with Iran, including prohibiting US banks from clearing Iran-related transactions in dollars.

10: Currency: as it stands, the free market exchange rate for the US dollar stands at IRR34,750. However, as most foreigners entering the country for business or pleasure reluctantly find out, the Iranian rial is a currency that hasn't been used in working circles for over four decades; the unofficial de facto Iranian currency is called the toman, which works with one less decimal point. This confusion of removing or adding one extra zero has cost foreign companies dearly over the years. In response to this unique inflationary turnaround, the previous Ahmadinejad administration intimated it would knock off the thousands to make the currency more usable. The Rouhani administration has roundly rejected the idea until, as it says, inflation remains at a much more stable level.