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When the sanctions come off

When the sanctions come off
Foreign businesses eye new frontiers. But many obstacles lie in their way
Jul 25th 2015 | HAVANA AND TEHRAN | From the print edition

IF THE lobbies of Tehran’s more expensive hotels are any guide, the rush
is already on. Six months ago they sported only the odd Chinese
businessman. Now they are alive with Westerners jostling for deals.
Trade delegations have started to arrive. First off the mark after Iran
struck a nuclear deal with world powers earlier this month was Germany’s
vice-chancellor, Sigmar Gabriel, who took a group of executives to
Iran’s capital on July 18th.

In Havana, too, hotels are bustling. Even before America and Cuba opened
embassies in each other’s countries on July 20th, bookings were up. Ever
since the two announced a rapprochement late last year, Cuban-born
American lawyers have been arranging business trips to the Cuban capital
for their best clients, with the added promise of fine rum, cigars and
tropical nostalgia. American businesses are eager to catch up, having
long watched Canadian, Spanish and other firms steal a march.

This unusual conjuncture of two long-isolated countries heading back
into the commercial mainstream is good for consultants, too. At the
start of the year ILIA Corporation, a Tehran advisory firm jointly run
by a German and an Iranian, had no foreign companies on its books. By
April it had three; it now claims 18. At American law firms, meanwhile,
experts on other areas are being drafted into the Cuba teams to handle
the workload. Pedro Freyre of Akerman, one of those firms, sums up the
mood: “Oh my gosh. My phone has not stopped ringing. It’s been insane.”

All the activity notwithstanding, the initial rush to reconnoitre Cuba
and Iran will slowly but surely give way to a more measured approach for
most. It will be months, if not years, before the sanctions on both
countries will be lifted. Even then foreign firms will face big
obstacles to conducting business, let alone making profits.

The Cuban and Iranian economies are starkly different: one is a tiny
island lying off the tip of Florida, the other a Middle Eastern power
sitting on an ocean of oil. The type of sanctions on the two countries
differ, too. Those against Cuba apply almost exclusively to Americans.
In the case of Iran, they also bind non-American entities. European and
Asian banks that do business with Iran without official approval, for
instance, risk seeing their accounts shut down.

But Cuba and Iran do have one thing in common: they are developed enough
that they could thrive once the restrictions are lifted. Iran in
particular ought to be able to attract much more foreign direct
investment, given its size (see chart). Many other countries targeted by
sanctions are more chaotic and have less well-educated populations, and
are thus “not poised for a growth spurt once sanctions come off”, says
Gary Hufbauer of the Peterson Institute for International Economics.

Some early moves in Cuba have been promising. Charter airlines have done
a good trade ferrying the 12 categories of Americans (excluding
tourists) now allowed to travel to the island. And tapping into Cuba’s
booming private rental market, Airbnb executives say some 2,000 people
have listed space in their homes via the online agency, charging up to
ten times the average $25 monthly salary per rental.

As befits the larger economy, opportunities in Iran are grander. “Few
countries have such immediate investment requirements,” says Rocky
Ansari, a commercial lawyer and business analyst in Tehran, who
estimates Iran’s pent-up need at over $1 trillion. In the next five
years the country needs an estimated $230 billion-$260 billion of
investment in oil and gas, according to analysts. Infrastructure badly
needs an overhaul. Iran Air, starved of investment since the Islamic
Revolution in 1979, wants to buy several hundred planes.

Some green shoots with foreign roots are already in place. Debenhams, a
British chain of department stores, has several outlets across Iran,
including one on a main thoroughfare in Tehran. Boeing is back bidding
for business, and after an earlier round of sanctions relief in November
2013, is again selling spare parts. “Click here to apply for a franchise
in Iran,” reads the website of McDonald’s, a fast-food chain.

In both countries, however, chickens are yet to hatch, let alone get
turned into nuggets. Big food companies are hungry to enter Cuba, but
the embargo prohibits them from using American banks to get letters of
credit in order to make the deliveries. Even industries with permission
to trade with Cuba, such as agriculture, medicine and telecoms, find
obstacles in their way. The biggest is finance. Though the Obama
administration removed Cuba from its “state-sponsor-of-terrorism” list
in April, easing restrictions on banking, the response has been slow. On
July 21st Stonegate Bank in Florida became the first American bank to
set up a correspondent account in Cuba, allowing financial transactions
between the two countries.

Similarly, even if the Iran nuclear deal passes Congress, the Islamic
Republic still has to implement 11 related measures, and a plethora of
sub-clauses. A dispute over any one of them could “set everything
kicking off again,” fears a businessman travelling from London to
Tehran. A 65-day “snapback” mechanism to reimpose sanctions if the deal
is breached will discourage banks from again transacting with their
Iranian counterparts. As long as they hold back, much of Iran’s $100
billion in oil revenues held abroad will remain there.

Jon Epstein, a lawyer at Holland & Knight in Washington, DC, says his
advice to clients is not to try and be the first American firm into
Cuba, but to give themselves a five-year horizon for entering the
market. He believes that the experience there—more than half a year of
ups and downs—has been a useful reality check that businesses are now
applying to Iran. “At this stage we’re only talking of potential
sanctions relief,” says Nigel Kushner, a British lawyer advising firms
on Iran.

The biggest obstacle to post-sanctions growth may be the two countries’
own governments. Cuba’s embrace of private enterprise has been halting,
to put it kindly. Authorities have been slow to vet foreign-funded
projects in the Mariel special economic zone; only five have been
approved in the past 18 months. Cuban bureaucrats are fanatically
risk-averse and inscrutable. “It’s not knowing the ‘who’ to approach and
the ‘how’ to go about it that’s the problem,” says Thomas Goodman of the
Cohen Group, a consultancy.

In Iran Mohammad Javad Zarif, the foreign minister, presented the
nuclear deal to parliament as a triumph. But behind his smiles a host of
problems dog the economy. Iran ranks 130th on the World Bank’s table of
easiest countries for business. Its absence from the International
Centre for Settlement of Investment Disputes, a World Bank-run
commercial-arbitration service, give investors pause. Corruption is
rife, and revisions to an old commercial law are bogged down in parliament.

For all his election promises, President Hassan Rohani has barely begun
to tackle the vested interests that relished sanctions as a form of
protectionism that kept competition out of the market. The Revolutionary
Guards control huge swathes of the economy. “Ali Khamenei [the Supreme
leader] sees globalisation as a national-security threat, and wants the
Revolutionary Guard as the economy’s shock-absorber” against such
forces, says Ali Alizadeh, a political analyst in London. Lifting
sanctions will open the door to investors. But only if the rulers in
Havana and Tehran want reform will economies be transformed.

Source: When the sanctions come off | The Economist –
http://www.economist.com/news/business/21659738-foreign-businesses-eye-new-frontiers-many-obstacles-lie-their-way-when-sanctions

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