Melodie Michel travels to Tehran to assess the impact trade and financial sanctions have had on Iran, and how the country’s companies are preparing for the reopening of trade relations with the west.


Iran is at the centre of everybody’s mind,” the country’s first deputy minister in charge of trade, Mojtaba Khosrowtaj, says with a proud smile while reaching for his tea glass. This is October 2015 in Tehran, and in the business community the excitement is palpable. Hotels are buzzing with people in suits who have come from all corners of the world to discuss opportunities with their Iranian counterparts.

“What did you think of Iran before you came?” locals ask, hoping to change any negative portrayal the country suffered in the media. And this is their time to shine. Trade delegations from Europe, Asia and even Latin America have visited the country in quick succession since the Joint Comprehensive Plan of Action (JCPOA) was signed in July 2015.
International investors know they have to act fast, as the sudden opening of foreign investment in a country with such vast economic capacity is bound to bring in massive amounts of competition. In fact, some companies are already rumoured to have finalised contracts under the condition that sanctions be lifted – contracts that will come into force as soon as the announcement is made. “It’s not unlawful to negotiate, it’s unlawful to perform contracts,” Sarosh Zaiwalla, a sanctions solicitor at Zaiwalla & Co, tells GTR.
“Whoever gives the better proposal in terms of local production and export share will get the deal,” adds Khosrowtaj.

Luckily, opportunities abound in many sectors (see ‘Top investment sectors’ below).

The country’s economic growth has been undeniably affected by ongoing sanctions: averaging 4% GDP growth for years, Iran went into recession in 2012 – the year the financial sector was cut off from the Swift messaging system. Since then, GDP growth has returned, standing at 1.5% in 2014, due to the partial relaxation of some sectorial sanctions when Iran accepted to negotiate on its nuclear programme.

With the lifting of sanctions, Iran will recover at least US$60bn of frozen assets (or up to US$150bn according to some Iranian sources), and of course increase trade and investment opportunities globally, which bodes well for the economy. In a November report, the Institute of International Finance forecast 6% GDP growth in 2016. Additionally, because of its low dependence on other countries in recent history, Iran’s sovereign debt is likely to be very low – around 5% of GDP according to government officials, though the country does not report to international organisations on that data. Cash reserves are estimated at around US$110bn, though here again there is no official channel to check accuracy.


Financial sanctions

The most damaging sanctions Iran has had to deal with are undeniably those on financial services. Though some in Iran tell GTR that Swift is still operating – a statement that Swift refused to confirm or deny, instead referring to one of its own statements which says that de-listed banks will automatically be able to connect to its service upon Implementation Day – the extent of the financial messaging firm’s presence in the country has been dramatically reduced.

Hassan Motamedi, CEO of the non-designated Eghtesad Novin (EN) Bank, explains: “The share of letters of credit (LCs) on the amount of trade transactions used to be more than 80%, but, with the sanctions, LCs are used mainly for those countries with which we still have correspondent relations, like China, India, Korea, etc. Most transactions are going through informal channels, so trade finance has moved in that direction. Now the percentage of LCs on the overall amount of trade is less than 50%,” he adds.

For sanctioned banks, the situation is even more dire. At the Export Development Bank of Iran (EDBI), where GTR’s interview takes place in a formal boardroom equipped with microphones, and in the presence of the communications and legal departments, the reluctance to share the measure of the loss of business is noticeable. “It is very difficult to provide any statistics regarding pre and post sanctions transaction amounts. Before the sanctions we had good relations with around 400 correspondent banks. The number of correspondent banking relations under the sanctions is not clear,” says Ali Salehabadi, EDBI chairman and managing director. He adds that the mix of currencies used by the bank has changed, but that it has “found ways to serve [its] obligations”.

The share of letters of credit (LCs) on the amount of trade transactions used to be more than 80%. Now it is less than 50%. Hassan Motamedi, Eghtesad Novin Bank

Bank Tejarat, which won a case for its de-listing by the EU at the start of 2015, only to be re-listed based on new evidence a few months later, lost 75% of its trade finance business due to the sanctions. Before 2012, it was the largest trade finance bank in Iran, with US$10bn worth of business. Today this number is around US$2.5bn, centred mainly on China, Russia, Turkey and India.

“US dollar transactions are completely out of the question. These days, euro and local currencies are used. Trade is currently done through a mixture of banking and non-banking means,” the bank’s international division director, Ali Mehrpour, tells GTR.

Importantly, he adds that trade continued, and that “the country on the whole didn’t feel sanctioned” – a feeling that transpires in all of GTR’s interviews. The business community is proud to say life continued under the sanctions. And in the political sphere, though the word “illegal” comes up more than once to qualify the west’s actions, mentions of the country’s resilience almost feel like a little nose-thumbing aimed at America.


Corporate resilience

Despite the reduced availability of trade finance, Iranian companies have found ways to continue to trade, showing extraordinary adaptability. Those with international branches and accounts made payments from there, avoiding any significant inconvenience. But those based only in Iran have had to resort to more costly measures.

Rojin Taak, a tomato paste producer located near the Iran/Iraq border, had to switch from Swift-based transfers and letters of credit to plain and simple cash. “We talked to our customers, telling them they needed to change their dollars to rials on the informal market to pay us. We were obliged to do this. We are working outside of the banking system,” explains the company’s managing director, SM Abdollah.

Overall, according to the corporates and banks interviewed for this article, trade transactions are costing Iranian companies around 7% more than they would through conventional channels – up to 8% of the transaction amount.

Even so, Rojin Taak makes 50% of its turnover in international markets – mostly in Iraq, but also in Norway, the UAE, Sudan and Senegal – and its export revenue has grown from US$2mn in 2008 to US$36mn in 2014.The company plans to set up factories in Canada and Georgia, whether or not the sanctions are lifted.

We talked to our customers, telling them they needed to change their dollars to rials on the informal market to pay us. We are working outside of the banking system. SM Abdollah, Rojin Taak

ChauffageKar, a boiler and heating system manufacturer that makes 34% of its turnover abroad, is another such example. The company currently uses all of its export revenue to buy raw materials and machinery through an international account – a barter system which spares it the cost of sending money back to Iran, but leads to a 2 to 3% loss on margins.
“We started exporting at the same time as the sanctions started, around 2011. It was the best decision for us at the time, because parallel to the sanctions, Iran started to have economic issues and our domestic sales were challenged,” the company’s managing director, Alimardan Alaei, tells GTR in his office on Taleghani Avenue – just a few doors away from the anti-American murals which adorn the former US embassy.

Now Alaei is in talks to set up joint ventures with German and Italian companies, and ChauffageKar anticipates growth of 35% and 50% in production and revenue respectively in the next two years as the export share of sales increases to 50% and domestic sales also rise, based on the country’s expected economic boost.

Importantly, the company will also recover some money that had been sent as pre-payment for a Danish piece of machinery it required, and which was frozen when the sanctions were imposed.

“In the end we had to buy that machine from a Chinese company, which bought it from the Danish company. We then sent people from Iran to go get
the machine in China. I paid more than 32% extra for this machine because of this very bad transportation,” Alaei laments.


A new chapter

But Iranian companies and banks are ready to put the past behind them, and to open a new chapter in the country’s history of international collaboration. Despite the (insignificant) risk that sanctions may not be lifted, and regardless of the word of warning issued by US regulators to institutions visiting Iran that they could still get fined if anything is signed before Implementation Day, the preparations are very much in motion.

The country’s ECA, Export Guarantee Fund of Iran (EGFI), has received approval from the government to increase its capital to US$500mn, and has also started negotiations with counterparts including NEXI, Garant, ICIEC and other export credit agencies to increase bilateral relationships. It signed a technical co-operation agreement with Sace as early as May 2015, and in November announced a memorandum of understanding with the Export Insurance Agency of Armenia (EIAA), quickly followed by a similar deal with the Kazakh ECA, KazExportGarant. EGFI is also preparing to get involved in projects for the first time, and take on the risk of the Iranian counterpart.

“If the project in Iran is export-oriented, EGFI is working to prepare some proposals to work with financiers and different ECAs to invest in them. For example, on a petrochemical plant being built in Iran with different international financiers, EGFI could have some partnership with them for risk sharing in covering syndicated loans, supporting the Iranian part of the project. This is a new strategy for us,” explains Arash Shahraini, EGFI board member.

On the bank side, most of the adjustments are being made towards training and technology. “We are preparing systems and human resources, as that’s a major issue. Considering that we have been cut out of the international business for almost four years, we have to renew the knowledge of our staff, to train them on the issues they may face during the work, and we are preparing the environment for our customers as well. Immediately it will be impossible to go back to normal, it will take some time,” says Bank Tejarat’s Mehrpour.

After the lifting of sanctions, the most important responsibility of this organisation will be accession to the WTO. Valiollah Afkhami, Iran Trade Promotion Organisation

In terms of technology, software is being updated and conversations with Swift are ongoing, but Iranian banks also hope to gain much from renewed correspondent relationships. “From all sides, we are ready for a new co-operation in the field of banking services. At first, we must sign some contracts in the field of correspondent relationships. After that, we can open letters of credit for different Iranian companies that import or export to Europe. The second field of co-operation is for money transfer, as after cancellation of the sanctions more than US$100bn dollars that is currently blocked in foreign banks will re-enter Iran through the international banking system,” explains Hossein Soltani, deputy of international affairs at Stratus Holding Group, Iran’s largest industrial group and EN Bank’s parent company.

Yet amidst all the hope and bullishness, EN Bank admits it has a contingency plan in case the sanctions are not lifted – a reasonable precaution considering the history of Iran’s relationships with the west.

Additionally, some factors are out of the Iranians’ control, and could determine the future of the country’s growth story. There is hope, for instance, that the OECD will improve its rating – currently standing at a very low 7. Iran is also working towards WTO accession – the request was raised at the WTO meeting in Nairobi on December 16 and 17.

The TPO’s Afkhami explains: “After the lifting of sanctions, the most important responsibility of this organisation will be accession to the WTO. I have talked about this with many delegations and told them about our interest to get WTO accession after the lifting of sanctions. This is a priority for our organisation.”

Clear guidance will also be needed from the world’s central banks to reassure international lenders. EDBI’s Salehabadi warns that “once the EU, UN and US remove the sanctions, central banks must still allow the banks to do business with Iran”.

Even with that guidance, it will take a while before large international banks – many of which have had to pay large fines for trading with the country – come back to Iran. An off-the-record conversation with a large French bank confirmed that there was no interest in doing business there anytime soon. But Iranians are realistic, and they are choosing to focus on the positive.

“The banks which have been penalised will be very cautious. They want to see what happens and how the US government handles this new banking era. And of course the big players such as Deutsche Bank, Commerzbank, HSBC, Standard Chartered, etc will not come to Iran in the short term. They have too many US interests. But tier 2 or 3 European banks that do not have as many interests in the US are ready to come back.

“All we need is channels – they may be small, medium-sized or large – as long as we have channels, trade will normalise,” says Mehrpour at Bank Tejarat.


Iran and beyond

Iran could also become instrumental for European companies wanting to grow their business in the rest of the Middle East region. Shunned by the west, Iran had to find new trade partners under the sanctions, and focused its attention on its neighbours, particularly Iraq and Afghanistan – both of which have tremendous reconstruction needs.

“There could be co-operation for projects in Iran’s neighbouring countries,” says Stratus’ Soltani. “European manpower cannot work in the Iraqi atmosphere. European contracting companies don’t have enough information about the cost of manpower and raw materials and all other expenses in our neighbouring countries. But Iranian companies have that knowledge. Moreover, in the technical engineering market the most important role is lobbying to get authorisations. We must have enough influence in formal and informal organisations, and negotiate with them before participating in the tenders. We have huge lobbying power in neighbouring countries. We expect a lot of joint ventures.”

Some Iranian companies already have a very strong market share in the region, and with the added cash and skills injection of European partners, could grow their presence even more. Projects involving Iranian counterparts in the region will now be able to get support from EGFI, and banks like EN Bank already have subsidiaries in Iraq.

This partnership has no apparent boundaries, as Iran has the economic strength and political stability its neighbours lack. “Iran is not only an importer of investment, it is also an outward investor,” EGFI’s Shahraini points out.

Undeniably, Iran’s legal and social complexities can be difficult to grasp for the western mind. This is a country where women wear Louboutin heels underneath their chadors; boys and girls enter buildings through different doors but flirt openly on the street; and propaganda demonises anything American, but Nike logos can be found on public bathroom taps. Moreover, let’s not forget persistent concerns over human rights violations, with a growing number of executions, telephone and internet surveillance and the regular jailing of dissidents.

But it is also a country of incredible beauty, with some of the most hospitable people in the world, and amazing commercial appeal. So whether or not you choose to be a part of it, Iran’s trade story is one that you will hear about for a long time to come.


Top investment sectors

Oil and gas
In the oil and gas sector alone, the Iranian government is targeting US$185bn worth of projects by 2020. At an industry conference attended by 135 energy companies in Tehran at the end of November, oil minister Bijan Zanganeh presented no less than 50 projects open to foreign investment, and is hoping to raise about US$25bn in a first phase through the country’s new integrated petroleum contract (IPC).

At around US$15 a barrel, Iran’s production cost is sure to attract oil companies looking for better yield in the current price environment. And with the world’s second-largest natural gas reserves, Iran’s opening could not come at a better time for Europeans trying to reduce their dependence on Russia.
Additionally, the government has been investing heavily in petrochemicals, even hosting a sector conference for international investors in December.

“Iron ore, copper, titanium… We say that all the elements in the periodic table can be found in Iran,” says Valiollah Afkhami, president of the country’s Trade Promotion Organisation (TPO). Iran currently exports around US$30mn of iron ore. It has over 3,000 active mines – most of which need new machinery – and a lot of untapped reserves.
According to deputy minister in charge of trade Mojtaba Khosrowtaj, Iranian mining companies could soon be looking for revolving credit facilities. “We have to find those investments that can transform raw materials into finished products, added-value products – financing to facilitate such kinds of investments is welcome,” he adds.

Investment in oil, gas and mining has to come with new infrastructure developments: the ministry of roads and housing has introduced a 10,000km project for highways, railways, tunnels and bridges, and there are plans to introduce high-speed trains in the country. However, European companies should be aware of the fact that Iranian contracting companies already have strong capacity in terms of skills, and therefore will be looking to take care of the engineering, procurement and construction themselves.

“Iranian contracting companies have enough capacity to build designs for Iranian projects. If you want to come into Iran, you must be a member of a consortium. The European contracting companies’ role in the consortium is to bring finance. If they bring finance, they can take a portion of projects with the co-operation of Iranian companies,” Stratus Holding Group’s deputy of international affairs, Hossein Soltani, tells GTR.

Iran Air is in desperate need of new aircraft: its 51-strong fleet includes planes from 1976, and many models that have since been discontinued. A large Boeing client before the Islamic revolution, Iran has since bought a number of Airbus planes (the last of which was delivered in 2009), and the European manufacturer is likely to remain Iran Air’s supplier of choice post-sanctions.

Arash Shahraini, member of the board of Iran’s ECA, EGFI, says: “Iranian aviation companies welcome all foreign aviation companies as the country needs lots of airplanes. Based on a study, Iran will need 400-500 airplanes till the end of Iran’s Macroeconomic Plan 2025. In the case of aviation, export financing is critical, and I’m sure that whichever ECA provides the best conditions for long-term guarantees will affect which companies get the tenders.”

With the expected increase in trade and business traffic, airports will also need to be renovated. In fact, French companies Bouygues and Aéroports de Paris are also reported to be in talks with Iranian authorities to build the second terminal at Tehran’s Imam Khomeini international airport.

Once the second-most lucrative sector after oil, Iran’s auto industry has been hit hard by the sanctions: production went from 1.6 million vehicles in 2011 to 743,680 in 2013, according to the International Organisation of Motor Vehicle Manufacturers. Many car part producers have lost their business, and workers have been laid off by the thousands.
While Peugeot and Renault are still the most common brands visible on the streets of Tehran, the condition these cars are in makes it clear the two French manufacturers haven’t sold anything there for years. Still, some factories have managed to produce parts themselves, and car production is finally picking up: the country passed the million mark again in 2014 with 1,090,846 produced – an almost 50% increase on the previous year – once again showing the resilience and resourcefulness of Iranian corporates.

Iran is the second-biggest Middle East consumer of cosmetics after Saudi Arabia, and market research firm Euromonitor expects the beauty and personal care market to almost treble in the next five years, and reach over €10bn in sales. The country produces little of its own personal care products, and an estimated 60% of the market is unofficial, with smuggled branded items being sold at bazaars. Europe’s reputation in that sector will make it relatively easy to sell into the country, and France’s Sephora is reportedly finalising talks to open its first stores in Tehran in 2016.

Trade credit insurance
The private insurance market is practically non-existent in Iran, with none of the corporates interviewed by GTR even aware of any products they could use for trade. Even the country’s ECA, EGFI, which has limited capacity, welcomes the idea of private sector competition in the country. “We hope to have some [competition] soon. When the private sector competes with the public sector, efficiency goes up,” EGFI CEO Seyed Kamal Seyed Ali, tells GTR.


Winners and losers

GTR takes a look at who’s most likely to benefit from the opening of Iranian trade, and who will probably miss out on the opportunity.


Germany: With a strong history of trade with the country and a positive brand image in terms of equipment and machinery, Germany is set to become an important trade partner.
France: French brands are everywhere in Iran, and the French were among the first to send trade delegations to the country. France has a good reputation in sectors that are in high demand in Iran (aviation, cosmetics, infrastructure) and which are also set to benefit from the country’s cultural appeal.
Italy: Just like France, Italy enjoys a positive cultural image in Iran, and the country has moved fast to strengthen ties ahead of the lifting of sanctions. In the second half of 2015, Italian export credit agency Sace signed three different agreements with Iranian counterparts, one of which also involved the Italian Ministry of Economic Development and investment bank Mediobanca.
Austria: Austrian companies in industries such as car parts, information technology and engineering are rumoured to have concluded deals worth €80mn during their visit to Iran in September, and the European country was mentioned every time GTR enquired about trade partners.
Asia: China, Korea, India and Japan continued to trade with Iran under the sanctions. With the reopening of financial channels, they will be able to do so more efficiently, and Iranians are unlikely to forget who their allies were when shunned from the west.


US: With US primary sanctions set to remain in place after Implementation Day, all US companies and banks will still be prevented from doing business in Iran. Moreover, it will take time for the two countries to overcome years of political and cultural resentment.
UK: Justifiably or not, the UK is very much associated with the US in Iran, and therefore suffers from a negative image. The country was late in sending trade delegations and was never mentioned as a potential trade partner in GTR’s interviews.
Saudi Arabia: Iran’s trade opening will mean a new source of oil for Saudi Arabia’s traditional buyers. The two countries are also unlikely to trade goods due to their religious differences, which led to the cutting of political relations at the start of 2016.


Turkey: As Iran’s closest neighbour, Turkey should logically benefit from the country’s need for infrastructure-related imports. Additionally, Turkish banks maintained close co-operation with their Iranian counterparts under the sanctions. But political relations could be affected by Iran’s recent declaration that it possesses evidence of Turkey’s illegal oil trade with terrorist group Daesh, which came in support of Russia’s allegations on the topic after the downing of a Russian war plane by Turkey.


The case for women

Soheila Jelidarzadeh is women’s affairs consultant to the minister of industry, mine and trade in Tehran. Here she tells GTR about the progress accomplished in Iran regarding gender equality and the opportunities the lifting of sanctions might bring in terms of female empowerment.

GTR: Tell us more about the women’s affairs department of Iran’s different ministries.

Jelidarzadeh: In all ministries we have a department for women’s affairs. It started first with the ministries that had the most female clients such as the ministry of health and the ministry of education. Since that time, gender mainstreaming has become one of our targets. We have been very successful in education and in universities. For more than 10 years, over 60% of university students have been girls.

In the mine and trade ministry, we are trying to reach 30% of involvement of women in all levels of employment by 2025. In ordinary jobs without any benefits, we have surpassed 30%, and even at high-expertise levels. But at management level, no. When it comes to leadership, and investment, we have not reached that target yet.

GTR: How was your work to empower women affected by trade and financial sanctions?

Jelidarzadeh: In the last 10 years, we had economic problems because of the sanctions, and combined with the last government’s view towards women, it led to a decrease in the level of female involvement in work. Although the last administration hired the first female minister ever in Iran, it didn’t make a lot of effort in that area.

But mostly we have a lot of cultural issues. Iran has always been involved in conflict, and women have always had to be protected, so they were always behind. It’s a male-dominated society, but there is also the lack of skills of women. Even 30% of female involvement would be breaking the mould.

GTR: How have things changed under President Rouhani’s government?

Jelidarzadeh: In the last two years there has been a better opening of opportunities for women. We were able to hold two exhibitions on the role of women in sustainable development. The situation is improving very fast, with great momentum.

The improvement for women in trade is very good, especially in the private sector. We now have many women participating in exports, working in commercial departments
or event management.

GTR: What will the removal of sanctions change for Iranian women?

Jelidarzadeh: The removal of sanctions will be very effective, because we have the fundamentals of educated women who are interested, have the skills needed for development and show a lot of enthusiasm.

There are a number of industries where women have particular potential: textile, precious and semi-precious stone carving and jewelry making, food (especially halal), medical herbs and herbal teas, manufacturing, IT, hygiene and cosmetics, and electrical equipment, including car parts.

It is impossible to reverse the progress made so far. If you look at the history of the world, there are always some steps forward and some steps backward, but overall the trend is for improvement. We say Iran is the land of high mountains. We, and our women in particular, are used to overcoming obstacles.