The long, long game

On 19 May, Iran went to the polls for what many believed would be a tightly-fought election. By the next morning it was clear that the analysts’ predictions had been wide of the mark. Incumbent president Hassan Rouhani, leader of the Moderation and Development Party, secured a landslide victory over his nearest rival, Ebrahim Raisi, chair of the Popular Front of Islamic Revolution Forces. Shortly after the results were announced, Rouhani appeared on state television to say the election had shown Iran was committed to improving relations with the rest of the world. To investors and businesses that have been eyeing the country for years, it was a positive sign, but hopes of an open market have been dashed before. Sanctions related to Iran’s nuclear programme were lifted in early 2016, but businesses have so far been frustrated in the ongoing difficulties they face in the market.

iranIt was, as such, an apt moment to discuss the opportunities and obstacles to doing business in Iran, a much-touted economy with a population of over 80 million. A few days after the election, we teamed up with Herbert Smith Freehills (HSF) to hold a round table discussion, bringing together a diverse group of speakers with experience in the Iranian market – from chief executives of investment funds to government bodies and senior counsel representing UK and multinational plcs.

While the election result had given some grounds for optimism, it soon became clear that Iran’s willingness to engage with foreign businesses and investors was only half of the story. Frustration over the lack of information on how to access the Iranian market, and the lack of support from banks and insurers, was palpable. Talk turned quickly to why, in spite of the widespread interest foreign companies have shown, so few deals have been completed in Iran.


Alex Novarese, The In-House Lawyer: Can we get some opening perspectives on the challenges and opportunities of investing in Iran?

Majid Sadjadi, Rostam Capital: I am a founder of Rostam Capital, which advises companies investing in Iran and Iranian institutions coming out of the country. I recently gave a talk at the invitation of the Tehran Stock Exchange to 250 of their companies and there was tremendous interest locally in using London as a window into the international capital markets. There are a number of really good companies that would do well with a dual listing.

iran2Simon Bane, Informa: Our interest in Iran has waned as we can’t convert commercial opportunities

Richard Adley, First Frontier Capital: There is a lot of interest, but converting latent interest into real interest seems to be a big problem. First Frontier Capital was one of the first international investment banks to write a research note on Iran, which we released just ahead of the sanctions announcements. Potential investors are very interested in analysing information on Iran, but the question is, what is stopping them converting that interest? In terms of institutional investors, what do they need to make this a real benchmark index investment?

Simon Bane, Informa: Informa moved very quickly after the Joint Comprehensive Plan of Action [JCPOA, the 2015 agreement with China, France, Russia, the UK and US, and the EU to ease sanctions against Iran in return for shutting down its military nuclear programme] was announced. We looked at ways of conducting business in Iran, but we are now finding that our very real and present interest is turning into a latent interest because we are unable to convert revenues back into the European money markets and banks.

James Bryan, IMI: IMI also moved quite quickly after JCPOA, although it has taken a long time, because of the compliance procedures, to get our first order. We are an international valve manufacturer and have a pre-installed base in Iran from pre-sanctions days. What we are still finding is that every step of the way, key strategic partners – mainly in the finance community – do not seem as prepared or ready to help us in Iran. It is not just banking, which is the obvious problem, but the wider financing industry as well.

Amy Gibson, Genus: Genus plc sells value-added products for livestock farming and food producers. We have longstanding customers in Iran. However, compared with other markets, Iran has challenges relating to sanctions. It has taken time and effort to ensure that our banking partners fully understand how we interact with our customers in Iran and what level of compliance is necessary with respect to our products and services.

iran3Key strategic partners are not ready to help us in Iran. Not just banking, but the wider financing industry.
James Bryan – IMI

Heather Peacock, CyanConnode: CyanConnode develops technology that goes inside smart meters and we are dealing in Iran with technologies in that field. We managed to secure an order really quickly after the sanctions were lifted and a further significantly larger order not long after that from the same customer. We had done a lot of compliance work and research before the sanctions were even lifted and were ready to accept orders literally as soon as the sanctions came off. However, we have had issues – along, it seems, with almost everyone around this table – with banking.

The other thing is that our technology is classified in Annex 1 of the Dual-Use List [covering goods, software, technology, documents and diagrams, which can be used for both civil and military applications], so we had to go through the whole export licence process as well. Even though we had received our export licence and the government [is] prepared to allow us to ship products to Iran, the bank that we were talking to raised the issue that our customer could use a little piece of our technology as dual use! This was strange, because to get the export licence we had to have the customer in Iran sign as to exactly what they were going to use the technology for and to confirm it would not be used for dual-use purposes. The bank has also recently announced that it will not be dealing in any transactions requiring money to be transferred from Iran.

Alex Novarese: Technically, many of these sanctions no longer apply. Why then are there so many ongoing issues with receiving payments from Iran and what is the UK government doing to address the issue?

Gordon Welsh, UK Export Finance: The moment sanctions were lifted in January 2016, UK Export Finance went back on cover for trade with Iran. Our support, in the form of bank guarantees or insurance, is delivered in partnership with major financial institutions and brokers, so depends on the ability of the private market to contract with parties in Iran. At present, due to the unwillingness of international banks to participate in transactions relating to Iran, we have been unable to support UK exporters. We are aware of some limited activity in some regional banks in Europe – most referenced is Germany – but are not aware of any of our export credit agency counterparts committing export finance support to projects in Iran.

iran4Gordon Welsh, UK Export Finance: International banks are so far still unwilling to support projects in Iran

Gary Bishop, Bank Sepah International: You have banks in Europe who are quite happy to do Iranian transactions. There are banks in Belgium, Germany, Austria, Spain and Italy. They are not necessarily that big, but they are certainly not that small. Also, the UK banks in particular like to claim that it is the Americans’ fault and that they are worried about sanctions from the US, but that does not really hold water. If you look at The Office of Foreign Assets Control (OFAC) FAQs, it quite clearly says that a non-American bank can engage with an Iranian transaction provided it does not touch the US banking system.

William Breeze, Herbert Smith Freehills: The OFAC wording is very clear. Yes, you can do this business, but people are terrified about what the US government might do to the US business they already have. It is not just sanctions that are a problem. Looking more widely, there are AML [anti-money laundering] concerns, KYC [know your customer] concerns with the Revolutionary Guard and how they are involved, financial architecture, and the ability to move money in and out on a purely technical basis, and in compliance with the Financial Action Task Force (FATF) [the G7-backed intergovernmental body that develops AML policies] requirements. There are lots of other challenges as well as sanctions.

iran5Heather Peacock, CyanConnode: Having an Indian subsidiary helps us get around the Iranian restrictions

Gary Bishop: I believe, just before or after Christmas, American officials were in Brazil. It was quite well publicised that the Brazilian banks were worried that they would effectively be blackballed by European and American banks if they touched Iran. They were told quite clearly: ‘No, you will not. It is not part of the American administration’s requirement.’ It is a question of what is the problem versus what they perceive is the problem. Banking restrictions are not a fact.

Majid Sadjadi: Yes, a lot of it is about perception and no-one is correcting that perception. The expertise needed [to scrutinise a deal in Iran] is a scarce resource for the banks so it has been a case of saying: ‘We will give that service to our VIP customers.’ Right now the business available is probably perceived as not worth it for many banks because the perception, wrongly to my mind, is that the risk is too high for them.

Reza Dadbakhsh, Herbert Smith Freehills: There is a lot of customer due diligence risk for the banks. However diligent a party might be, if it transpires subsequently that the transaction is in some way tainted, then they are concerned about that risk being brought to bear on them.

Richard Adley: Is not part of the problem the lack of support from the UK government? If a UK-originated transaction complies with UK laws and regulations then it ought not to be a risk if the US or any other government takes a different view.

Gordon Welsh: We are working closely with departments across Whitehall and with our colleagues in the Department for International Trade to explore solutions to these difficulties and open banking channels to try to ensure all parties benefit from enhanced trade with Iran.

James Bryan: What is frustrating is that still no-one is prepared, whether it is the UK Treasury or government, to say who the financial institutions are that one can approach in relation to Iran. Why can’t someone publish a list of the banks that will deal with this? The UK banks are not doing it at the moment.

Taco Sieburgh Sjoerdsma, Sturgeon Capital: The list is pretty well publicised. If you do a quick search you will find about ten to 20 [banks] that are supposedly doing business with Iran. The list is not the difficulty; the difficulty is knocking on their door because they will ask: ‘Who are you? Why should I do business with you?’

Alex Novarese: What reasons do banks give for refusing to handle Iran-related business?

Richard Adley: Part of the problem here is down to the compliance officers themselves. I have worked with a number of big banks and it was always the same story. You can speak to one compliance officer and get approval; you speak to another one and they say no, depending on the day of the week. Compliance is interpretation and not what is written down.

iran6If and when banks start to realise they need Iranian-derived money, things will get easier.
Dan Hudson – Herbert Smith Freehills

James Bryan: That is what we find. You can argue [with banks] over a sanctions clause – but it is not likely to change the decision.

Sharon Gaughan, Bank Sepah International: It is possible to present evidence that you have done your due diligence, conducted by experts who know Iran. That is enough to satisfy the regulator here, so that should be enough to satisfy the banks.

Dan Hudson, Herbert Smith Freehills: There are very few deals from the banks’ point of view worth risking billions of dollars in fines.

Gary Bishop: You could argue that banks are being anti-competitive by preferring some customers over others. It is very interesting that banks with this almighty fear of what the US will do over sanctions are still prepared to execute transactions for specific customers. That is against the Payments Services Regulations and the Payments Services Directive. There are lots of different legal arguments people could use.

James Bryan: UK banks do execute transactions but they are taking baby steps on a case-by-case basis. Our European businesses tell us their competitors have been in Iran for the last six or seven years and are gaining an advantage. The opportunity is huge in that sector because the infrastructure needs to be upgraded. That is where we come in. The after-market is a huge opportunity. But it has been a long, tortuous journey from [the initial lifting of sanctions] to today.

iran7William Breeze, HSF: We are getting more requests to pitch, regarding business both into and out of Iran

James Wood, The In-House Lawyer: Some of the companies around this table have secured orders from Iran. How are you moving money in and out of the country in the face of all these difficulties?

Taco Sieburgh Sjoerdsma: It is possible. The larger multinationals are certainly in the country. They might not say they are but they are, and they have been bringing money in and out of [Iran and other emerging] countries for decades. The route is difficult but billions of dollars flow in and out of the country.

It is hard, but is getting easier and less costly. We spent an enormous amount of money on legal advice. There was an enormous amount of effort, and that was largely doing diligence checks both externally and internally. It is an investment that you make and a choice you make. You go into the markets at an early stage and you get the reward for it at an earlier stage. If you want to buy a company in Iran you are going to pay twice the price in two years’ time.

Heather Peacock: There are ways around these difficulties. We have a subsidiary in India. Interestingly, not all banks in India will accept money from Iran. Our subsidiary’s bank would not, so we have had to open an account with another bank that will accept money from Iran. It also makes things easier because we manufacture in India, so we do not need an export licence if we do transact everything through our Indian subsidiary. We do, however, then run into the problem of having all our money sitting in India and have to then deal with the Reserve Bank of India to get the money out, so it is not an ideal solution [to the banking restrictions].

Alex Novarese: What is likely to make banks and insurers feel more comfortable with Iranian business? Is it just a question of time or are we waiting for political signals from the US and Europe?

Dan Hudson: People may argue about whether or not activities are restricted, but it is not the black-letter law restrictions slowing things down. It is more about bank policies, what international businesses have promised each other, and regulators, about what they will lend to companies, what they will do with money they are borrowing from banks and how they will repay them. If and when banks start to realise they need Iranian-derived money, things will get easier.

Majid Sadjadi: It comes down to hearts over dollars. Banks do not believe that they are losing business by staying out of the Iran market. If enough companies pushed for it that perception would shift. There is a great deal of willingness in Tehran to make things happen. There will be even more momentum following the Iranian elections because [the Moderation and Development Party] has now another four years. President Rouhani winning with quite a substantial majority should free up an awful lot of additional channels.

In UK plc’s case, credit rating is an issue when scrutinising Iranian businesses, but there are ways of having pathfinders that get around the credit rating issue. Iran is not the first country to face these problems and the capital markets always find ways around them sooner or later.

iran9You are talking about 4-6% growth. Try and figure out where you are going to get that in the world.
Taco Sieburgh Sjoerdsma – Sturgeon Capital

James Bryan: It is risk and reward. Are we being impatient?

Taco Sieburgh Sjoerdsma: The long-term story is not a story of two, three or four years. The investment opportunity is there. Take your pick of statistics from the IMF, World Bank or any of them – you are talking about 4-6% GDP growth. Try to figure out where you are going to get that anywhere else in the world. Nobody is going to tell you how because there is a first-mover advantage. You need to spend money and time, and it is frustrating [as] hell. However, it is a widely diversified economy with the right environment.

Majid Sadjadi: I have dealt with many emerging markets. Iran is not an emerging market; it is a re-emerging market. In China, Russia and Vietnam the investment community had to wait many years for an economic infrastructure to be created. The economic infrastructure in Iran may not be up to date, but it is there and the 85 million people in the country creates an ecosystem by itself. On my visits to Iran I notice how well aware senior managers within different sectors are for the need to upgrade and are very eager to engage with someone to help with that. It is not an oil-dependent economy like many others in the region. One does not have to import human resource to make a business work. The availability of educated citizens means they have capacity to learn very quickly.

Alex Novarese: Leaving aside sanctions and banking issues, what are the things one needs to bear in mind when approaching the Iranian market?

Majid Sadjadi: UK companies often approach their investment in Iran the wrong way. For instance, there is no way a foreign investor new to the market could perform meaningful due diligence in Iran. It is necessary to have a clear champion within the senior levels of the company supporting the deal. I find companies also make the mistake of using Dubai as a base to go into Iran. It does not normally work. Go to Tehran direct, where the people have a better market familiarity.

Reza Dadbakhsh: There is a lot of self-awareness in Iran. There is a real hunger to learn about international finance and commercial transactions, because for ten years the society has been closed to international finance. But in other areas, the thing you need in Iran is a lot of patience. With counterparties that is where the patience is beginning to run out. It has been 18 months. How much longer are they prepared to wait before seeing real signs on investment and change?

James Bryan: Perhaps we should not be too negative. We are seeing progress. If you are determined, there is movement. The more people knock on the same door then we will see momentum in financial institutions begin to gather pace.

Taco Sieburgh Sjoerdsma: There are many reasons to be positive. You are welcome in Iran. I have been doing many emerging markets for many years and the level of information you are getting is, for an emerging market, far superior to anywhere else in the world. As far as frontier markets go, the greatest investment opportunity is Iran at this point in time.

William Breeze: We are getting more [requests to pitch]. Clients realise that sourcing funds in-country is not going to work. Petrochemicals businesses know that they are going to need international involvement for technology and licensing. There is certainly a measure of optimism on our part.

Amy Gibson: My business colleagues who have day-to-day dealings with our Iranian customers are positive about our relationships and we plan to introduce technology and genetic improvements to Iran in the same manner as we do with customers elsewhere around the world. It is definitely a market worth continuing to engage in given the opportunities.

Sharon Gaughan: We went to Tehran as a delegation from our bank and we were treated like VIPs. They want to see visitors and tourists, and all the rest. A further positive for us came when we met with the Central Bank of Iran. Currently FATF requests enhanced due diligence measures for Iran. The Central Bank has presented to FATF and FATF were very impressed. It looks like they could be coming off the grey list sometime next year and that will make a big difference to due diligence requirements for banks. That is a really positive move.

Majid Sadjadi: I would have one piece of advice to anyone who is concerned about the risks they might face: go to Iran and see the scale of the economy.

The panellists

Richard Adley Chief executive, First Frontier Capital
Simon Bane General counsel – EMEA, Informa
Gary Bishop Chief operating officer, Bank Sepah International
James Bryan Chief compliance officer, IMI
Mark Collins Head counsel – EMEA and India, Accudyne Industries
Sharon Gaughan Chief compliance officer, Bank Sepah International
Amy Gibson Legal counsel – EMEA and Asia, Genus
Simon Harper General counsel – South Asia, Middle East, Turkey and Africa, Eli Lilly and Company
Janet Kidd Vice president, EMEA legal, Aegerion Pharmaceuticals
Heather Peacock Company secretary, CyanConnode
Majid Sadjadi Chief executive, Rostam Capital
Taco Sieburgh Sjoerdsma Chief finance officer, Sturgeon Capital
Gordon Welsh Head of business group, UK Export Finance
William Breeze Partner, Herbert Smith Freehills
Reza Dadbakhsh Partner, Herbert Smith Freehills
Leila Hubeaut Partner, Herbert Smith Freehills
Dan Hudson Partner, Herbert Smith Freehills
Alex Novarese Editor-in-chief, The In-House Lawyer
James Wood Research editor, The In-House Lawyer