The Forum for Partners in Iran's Marketplace

September 2017, No. 85

World Media

Iran, Russia Enter €2.5 bn JV to Produce Rolling Stocks

“Negotiations and exchange of delegations are gradually bearing fruit,” he said, referring also to a contract with French energy giant Total as well as another agreement with France’s Alstom.

The Industrial Development and Renovation Organization signed a €2.5 billion contract with Russia’s CJSC Transmashholding in Tehran (July 31) for joint production of rolling stock in Iran.

Based on the contract a joint venture will be formed between IDRO and the Russian company with the Russian side holding an 80% stake and the Iranian side a 20%.

Transmashholding CEO Kirill V. Lipa told the Financial Tribune after the signing of the contract that the capacity of the joint venture will depend on the depth of localization. “For assembling, we’re thinking about 300-400 units per year.”

The largest manufacturer of locomotives and rail equipment in Russia with Dutch firm Breakers Investments BV and French engineering group as its stakeholders, Transmashholding will be taking over Iran’s Wagon Pars Company to start manufacturing.

The Russian firm has major customers in Bulgaria, Belarus, Kazakhstan, Ukraine, and Serbia. It manufactures and sells subway cars, passenger diesel locomotives, diesel engines, freight cars, flat cars and diesel trains.

“We are thinking about deeper cooperation. We will look more precisely on the equipment which is already installed. But anyway we are ready to develop [the facilities],” Lipa said.

“We’re here not to bring, let’s say, products just from Russia. We are here to develop local production. Because we really believe that it is absolutely impossible to produce the rolling stock from outside of the country. It is very important to produce the most significant spare parts locally,” he added.

Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh who was present at the signing ceremony referred to the contract as “a partnership agreement that will last for 30 years and is extendable for more.”

This is among the biggest contracts signed with international companies after the removal of international nuclear sanctions against Iran.

The embargoes were lifted in January 2016, as part of a landmark nuclear deal—officially known as the Joint Comprehensive Plan of Action—which Iran signed with the US, Britain, China, Russia, France and Germany in July 2015.

Deputy foreign minister Abbas Araqchi, who was also present at the ceremony, expressed satisfaction that the JCPOA is slowly paying dividends.

“Negotiations and exchange of delegations are gradually bearing fruit,” he said, referring also to a contract with French energy giant Total as well as another agreement with France’s Alstom.

Total, together with Chinese state-owned China National Petroleum Corp, signed a $5 billion deal with Tehran early July to develop Phase 11 of Iran’s South Pars, the world’s largest gas field, marking the first major western energy investment in the Islamic Republic since the lifting of sanctions.

Alstom signed an agreement with IDRO and Iranian Rail Industries Development Company last week to manufacture 1,000 subway wagons in IRICO facilities.

Another major deal signed recently was a contract China’s Exim Bank signed last week with Iran’s Bank of Industry and Mine to provide $1.5 billion in finance for the electrification a 926km railroad from Tehran to the eastern city of Mashhad. The contract is considered as the first foreign financing in Iran after the removal of nuclear sanctions.

“This shows the diversity of our collaborations with our European partners, our Asian partners and our old friends, notably Russia,” Araqchi said. “We definitely will not forget our friends during the sanctions.”

London-Based Investor Says
Iran Holds Promise beyond Energy

The United Nations Conference on Trade and Development has put Iran among successful countries in terms of attracting foreign investments in 2016.

Iran has piqued financial interest throughout the world for its massive energy reserves, but the country actually has a host of other opportunities in less obvious areas, according to one global investor.

For Clemente Cappello, CIO of London-based Sturgeon Capital, Iran holds promise in part for its cheap labor, abundance of natural resources, and well-educated youth. Specific sectors that could benefit from this mix include glass, manufacturing and petrochemicals, he explained, but Iran could also grow its technology sector.

In fact, the country already has local versions of Uber, Amazon and eBay.

In addition, Cappello mentioned that he thinks “equity opportunity is the easiest and most profitable” option in the country. Stocks, he said, are trading on average of six times price-to-earnings ratio, dividend yields are “well into the double digits” and interest rates could soon be cut in half.

Iran’s recent election in May could provide a strong mandate for President Hassan Rouhani to continue with a foreign policy of re-integrating Iran’s economy with the rest of the world, and also with his domestic economic reforms, especially in the troubled banking sector.

Cappello, who launched Sturgeon Capital’s Iranian fund, told CNBC’s “Street Signs” that service providers such as banks are the “real obstacle” for foreign investors. Those banks, he said, “are not keen to do business with Iran.”

The investor also highlighted the risk foreign investors run when they lack understanding about the changing Iranian business dynamics. Other risks associated with doing business in Iran include not understanding the stakeholder structure of entities, he said.

A week before the Iranian election, the U.S. signed a waiver extending sanction relief. That was followed by a statement from French energy giant Total, stating it will resume investments in Iran.

The United Nations Conference on Trade and Development has put Iran among successful countries in terms of attracting foreign investments in 2016. In its 2017 World Investment Report, Iran attracted $3.372 billion worth of foreign investments, which is a 63 percent increase from the previous year.

It is plausible that the prospect of new sanctions could scare off foreign investors, as President Donald Trump’s administration has said it is “putting Iran on notice.”

Nonetheless, Cappello said, the U.S. cannot legally alter the international agreement with Tehran on its own and “the continued aggressive rhetoric clearly does not help sentiment and makes perceived risks higher than what they actually are.”

And when it comes to Iran developing a fruitful economic relationship with investors, it will depend on continued reforms, he said.

“Our hope is that ... deals such as the one Total signed will set a precedent that doing business with Iran is okay and encourage the global business community to re-engage the country.” 

Iran Foreign Trade Tops $29b

Iran’s non-oil foreign trade during the four months of the current Iranian year (March 2017-18) reached $29.27 billion, indicating a 6% rise compared with last year’s corresponding period.

Non-oil exports during the same period of last year hit $13.45 billion, indicating a 9.54% decline year-on-year.

Imports stood at $15.81 billion, registering a 23.97% rise YOY, Financial Tribune reported, citing the latest report by the Islamic Republic of Iran Customs Administration.

Gas condensates ($2.31 billion), followed by light crude oil excluding gasoline ($512 million), polyethylene ($485 million), liquefied propane ($446 million) and methanol ($426 million) were the main exported commodities.

Imports chiefly included rice ($603 million), field corn ($484 million), vehicles of engine displacement between 1500 cc and 2000 cc ($426 million), soybean ($338 million) and auto parts ($311 million).

China was the main customer of Iranian products during the four-month period, as Iran exported $2.84 billion worth of goods to the Asian country. Other major export destinations included Iraq with $2.52 billion, the UAE ($2.03 billion), South Korea ($1.4 billion) and India ($926 million).

Major exporters to Iran included China ($3.49 billion), the UAE ($2.99 billion), South Korea ($1.07 billion), Turkey ($958 million) and India ($891 million).

The average price of each ton of exported goods stood at $358 and that of imported commodities hovered around $1,399.   

Traditional Partners Remain as EU Trade Gets Boost

The above stats indicate that while China remains Iran’s biggest trade partner, as it has been over the past many years, other major countries with which the Islamic Republic conducts its commercial exchanges are still the same ones that traded with the country after international sanctions were imposed.

The sanctions imposed against Iran over its nuclear program began to roll back as of January 2016 as part of a landmark deal Tehran signed with world powers a year earlier.

Nonetheless, data released by Luxembourg-based Directorate General of the European Commission, Eurostat, show Iran’s trade with Europe has been on the rise post sanctions.

Iran exported €2.77 billion worth of goods to the European Union in the first quarter of 2017, registering a sixfold rise compared with the preceding year’s corresponding period, Eurostat reported.

Mineral fuels, mineral oils and products of their distillation, bituminous substances and mineral waxes accounted for a majority of Iran’s exports to the EU during the period, with a total value of €2.5 billion. Non-oil exports to the EU, however, still remain unimpressive. Fruit and nuts (€72 million) and plastic products (€48.5 million) were other top exports during the period.

Iran imported €2.52 billion worth of commodities from the European Union during the same period, recording a %56 rise year-on-year. Imports mainly included nuclear reactors, boilers, machinery and mechanical appliances and parts worth €665 million. Vehicles and their parts and accessories with $245 million and aircraft, spacecraft and their parts with $242.6 million came next.

Italy was the biggest importer from Iran in the first quarter among all European states, as it bought €807.4 million worth of Iranian goods during the period. France, Spain and Greece followed with €614.6 million, €329.6 million and €320 million worth of imports respectively.

Germany topped the list of exporters to Iran, shipping €694.4 million worth of goods to the Islamic Republic in three months. France came second with €461 million and Italy followed with €418.6 million.

Iran among Most Tax Attractive Emerging Markets

Beyond the commercial potential, how do Iranian taxes impact foreign investment profitability? Vincent Lacombe with multinational law firm Dentons has sought to answer the question.

Every week, press updates confirm the growing commercial interest of first class international groups in entering the Iranian market-whether it’s the US green light for export licenses to Airbus and Boeing, Renault’s joint venture, Peugeot’s extensive manufacturing contracts, or the return of major energy, oil and gas and infrastructure players to the market.

Less visible but just as dynamic, a number of private investors are currently implementing investment structures in sectors as diverse as finance, real estate and retail.

Beyond the commercial potential, how do Iranian taxes impact foreign investment profitability? Vincent Lacombe with multinational law firm Dentons has sought to answer the question.

Last September, Europe LLP entered into association with APP Legal Institute, an Iranian law firm based in Tehran, to better serve its international clients investing and doing business in Iran. The Tehran-based team advises international clients on a broad range of legal and tax issues, including corporate, infrastructure, regulatory, capital markets, employment, and litigation matters.

Below is the full text of Lacombe’s write-up exclusively shared with Financial Tribune (July 29):   

The economic growth of emerging markets boosts foreign direct investment and integrates their domestic economies to the world market. With the lifting of sanctions and a gross domestic product growth projected to reach 4.6% in 2017, Iran has been able to enter the new emerging market group and is expected to gain a solid share of increasing world FDI.  

This comes at a time when investors and financial institutions with huge available liquidity are struggling more and more to achieve a high return on investment. In this context, Iran’s taxes are among the lowest in emerging countries.

Thanks to a relatively moderate 25% corporate income tax and no domestic withholding tax on dividends, Iran is one of the emerging markets where locally created value and cash repatriation to the investor’s home country attracts the lowest taxation.

Even though in benchmark countries, depending on the investor’s home jurisdiction, relevant double taxation treaties may mitigate withholding tax on dividends, this generally does not change Iran’s first rank.  It is also important to note that Iran has signed DTTs with many countries. 

No Capital Gains Tax on Sale of Company Shares

The Iranian tax system does not provide for taxation of gains resulting from the sale of company shares. The sale of non-listed companies’ shares triggers a 4% stamp duty assessed on the par value of the shares. The sale of shares negotiated on Tehran Stock Exchange is subject to a 0.5% stamp duty assessed on the transaction value. 

Value Added Tax

Iran’s VAT rate is 9%. VAT credit can be reimbursed or carried forward without a time limit. It is anticipated that the Iranian VAT rate may increase to 10 or 12%. 

Double Taxation Treaties

Cross-border structures and transactions benefit from a number of tax treaties in force to avoid double taxation.

Iran has signed around 40 DTTs, notably with Austria, China, France, Germany, Indonesia, Kuwait, Lebanon, Malaysia, Oman, Poland, Qatar, Russia, South Korea, South Africa, Spain, Switzerland and Turkey. 

Free Trade Zones

Iran currently has seven free trade zones: Qeshm, Chabahar, Aras, Anzali, Arvand, Kish and Maku. These free-trade zones enable investors to benefit from investment guarantees under the Foreign Investment Promotion and Protection Act of 2002 (which also applies outside FTZs), protection of registered trademarks and intellectual property rights, 100% foreign ownership, no restrictions on repatriation of capital and finally no entry visa requirements.

Revenues from commercial or industrial activity are, under certain conditions, tax free for 15 to 20 years from the date of the transaction.  This has been extended to 25 years by a decision of October 1, 2016, but has not yet entered into force.

Moreover, importation of raw materials and machinery for production and manufacturing is free from all kinds of duties and taxes. 

General Tax Incentive in Tourism

On October 2, 2016, Deputy Economy Minister Mohammad Khazaei stated that both foreign and Iranian investments in the tourism industry will enjoy tax exemptions for 5 to 13 years depending on the area.

Time to Look at Iran for Investment

Sanctions and low oil prices have been fully priced in by investors in Iran.

You are considering investing in a large country with 80 million people and a relatively prosperous GDP per capita of almost $20,000.

It had democratic elections this year where the reformists won again on a mandate to increase trade with the rest of the world in contrast to the populism seen in many developed countries. Its capital city is full of history yet cosmopolitan, and tourism has picked up recently.

Yet foreign investment, particularly from the Western world, is much lower than what you would expect in a country with such a large domestic market.

That country is Iran. Is it time for contrarians to get in? An article published by Frontera News seeks to answer the question. It delivers business news, investment research and political risk analysis on the world’s frontier and emerging markets. 

The article opens by probing “the case against Iran”, where it refers to unilateral US sanctions against the Islamic Republic, which have complicated doing business with the country.  

Another concern, the article reads, is the reliance on the oil and gas industry, explaining that oil dominates Iran’s economy, and as one of the biggest producers in OPEC there are a couple of related concerns.

“One is the transition to alternative energy that has undercut oil prices amidst ample supply from other nations. Countries like Saudi Arabia, Qatar and the UAE have ridden oil revenues to large war chests and huge per capita GDPs–Iran is late to the party and does not have the same resources to attempt a large pivot into other industries. The other concern is how easily their exports are affected by sanctions–they experienced this from 2012-16 and it resulted in a negative GDP growth rate of -1.5% in 2015,” it said.

The write-up then moves on to the bright side of the situation in Iran under the subtitle “The Case for Iran”. The following are taken from this part on:

Bad News Is Priced in

Sanctions and low oil prices have been fully priced in by investors in Iran. Yes, sanctions can be put back in force and oil prices can go lower, but by and large, the bad news is priced in and there is much more upside than downside.

Let’s say that [US President Donald] Trump’s threats that the US-Iran nuclear deal is “very, very bad” do not come to fruition and sanctions continue to be eased as the deal is followed. This would be a complete game changer for the economy with western money beginning to flow in earnest for the first time since sanctions were first put against Iran in 1979.

It is understandable that while UN sanctions were lifted in January 2016, Iran has not reaped the benefits yet with many countries and businesses erring on the side of caution before doing business there.

However, when you consider that sanctions have plagued Iran for 37 years and there might finally be light at the end of the tunnel, the upside potential here is very strong, especially with domestic support to ensuring sanctions continue to be eased.

A sizable diaspora and a massive amount of frozen funds around the world could also help kick-start economic growth, if sanctions continue to be eased. 

China Is Already in

Most people believe that China’s foreign investment is focused in Africa or Asia. But with the western world’s sanctions against Iran, China has also become Iran’s biggest trade partner with over 40% of its exports and imports.

China’s One Belt, One Road strategy has benefited Iran strongly since it has become a gateway to Europe. With financing from China, Iran is becoming a transportation hub with rail and sea ports a main focus.

Infrastructure built with Chinese expertise and financing is popping up around the country. 

High Chances of Success

One of the main reasons investors take interest in frontier markets is to get in at the beginning of the economic cycle in the hopes of making outsized returns, as the economy enters a rapid growth phase.

Iran is an interesting case where its GDP per capita is relatively high, but where there are a lot of severely underdeveloped industries due to almost 40 years of sanctions. Tourism is a very low hanging fruit, as is any trade with western companies.

Bolstering chances of success are a large population (18th in the world) that is highly educated with a literacy rate above 95%. The population is also relatively young, with about half the population under the age of 30. Both these factors have contributed to a burgeoning startup and tech scene in Iran.

When you compare the potential of Iran to other countries that have been held back due to sanctions–Cuba, the DRC, North Korea, or Sudan–the contrast is extreme in terms of how well Iran has done relatively.

The case of Myanmar, a country that is booming now with the removal of sanctions and embrace of the western world, is a hopeful case for Iran, and Iran is way ahead of where Myanmar was when sanctions ended.

Iran Fast Emerging as Economic Power, Player

In a long history of intense religious rivalry, Saudi leadership seeks to choke Iran’s economy by steeply cutting its own oil output, hoping to complicate Iran’s overtures to international businesses.

The Kingdom of Saudi Arabia’s hostile policies toward Yemen, Syria, Qatar and Iran are failing. The desert kingdom’s broader strategy: a desperate attempt to erode the Islamic Republic of Iran’s growing power and influence over these domains and beyond.

In a long history of intense religious rivalry, Saudi leadership seeks to choke Iran’s economy by steeply cutting its own oil output, hoping to complicate Iran’s overtures to international businesses. Oops, too late! The Iranian regime is excited about engagement with other countries following its 2015 nuclear agreement with the West. Asian and European companies are now investing in Iran’s energy sector, which promises high returns on investment.

Iran’s oil minister, Bijan Namdar Zangeneh, says Iran is negotiating with BP, Russia’s Gazprom and Lukoil and Malaysia’s Petronas, among other international companies. France’s Total signed a $5 billion gas deal with Iran this month.

“I can assure you this isn’t the last one. We’ll see other contracts being made within the next few weeks,” Deputy Minister of Petroleum for International Affairs Amir Hossein Zamaninia said at a recent conference in Istanbul. He was referring to Austria, Norway, Sweden, the United Kingdom, Germany and Denmark, all of whom have expressed interest in investment opportunities in Iran.

Denmark, for instance, proposed a $1 billion investment contribution to Iran’s development plans. Iran itself already stands to reap between 65 percent and 70 percent of the international investments, estimated at $200 billion so far. Thus, Saudi Arabia’s notion of snuffing Iran’s economy through oil prices is a failed one.

Between petrochemicals and gas exports, Iran hopes to have a major impact on the global oil market. Iran’s oil-industry officials previously put total investments required in various sectors of the oil industry at $445 billion: $230 billion in oil, $130 billion in gas, $20 billion in refining and delivering oil products and $65 billion in the petrochemical industry. Mr. Zangeneh’s disclosure of these investments comes at a crucial time as the political landscape of the Middle East shifts faster and faster.

And don’t write off China and Russia, key supporters of Iran. I’m certain Chinese and Russian companies will win lucrative contracts that ensure access to Iran’s oil and natural resources. Meanwhile, Iran is capitalizing economically on its growing influence in the region at the expanse of Saudi Arabia’s botched policies.

To solidify its economic influence in the region, Iran aims to export its goods to its neighbors: Iraq, Pakistan, Oman, the United Arab Emirates and Kuwait. Iran already has engaged Turkey in negotiations regarding transfer of Iranian gas to Europe. I can see how a project such as this will benefit not only Iran but also Russia and Turkey. What Saudi leadership has failed to foresee is that the demand for gas is expected to grow in countries like China, India, Iran, the United States and even their own country.

What of the much-debated prospect of sanctions on Iran? Unlikely! Someone forgot to tell Saudi decision-makers that Iran has about 18.2 percent of the world’s proven gas reserves, ahead of Russia and Qatar, according to the BP Statistical Review of World Energy. China and the Middle East are expected to lead the way in gas demand growth, 28 percent and 24 percent respectively, over the projected period to 2035, according to Cedigaz, a research group that specializes in the energy industry.

Given Iran’s supply and the international community’s demand, widespread global sanctions against Iran simply won’t happen.

I agree with Foreign Affairs magazine: The Saudi royal family is licking its wounds after its disastrous, unrealistic and flat-out ill-conceived campaign against Qatar, where we have some 10,000 U.S. troops based. Qatar is forging economic ties with Iran and Turkey.

One thing’s sure: The region’s geopolitics now play to Iran’s favor. Saudi rulers must accept that they can’t force oil prices to return to pre-2014 levels of $120 per barrel. That’s a bygone era.

Their plan to target Iran economically has flopped miserably, even given the Trump administration’s implementation of some sanctions this week — while also acknowledging Iran’s compliance with the 2015 nuclear deal. International corporations are seizing the opportunity to forge economic ties with Iran. What might happen when China’s Silk Road project is completed? Will all roads lead to Tehran? Stay tuned.  

Source:, July 19, By David Oualaalou, Veteran, global affairs analyst and educator and author of “Volatile State: Iran in the Nuclear Age,” due for release in January.


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  September 2017
No. 85