Oil, Auto Companies Make Plans to Invest in Iran if Sanctions Ease

TEHRAN—A year ago, the president of Iran's chamber of commerce could go more than a month without hosting a foreign business delegation, due to their fears of violating economic sanctions. These days, Gholam Hossein Shafei greets trade missions from the Middle East, Asia and Latin America almost every day and travels to European capitals.

"We have a new environment domestically, and a new look from the outside," the 63-year-old said from his expansive offices in central Tehran, which overlook the abandoned American Embassy. "We have good interest now in our economy."

Firms including energy giants Total SA FP.FR +0.26% and Royal Dutch Shell RDSB.LN 0.00% PLC; car maker PSA Peugeot Citroën UG.FR +1.17% ; and financial firms Deutsche Bank AG DBK.XE +0.70% and Russia's Renaissance Capital Ltd. have participated in presentations about investment in Iran.

 

As talks between Iran and six major powers on limiting its nuclear program enter the final stages of diplomacy this week in Vienna ahead of a July 20 deadline, global companies are fact-finding, meeting with potential Iranian partners and jockeying for position should an end to sanctions open the isolated economy.

They are drawn by what could become the largest market in the Middle East, with nearly 80 million people, the majority of whom are under 30, well-educated and tech-savvy, and by the country's energy potential—it has the fourth-largest proven oil reserves and second-largest proven gas reserves in the world.

The U.S. and Iran have held talks on trying to cooperate to quell a Sunni uprising in Iraq, but officials say big gaps remain before a nuclear agreement can be settled. Diplomats say Iran isn't yet prepared to dismantle its nuclear infrastructure to the levels demanded for a deal, and companies say plans are on hold until sanctions are lifted. The negotiators have said they could extend the July deadline by six months if needed. For now, Iran remains at the top of the West's blacklist for a program widely seen, despite Iran's denials, as aimed at developing an atomic bomb.

Iran's economy has been struggling under a web of U.S., United Nations and European Union sanctions designed to force the country to freeze its nuclear program. An interim pact signed in November resulted in the unfreezing of more than $4 billion of Tehran's oil funds, the easing of some sanctions and the spike in investor interest seen at Mr. Shafei's offices. A potential July agreement could lift sanctions on Tehran's central bank and reduce restrictions on the finance, energy and technology sectors. This could free Western companies to pursue investments in potentially high-growth industries that have been closed off for nearly a decade.

Some U.S. sanctions, related to Iran's alleged human-rights abuses and support for international terrorism, are expected to remain. U.S. companies would still face limits to entering Iran until there is a broader normalization of relations between Washington and Tehran.

"The interest in Iran is accelerating, and the country could be at a turning point," said Ali Amiri, a Harvard-educated Iranian partner based in Tehran and London for investment firm ACL Ltd., who said his team has more than $100 million in commitments, largely from European investors, for a fund focused on the country. "But if a deal isn't reached in Vienna, this all could evaporate."

Mr. Shafei of the Chamber of Commerce is part of a core group of Iranian businessmen, diplomats and economic planners who have been mobilized by President Hasan Rouhani since he took office in August to reintegrate Iran into the international economy. They include Ph.D. economists from American universities and former Wall Street executives.

The strategy of the group, which is also aiming to rebuild the domestic economy, was outlined during interviews with more than a dozen Iranian government officials and businessmen in Tehran and Europe over the past three months.

Sanctions have left the country cut off from the world's banks and its oil revenues sliced in half. Populist policies pursued by President Mahmoud Ahmadinejad, Mr. Rouhani's predecessor, fueled hyperinflation, a steep plunge in the Iranian currency and an economic contraction of nearly 6% during the fiscal year ending March 2013, according to the International Monetary Fund.

 

Mr. Rouhani's government slashed spending on public housing projects and price subsidies on gasoline; launched an anticorruption drive; and reined in the central bank's printing of money.

Monthly inflation has been cut in half, the rial, the currency, has strengthened and the IMF is projecting economic growth to return this year. Iran's crude oil exports have also increased to around 1.2 million barrels per day from as low as 700,000 last year, according to the Iranian government, though still well short of pre-sanctions levels of nearly three million.

Mr. Rouhani is pouring diplomats into European and Asian capitals to spread the message that Iran is open for business. Special focus is on rehabilitating Iran's oil industry, which had a steep decline in production and exports over the past decade due to a drop in investment and a European embargo on oil exports.

In recent months, senior executives from European energy giants Total of France, Anglo-Dutch Royal Dutch Shell and Italy's ENI ENI.MI +0.65% SpA have met with Iran's Oil Ministry to discuss their potential return if sanctions are lifted, according to the ministry and companies. All had major oil-extraction operations in Iran prior to the sanctions and have expressed interest in resurrecting them.

Spain's Repsol SA REP.MC +0.08% and Norway's Statoil AS STL.OS -0.16% A have met Iranian oil officials in recent months to explore the possibility of returning to the country, according to people familiar with the meetings. Repsol declined to comment. Statoil said the company meets Iranian officials regularly over remaining payment obligations to the country but said it doesn't comment on assessments of potential business opportunities.

Iranian Oil Minister Bijan Zanganeh said that once sanctions are lifted, Iran could quickly boost output by 700,000 barrels a day. He has sought to sweeten terms for investors by offering longer-term and more-flexible contracts.

Iran's largest auto maker, Iran Khodro Industrial Group, has restarted partnership talks with international car makers including Renault SA RNO.FR +1.36% and Peugeot, one of its key former joint-venture partners, which pulled out of Iran in 2012.

Sanctions on car makers were suspended by November's interim nuclear deal with the aim of easing Iran's ability to import parts. The penalties are expected to be permanently lifted with a July agreement.

The auto maker has been squeezed between the international sanctions and the domestic economic slump. Last year, Iran Khodro cut its production to 500,000 units, half its capacity, due to weak demand. Before the suspension in November, the U.S. sanctioned any international dealings with Iran's auto industry last summer, impairing Iran Khodro's ability to import pistons, cylinders and other parts for its locally made units.

Still, Peugeot and Renault sedans continue to roll off Iran Khodro's assembly lines at the company's production headquarters in a west Tehran suburb using technologies and designs acquired years ago from the French companies.

"We are trying to interest partners in increasing our production even more," said Hasan Bananej, head of Iran Khodro's international relations unit, who wears a blue company uniform. Iran Khodro expects to increase Iranian production to 600,000 units this year while also operating plants in countries like Iraq, Azerbaijan, Syria and Venezuela, he said.

Officials at Peugeot and Renault confirmed their discussions with Iran Khodro about restarting their partnership if the sanctions are lifted. "The Group has started to get back in touch with our past partners to get ready for a return of our activities there, if possible," said a Peugeot spokeswoman. She said Peugeot's top brand manager, Maxime Picat, has conducted some of the discussions.

Mr. Bananej said Iran Khodro invited executives from General Motors Co. GM +3.55% and Ford Motor Co. F -0.17% to attend a recent investment conference in Tehran, but they declined.

A spokeswoman for GM said she was unaware of the Iran Khodro invitation; Ford said it won't conduct any business in Iran until U.S. sanctions are lifted.

Roubeh Pirouz, an Iranian schooled at Stanford, Harvard and Oxford, is also aggressively promoting Iran to foreign investors. His Turquoise Partners, an investment management firm, has been organizing investment meetings and trips to Iran since November's interim agreement.

"We want to make sure that Iran is positioned if the sanctions get lifted," said Mr. Pirouz, 42, who splits his time between offices in Tehran and London.

In May, the firm hosted a group of largely European investors in Tehran where they met with finance officials and visited local companies, he said.

In April, Turquoise hosted a lunch in London for executives from the Tehran Stock Exchange and interested foreign investors. Over two days, the Iranian delegation also had a meeting with Thomson Reuters Corp. TRI.T +0.31% on the company's financial news and data services; and with Deutsche Bank on asset management strategies. Renaissance Capital inquired about new investment opportunities with the Iranian exchange. And exchange executives met with European law firms and a strategic communications company, according to participants in the meetings.

Reuters confirmed the meeting; spokesmen at Deutsche Bank and Renaissance Capital declined to comment.

Executives at Turquoise Partners said they receive as many as 50 emails a day inquiring about investment opportunities in Iran.

Since the start of the year, Société Générale SA, GLE.FR -0.10% BNP Paribas BNP.FR -0.41% and Barclays BARC.LN +1.04% PLC have received permission to conduct limited transactions in Iran, according to records The Wall Street Journal obtained from the U.S. Treasury Department through a Freedom of Information Act request.

If current discussions are mostly about getting in position to move if sanctions are lifted, U.S. companies, which are hanging back because of the political sensitivity of investing in Iran, may end up at the back of the line.

"The first losers will be the U.S. companies," said Akbar Komijani, deputy governor of Iran's central bank, who noted little interest so far from American firms.

But Iranian businessmen in Tehran privately indicated that they would love to partner with American investors going forward. Russian, Chinese and Turkish companies, which have big presences in Iran, aren't known for high quality products or the ability to introduce cutting edge technologies. In late April, Iran canceled a $2.5 billion deal with state-owned China National Petroleum Corp. following repeated delays at a giant oil-field project. China National Petroleum declined to comment. Current sanction laws allow for Chinese companies to conduct a limited amount of oil work in Iran.

"Eventually the relationship has to happen," said Reza Soltanzadeh, a U.S.-educated financier, referring to a normalization of commercial ties between the U.S. and Iran. He said his company, Iran Industries Investment Co., has been talking to British, Emirati and Russian investment funds about buying into Iranian companies, particularly in the steel and mining sectors.

Iran's ambivalent views of the U.S. are on display across Tehran. Next to the Chamber of Commerce, the former U.S. embassy's walls are decorated with anti-American propaganda, including a mural that proclaims "Down with USA" and a painting of the Statue of Liberty with a skull for a face.

Still, officials working at the chamber seem genuinely excited about re-engaging with Washington. Mr. Shafei said Iranian firms are eager to have access to the world's best markets and technologies, wherever they are.

"We are for sure interested in having relations with the American economy," said Mr. Shafei, a 30-year veteran at the Chamber who just missed working in his building at a time when American diplomats were next door. "It seems like it's not just us who lost."

First published: http://online.wsj.com/articles/oil-auto-companies-make-plans-to-invest-in-iran-if-sanctions-ease-1404257812