The economy in the Islamic republic is still largely state-owned, with much of its ‘privatised’ capital in the hands of regime-affiliated organisations

As the Hassan Rouhani government woos western capitals in anticipation of a nuclear deal and the end of sanctions, foreign investors eying opportunities in Iran would do well to remember the lessons from the economies of the crumbled Soviet Union circa 1991 or gaizhi-era China over a decade later: strengthen your legal team, treat trust like a commodity, and beware of cephalopods.

Since the administration of economically pragmatic President Akbar Hashemi Rafsanjani, Iranian governments have attempted to sell large portions of the mostly state-owned economy to “the real private sector.” But after trying out a range of ideological strategies and transferring large volumes of capital, over 80% of it ended up in the tentacles of organizations linked to the regime: banks, military enterprises, religious foundations, pension funds and populism-driven welfare projects, according to Princeton University scholar Kevan Harris.

Far from entering a green field of opportunities, as some members of the Rouhani administration would have them believe, foreign investors will have to reckon with around 120 pseudo-private entities that by the estimates of former deputy industry minister Mohsen Safai Farahani account for half the country’s gross domestic product.

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“The quasi-governmental players are powerful and like octopuses over the Iranian economy,” says Marvin Zonas from the University of Chicago’s Booth School of Business. “Nonetheless, major foreign firms will work out relations with many of them which are eager for greater efficiencies… But the underlying culture is not likely to change anytime soon. Nor is the country’s closed political structure.”

Facebook Twitter Pinterest Iranian customers watch model cars of the joint assembly lines of Iran’s SAIPA and China’s Brilliance Auto in Tehran, Iran, on 19 May 2015. SAIPA, Iran’s second largest carmaker, launched two assembly lines last month in cooperation with China’s Brilliance Auto. Photograph: Halabisaz/Halabisaz/Xinhua Press/Corbis

Still, Iran is home to dozens of foreign firms that have tackled the intricacies of the local business environment. Following the suit of manufacturers and engineering firms from Turkey and China, whose governments never fully implemented the sanctions regime, South Korea’s Samsung and a several European automakers restarted their activities in Iran, taking advantage of sector-specific exemptions announced by the United States after the start of the nuclear negotiations in 2013.

Most international banks are unlikely to touch Iran-based transactions as long as the sanctions on the country’s financial system remain in place, so companies like Chinese computer manufacturer Lenovo or French carmaker Renault rely on oil-for-product swaps and other types of barter. While these measures help meet the immediate needs of a consumer market starved for foreign products, the involved firms are often slated by the Iranian press for cutting disadvantageous deals that hinder the country’s long-term economic prospects.

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Returning emigrants, who have been trickling back into Iran after the last presidential election, have also made exploratory investments, but many report struggling against a culture of corruption and distrust. In an interview for an article on business culture in the Islamic republic, a veteran corporate lawyer in Iran told Tehran Bureau that breach-of-contract cases have mushroomed in recent years, raising the legal costs of business transactions.

Irregularities on the Tehran Stock Exchange (TSE), populated mainly by large industrial holdings co-owned by pseudo-private entities, are also common. Last month, 43 individuals bought up 18 million shares of Mobin Petrochemical Company on a single day of trading, causing share prices to rise by over 30%. A parliamentary committee later cancelled the transaction, which TSE managers said was caused by “defects in stock trading software.”

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Andreas Schweitzer, CEO of the Swiss-Iranian consultancy Arjan Capital, says he employs a disproportionately large legal team to address the “special circumstances” of the Iranian business environment. “You have to look at Iran as a Chinese or Russian economy that is highly state-owned,” he says. “You have to make a decision if you accept this. If you do, you have to adjust yourself. We don’t believe that one should go to Iran with just a little bit of business, because the cost is too high.”

When the government controls most of the economy, “You cannot prevent that big buyouts are made to government entities. One can’t blame the system as such - one can only privatise again,” Schweitzer says. “I don’t think the government is getting the best value for its assets. If this is the goal, and if one wants to attract money from western investment banks, the process should be competitive.”

Schweitzer’s business activities in Iran began eight years ago, with a wind farm construction project in the country’s northwest. The renewable energy sector was exempt from sanctions and wind was a topic of national interest, allowing Schweizer and his partners to access subsidized loans. Together with an Iranian co-investor based in Tabriz, they approached now-Energy Minister Hamid Chitchian, a former Revolutionary Guards intelligence unit head, and completed the four 200-page licenses required and environmental studies.

The company was compelled to pause the project amid the inflation and political uncertainty of the late Ahmadinejad era, but to Schweitzer, that all comes with the territory. “You have to adjust a bit to the geopolitical weather,” he says.

To succeed in Iran, Schweitzer recommends raising capital locally and taking advantage of existing infrastructure and expertise. Ideally, the only imports should be upper management and know-how, he says. Now, Arjan Capital consults foreign firms interested in a range of sectors: construction, hospitality, energy and branded retail. “Like the Chinese, the Iranians love western brands, so we bring a few very serious companies...with a long-term vision,” Schweitzer adds. “No one comes to build just one hotel. They are coming to stay because the cost of getting established is significant.”

As in other transitioning economies, staffing poses a particular challenge for foreign firms. After years of isolation from international trends, Iranian workers lack the skills to fill middle and upper management positions. “If you needed in Russia 20 years ago 16 interviews to fill one job, you’re looking at double that in Iran,” Schweitzer says.

Domestic politics are also likely to affect the role of western businessmen, who will likely have to collaborate with pseudo-private companies and various factions of Iran’s rulings elite to get their projects off the ground. “I doubt things are going to open up for American companies any time soon,” said an Iranian expat doing business there. “Europeans will partner up with companies linked to the Revolutionary Guards, the bonyads and social welfare organisations to snatch up a lot of the good deals, and the regime will silence hardline opponents of the nuclear deal by handing them the crumbs.”

Schweitzer adds that Iran remains a managed economy, and investors should not overestimate the country’s readiness to handle a foreign influx in people and products. “Even if there’s a lot of enthusiasm and pressure built up, it’s a wiser move to make this process organized over a few years,” says Schweizer. “Otherwise, it will be a tsunami that could do more damage than good.”

This article was amended to reflect that Arjan Capital completed four 200-page licenses for its windmill construction project in northwestern Iran. The original article stated that 200 licenses were originally required.