European Small and Medium-sized Enterprises (SMEs) are facing a thorny choice in Iran, Menas Associates reports.
Menas, a political risk consultancy has been helping multinational companies operate in the Middle-East, Africa, and other emerging markets since the late 1970s.
According to Menas, European SMEs want to be able to benefit from opportunities offered by the Iranian market, ‘’but they need to attend to US and EU sanctions restrictions.’’
Under US sanctions, only SMEs have the potential to trade with Iran.
While the EU remains relatively passive, Iran–China relations is strengthening and the European companies are in a challenging position.
Obstacles to doing business with Iran are on the rise. Even non-sanctioned exports such as pharmaceuticals run into difficulties because of banking, IT, and other sanctions.
European companies are also facing pressure from deeply anti- Iranian NGOs in Washington such as the Foundation for the Defense of Democracy (FDD) and United Against Nuclear Iran (UANI).
The question is whether European companies should simply forego exporting to the Iranian market or whether they can find ways to remain engaged and wait for future opportunities.
‘’The Iranian business community is generally more interested in working with European companies than with Asian ones, because it trusts European technology and quality.
‘’The longer Europeans stay away from the market, however, the more the average Iranian company will be compelled to look for alternatives, and potentially Russian or Chinese competitors’’, Menas says.
The sanctions regime is becoming more stringent, but if a company is in a non-sanctioned sector and working with a non-sanctioned company, doing business is possible.
For Menas, ‘’non-sanctioned sectors such as food, medicine, and humanitarian goods, sectors such as renewable energy, water and wastewater, environmental projects, cosmetics, infrastructure, and engineering design are in a so-called grey zone between fully sanctioned and explicitly non-sanctioned.
‘’Doing business in these grey sectors raises the possibility that they will be targeted by a new executive order, as recently happened with respect to mines and metals.
‘’Further, some categories of goods are barred from the Iranian side due to hard currency limitations. Luxury goods and product groups for which Iran has sufficient domestic production fall into this area.
‘’Consequently, the most promising business areas from the perspective of European companies are the food sector, pharmaceuticals, humanitarian trade, and technological solutions for sectors such as water and wastewater, the environment, and so on.
‘’Manufacturing machinery, technical equipment, and the like also offer enormous export potential. Finding a workable payment channel is also problematic. Currently, two official channels exist: the European mechanism known as INSTEX; and the Swiss Humanitarian Trade Assistance (SHTA), which was established under a special licence by the US Treasury to avoid future sanctions for transacting with the Central Bank of Iran.
‘’General Licence 8 covers transactions related to agriculture, food, medicines, and medical devices, but any company wishing to use the SHTA will have to do so through a Swiss subsidiary or partner. INSTEX has become more active in recent months, though its volume of transactions is well below the actual need of companies working with Iran.
‘’The main challenge is that the volume of Iranian exports to Europe is only a small proportion of the volume of European exports to Iran, creating an imbalance in potential transactions. Iranian authorities had hoped that they could release some funds that have been blocked in European bank accounts so that these would flow into transactions managed by INSTEX.
‘’Furthermore, Central Bank of Iran governor Abdolnasser Hemmati had suggested that a potential International Monetary Fund (IMF) loan to Iran could be put at the disposal of INSTEX to manage trade-related transactions between Iran and the European Union.
‘’So far, however, INSTEX has had very limited access to funds. In addition to financial bottlenecks is the risk that sanctions will be imposed on the Iranian counterpart to INSTEX.
‘’Several other channels are offered by private companies in the European Union. Such payment solutions charge some 5%–6% of the transaction volume as a fee for the service.’’
Continuing, the Menas report says European companies also have the burden of carrying out due diligence on their clients and business partners in Iran, making sure that neither they nor their ultimate beneficiary owners are on the UN, US, and EU blacklists.
Carrying out due diligence is certainly feasible — and can be carried out by Menas Associates — but sometimes complex ownership structures in Iran create additional obstacles.
Some companies have resorted to what can be referred to as triangle solutions. This strategy transfers Iran-related business to a company subsidiary located in a country within which the process is more feasible.
For example, Iran and Iraq have established a joint bank to manage transactions between them. Some companies use this as a business route to Iran. Other potential routes are through Turkey, India, or Russia.
Though such a strategy has its own challenges, in some cases it facilitates engagement with Iran more generally. Bank transactions between Iran and Russia are also complex, for example, but both sides are trying to improve the situation to boost bilateral trade to new levels.
From the perspective of European companies, Iran is a high-risk, high-reward market. Political, economic, legal, and intercultural risks exist, but with the right strategy, they can be managed.
Counterbalancing the idea that companies should wait until Iranian relations with Western nations improve and sanctions are lifted is the possibility that competitors from China and Russia will secure a market share that will be difficult to regain.
It may be preferable to maintain a foot in the Iranian market through indirect engagement, either through subsidiaries or through co-operation with internationally active Iranian companies in third countries.
There are a number of opportunities to engage Iran without breaching sanctions. For example, some companies are offering Iranian authorities training or helping them to organise delegations to European countries so that they can stay informed about a given company and its offerings.
The show of interest and exchange of information is designed to ensure that Iranian clients return to European solutions in due course.
There is no doubt that making the right strategic choice is very challenging, but it would be a mistake not to make a strategic assessment of how to maintain business goodwill in Iran.