A GENERATIONAL OPPORTUNITY IRAN RE-EMERGES:
v FOREWORD
Given its population of 80 million and its To ensure that Australian companies are significant mineral resources, Iran’s re- well-positioned to take advantage of Iran’s engagement with the international economy re-emergence, offers significant potential for Australia. Australia has world-class capability in a range I took the opportunity of my visit to Iran to re- of sectors that are highly relevant to Iran’s open the Austrade office in Tehran. Through economic reintegration, including mining, this office, the Australian Government is oil and gas, agribusiness and food, water actively assisting Australian businesses to resource management, health and medical navigate the Iranian commercial landscape services, and education and training. and to explore specific commercial opportunities. I strongly encourage This report provides a timely analysis of Australian companies with an interest in The Hon. Steven the emerging opportunities for Australian the Iranian market to take advantage of Ciobo MP businesses in Iran. As the report states, Austrade’s presence. Minister for Trade, there is potential for Australian business to Tourism and diversify our balance of trade with Iran, noting The opportunities in Iran are exciting but Investment that wheat exports currently dominate the Australian businesses need to be cognisant trade relationship. While this trade will remain of the risks and challenges that still exist. important, it is Australia’s globally accepted This report developed by the Export Council reputation as a quality producer of a broad of Australia and funded by Austrade provides range of agriculture products and as a leader a comprehensive introduction to a market in sectors such as education, mining and oil that has considerable untapped potential. and gas, and water management that mean The Hon. Steven Ciobo MP we are well placed to be a trusted trading Minister for Trade, Tourism and Investment partner for Iran in the future.
To begin the process of re-building Australia’s commercial relationship with one of the Middle East’s largest economies, I recently led a high-level business mission to Iran that confirmed immediate opportunities for Australian agribusiness exporters and educational institutions, and longer- term potential for suppliers of equipment, technology and services for the mining and oil and gas sectors.
The mission also highlighted Iran’s interest in developing a water security strategy that will underpin its future economic growth. Australia has world’s best practice in this regard, and this is a sector that Australia can therefore lead with, to build confidence in Iran in our leading-edge capability and to differentiate us from our international competitors.
2 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY The Export Council of Australia (ECA) For Australian education and tourism is pleased to present this timely report service providers, Iran is a largely untapped examining renewed opportunity in Iran, a opportunity for two of our strongest sectors, market with significant untapped potential for and are areas where Australian companies Australia. can leverage significant demand gaps and offer best-practice expertise. International sanctions relief opens the door for Australian businesses to once again Though these are the broad sectors covered engage with this large, well-educated and in this report, the Iran opportunity does not relatively affluent country. Iran was once a end there. Australian companies of all shapes major market for Australia, and the potential and sizes may find potential lucrative market is there to restore and grow our trading opportunities in Iran. Lisa McAuley relationship. CEO, Export Council A number of challenges and risks for of Australia Australian companies offering goods and Australian companies in Iran remain, services in the agriculture, resources, energy, however, including the impact of remaining education and tourism sectors in particular US sanctions and issues accessing finance. stand to benefit from this re-opening. This report touches on some of these challenges. Iran is already one of the largest food and beverage markets in the Middle East. Its large We would like to thank Austrade for and expanding population – combined with sponsoring and supporting this report, challenging environmental conditions – create and recognise the crucial role they are significant demand for Australian agricultural playing to assist Australian companies with exports, as well as for the knowledge and exploring opportunity in this challenging but expertise Australian companies can provide very promising market. I would also like to to help Iran modernise its agricultural sector, acknowledge and thank Niels Strazdins, and deal with challenges such as water Head Research Manager at the ECA for management. creating this practical and timely report.
The country is home to the world’s second- The ECA hopes this report will help to raise largest gas reserves and fourth-largest oil awareness of some of the opportunity reserves but has been unable to access waiting for Australian companies in Iran. the foreign investment, technology and expertise necessary to modernise its energy We have a long, proud history of supporting infrastructure. This creates significant Australian international business. For the past potential in the post-sanctions environment to 60 years, we have encouraged, educated match Australian knowledge, expertise and and assisted Australian companies to take innovation in the energy sector with Iranian on the world. We stand ready to provide demand. assistance to Australian companies exploring opportunities in this exciting market. Iran’s natural resource riches extend to mining and minerals, where infrastructure Lisa McAuley is also under-developed, and the sector CEO, Export Council of Australia underfunded and uncompetitive. This presents significant opportunity for Australian investment, technology and expertise in a country that features a similar geological environment to Australia’s own.
3 Executive Summary 5 InCONTENTStroduction to Iran 6 Opportunities in Iran 12 Challenges in Iran 42 Concluding advice 50
4 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY EXECUTIVE SUMMARY
Post-sanctions Iran is one of the largest sources of untapped opportunity in the world for Australian companies. Offering a market of 80 million relatively affluent consumers and pent-up demand for quality goods and services, Iran is an opportunity worthy of serious consideration by Australian firms.
Trade has traditionally been the glue binding Australia and Iran, which was once our largest trading partner in the Middle East. Though international sanctions derailed our commercial relationship, shrinking it to a fraction of its former size, the international agreement over Iran’s nuclear program has re-opened this potentially very lucrative market.
Australian companies in many of our key sectors can now access opportunity to provide the goods, services, technology and expertise that Iran needs to modernise and grow its long-isolated economy.
This report outlines some of this opportunity in sectors where Australia is well-placed to match export strengths with strong Iranian demand: in agriculture, including meat and livestock, and water management; in energy, including oil, gas and renewables; and in services, especially education and tourism.
As Iran is attracting significant attention from companies around the world, these are sectors where Australian goods, services and expertise can be very competitive, and where we can leverage our strengths and experiences with similar challenges.
However, Iran is still a very challenging and complex market to navigate for Australian companies, and real risks remain. Sanctions on designated individuals and organisations are still in place, as are US primary sanctions. Access to finance remains challenging, political risks are ever-present, and opposition to re-engagement between Iran and the West lingers in certain quarters.
Comprehensive due diligence is therefore crucial for any Australian company seeking to do business in Iran. Severe penalties apply to companies that run afoul of remaining sanctions on the country.
Patience is required as Iran re-engages with the West. It will take time for sectors such as financial services to develop their understanding of the market, and for bank-to-bank connections to develop and support trade and investment. It is important at this stage for Australian companies to develop relationships in preparation for a changing environment.
The Australian government is proactively engaging the Australian and Iranian financial sectors to assist with this transition towards a financial situation conducive to business.
Iran presents opportunity too big to ignore. Australian companies with strengths in the sectors covered in this report, as well as with strengths in many other sectors not covered, should leverage renewed market access and seriously evaluate opportunity and potential in Iran.
5
INTRODUCTION TO IRAN
Long-isolated from large sections of the international community, Iran is an unfamiliar market for many Australian and foreign companies. This section is intended to reacquaint Australian companies with Iran in general, providing introductory overviews of Iran’s geography, politics, economy and society.
6 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN’S GEOGRAPHY Iran is a vast country, the 18th largest in the world by size Other than the area around Mashhad – Iran’s second and 17th largest by population.1 Its territory exceeds that of largest city located in the far north-east, near the Turkmen Western Europe. It is four times larger than neighbouring and Afghan borders – the rest of the country is very lightly Iraq and three times as populous.2 populated and difficult to traverse.
Topographically, Iran is a very mountainous nation, outlined The majority of Iran’s middle and upper class is found in by peaks along its frontiers. Uninhabitable areas of salt- the Greater Tehran area, as well as the cities of Mashhad, mud flats comprise the interior of the country, forcing most Isfahan and Tabriz. Iran’s largest cities are illustrated in of the population into the mountains and their foothills. Figure 1.1.
The population is roughly concentrated toward the north- west of the country, with high densities around larger cities running north-south from the Caspian to the Gulf.
IRAN AND ITS LARGEST CITIES
Tabriz 1.4 million Karaj 1.6 million Tehran 8.1 million Mashhad 2.7 million
Isfahan 1.7 million
Shiraz 1.4 million
Figure 1.1: Iran and its largest cities
7 INTRODUCTION TO IRAN
IRAN’S POLITICS Ultimate political power and authority rests with the President Rouhani is viewed as socially conservative and Supreme Leader and a 12-member Guardian Council. economically liberal, and has been a driving force behind the Joint Comprehensive Plan of Action (JCPOA) – the The Supreme Leader sits atop Iran’s policy-making agreement with the international community ending apparatus with particular influence in foreign and strategic nuclear-related sanctions on Iran – as well as the country’s policy, setting guidelines for both. resumption of harmonious relations with the West.
The Guardian Council acts as a constitutional watchdog The 290-member Parliament – or Majlis – is elected and may veto legislation it finds to be “un-Islamic” or via popular vote. It is typically representative of Iranian unconstitutional. Six of its members must be clerics and society, and includes representation from minority groups are appointed by the Supreme Leader, and six must be and women. Over 6,200 candidates were approved by legal scholars whose appointments are proposed by the the Guardian Council to run for election to Iran’s most judiciary chief to the parliament for approval. recently-elected parliament in May 2016, nearly 600 of whom were women.3 The elected portion of Iran’s government is the public face of the Islamic Republic, and the vehicle through which The Majlis acts as an important forum for policy debate, other governments interact with the country. has the power to confirm and impeach ministers, controls the budget, and may issue formal questions which the The President of Iran is the country’s head of government, government must answer. and is accountable to the Supreme Leader who acts as head of state. The President is directly elected for a In addition to these actors, Iran’s Islamic Revolutionary four-year term, and is limited to two consecutive terms Guard Corps (IRGC) is a core political constituency and in office. As per Iran’s Constitution, “functions of the plays a key role in the country’s foreign and strategic executive” are vested in the President’s office, which has policy. It is ultimately responsible for the protection of the been occupied by Mr Hassan Rouhani since his election Iranian regime, and practically controls key elements of in 2013. the country’s military.
8 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN’S ECONOMY
IRAN HEADLINE ECONOMIC INDICTORS
Indicator 2010 2011 2012 2013 2014 2015
GDP, current prices (USD) 464 564.5 418.9 380.3 404.1 393.5
GDP per capita (USD) 6,241 7,511 5,512 4,941 5,183 4,983
Real GDP growth 6.6 3.8 -6.6 -1.9 3.0 0.6 (% change year-on-year)
Current account balance (% GDP) 5.9 10.5 6.3 7.4 3.8 0.8
Goods & services exports (% GDP) 24.9 26.1 17.1 21.8 23.6 21.4
Inflation (% change year-on-year) 12.4 21.5 30.5 34.7 15.5 16.5
Unemployment (% labour force) 12.3 12.2 10.4 10.6 10.8 11.3
Figure 1.2: Iran headline economic indicators (Source: Australia Department of Foreign Affairs and Trade)
Iran’s diversified economy stands out amongst the Though onerous, sanctions have not been the sole factor petro-economies that ring the rest of the Gulf. Though holding back Iran’s economic development. The post- Iran is energy-rich, its economy also boasts a significant 1979 Iranian economy has also suffered from haphazard manufacturing sector and a sizeable consumer market. economic policy-making and a succession of five-year Figure 1.2 details some of Iran’s headline indicators over economic plans that have been heavy on pro-market the past few years. rhetoric, but light on actual action.
Iran’s business environment can be challenging. It ranks Iran is the 28th largest economy in the world by GDP, just 120th out of 190 countries on the World Bank’s 2017 Ease ahead of Thailand and the United Arab Emirates (UAE), and of Doing Business Index, with particular issues to address behind Austria and Norway.4 It is an export-led economy, around resolving insolvency (ranking 156th in the world), and has been considered upper-middle income since 2009. protecting minority investors (165th) and trading across 6 Large state-owned companies hold dominant positions borders (170th). in key industries, such as finance and manufacturing, and Unemployment is an issue and an ongoing governmental account for a significant proportion of Iranian GDP – up to concern. Around 750,000 youths join the Iranian labour 60% by some estimates. This largely confines the private force every year, many of whom struggle to find gainful sector to medium and smaller-sized companies. employment.7 One in five youths are unemployed.8 Despite having a more diversified economy than its This has had societal repercussions – 77% of respondents neighbours, energy is still a sector in Iran, with with nearly to a 2015 survey conducted by FTI Consulting, a global half of the country’s budget dependent on oil revenue. risk consultancy, said they were struggling to meet the 9 Further economic diversification is therefore an imperative costs of everyday expenses. in post-sanctions Iran, and will now be easier to achieve Job and opportunity-creating economic growth is following the JCPOA. therefore imperative for Iran’s stability and prosperity. Diversification and economic growth had previously been Unburdened by sanctions and encouraged by an constrained by an ever-tightening sanctions regime that international willingness to engage with the country, targeted Iran’s oil exports, technology imports and access the short-term picture looks promising. to international finance in particular – effectively placing a leaky international quarantine around Iran’s energy and GDP is expected to grow 5% in the 12 months to financial sectors. March 2017, a 0.5% increase over previous estimates.10 Inflation is now in single digits for the first time in 25 years, The total damage to the Iranian economy over the past two and deposit interest rates are on a downward trend, decades is largely incalculable, with some estimating that declining from 18% to 15%, as of July 2016.11 the economy shrank 10% and oil exports more than halved between 2012 and 2014 alone, the harshest sanctions period.5
9 INTRODUCTION TO IRAN
Iran’s current five-year economic development plan, Australian companies are well-advised to conduct a running to 2021, envisages economic growth of 8% p/a thorough and comprehensive due diligence process on and a slate of reforms to state-owned enterprises and the potential Iranian business partners to avoid running afoul banking sector, as well as the allocation of oil revenues to of remaining sanctions on Iran. These include: finance priority development areas. • Restrictions on the export of arms and related material; Full economic recovery is expected to be gradual over the • Restrictions on some metals and software, such longer-term, underpinned by a relatively young, educated as graphite and software for integrating industrial and skilled population, as well as some of the world’s processes of a kind specified in the Autonomous largest proven energy reserves. Sanctions (Export and Import Sanction Goods – Iran) Amendment Specification 2016; and There are of course many potential pitfalls on the road ahead. The global oil glut and slump in commodity prices • Remaining designated Iranian persons and entities on threatens the value of Iran’s largest exports; its young the revised Consolidated List. population will expect jobs and professional development More information on remaining sanctions, including US opportunities in-line with their skills and investments made sanctions, can be found in Section 3 of this report. in education; and sectarian-tinged regional rivalries pose on- going security risks and challenges to geopolitical stability. Overall, Iran is a relatively untapped land of opportunities for Australian businesses, offering significant catch-up In addition to their political and military influence, the and future development potential in nearly all sectors of IRGC has also amassed a considerable commercial arm its sizeable economy – albeit with significant challenges and is considered to be the most powerful economic and risks along the way. More on risk can also be found in actor in the country.12 Having filled the void left by foreign Section 3 of this report. companies during the sanctions period, the IRGC now holds stakes in a number of sectors, ranging from Australian businesses are well-advised to take risks into construction and energy to media and import firms. consideration when performing their due diligence on engaging with opportunities in the country. Australian sanctions remain in place on certain individuals and organisations affiliated with the IRGC, as per the Australian Consolidated List. The List has been amended to remove a number of Iranian individuals and entities following the JCPOA, which has led to the suspension of most Australian autonomous sanctions on Iran – including those targeting the banking, oil and gas, and transportation sectors.
10 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN’S SOCIETY Iran is the second most populous country in the Middle Education is valued and highly competitive in Iran. Parents East and North Africa, at 82.8 million people, trailing only spend significant amounts of time and money on their Egypt’s 94.6 million.13 Around 60% of Iranians are ethnic children’s education, going as far as forgoing holidays or Persians, with the rest of the population belonging to a social engagements during exam preparation periods. myriad of ethnic minorities.14 Despite decades of political friction between Iran and Around 40% of this population is under 35 years of age15, the US, the majority of Iranians hold a favourable view and the country boasts a median age of just 29 years16, of the West – 83% of respondents to a 2015 FTI survey a promising demographic for the future. across all age groups saw no problem with peaceful coexistence.20 Just 6% said “Iran’s contacts with the West Iran is a Muslim state dominated by the Shia sect of should be limited” and that “Iran should be protected from Islam, whose adherents comprise around 90-95% of the Western concepts”. population.17 This is an important contrast to most of the Middle East and the wider Islamic world, as Shia make Younger Iranians also tend to be less ideologically driven up only around 10% of the world’s Muslim population.18 than older generations, embracing pluralism in their politics. Azerbaijan, Bahrain and Iraq are the only other Shia- Iranians are tech-savvy, despite state restrictions on majority countries, though there are sizable Shia minority Internet access which render around half of the world’s top communities across the Gulf and the Arabian Peninsula.19 500 websites inaccessible in Iran.21 Internet penetration is Iranians are generally highly educated, adaptable and nevertheless around 40-50% – and around 77% in Tehran favourably dispositioned toward the West. – with 11 million people having mobile Internet access.
AUSTRALIA-IRAN TRADE AND DIPLOMATIC RELATIONS
Trade has traditionally been the glue binding Australia Fruit and nuts were Australia’s biggest import from Iran and Iran, and has long defined our relationship. in 2015 (AUD 9.5 million), followed by floor coverings (AUD 6.3 million); lime, cement and construction materials Increasing trade flows were the original impetus for (AUD 3.9 million); and furniture, mattresses and cushions establishing diplomatic relations between Australia and Iran (AUD 1.8 million).24 in 1968, and our exports to Iran quickly doubled thereafter. Australian exports to Iran declined significantly in 2015 However, the size of this relationship has shrunk (75% year-on-year), primarily as a result of a sharp decline considerably due to the impact of international sanctions. in wheat exports – from AUD 338 million to AUD 51 million. This decline was due to strong domestic production in Iran is currently Australia’s 75th largest trading partner Iran, which dropped the country nearly 20 places among – our 58th largest export destination (AUD 89 million in Australia’s export markets. 2015) and 79th largest import source (AUD 32 million).22 For Iran, Australia is its 36th largest export market and Wheat accounts for AUD 51 million of Australia’s exports 23rd largest import source.25 to Iran, nearly 60% of total exports, followed by wool (AUD 11.5 million); milk, cream, whey and yoghurt (AUD Figure 1.3 details Australia’s trade with selected countries 23 7.3 million); and meat, excluding beef (AUD 6.2 million). in the region, and where Iran currently stands.
AUSTRALIAN GOODS AND SERVICE EXPORTS TO MIDDLE EAST
Goods Services
Amount Amount Amount Amount Exports Imports Exports Imports (AUD, rank) (AUD, rank) (AUD, rank) (AUD, rank)
UAE 3.3bn (15) UAE 2.4bn (19) UAE 655m (22) UAE 2.3bn (10)
Saudi Arabia 2.1bn (17) Saudi Arabia 817m (35) Saudi Arabia 341m (29) Saudi Arabia 398m (30)
Qatar 666m (31) Qatar 555m (42) Qatar 136m (42) Qatar 238m (35)
Turkey 466m (38) Turkey 435m (45) Turkey 120m (44) Turkey 75m (58)
Iran 89.8m (58) Iran 32.3m (79) Iran 94m (49) Iran 52m (69)
Figure 1.3: Australian goods and services exports to select Middle East countries, 2015 (Source: Australia Department of Foreign Affairs and Trade) 11
IN IRAN
AmongstOPPORTUNITIES the world’s remaining untapped opportunities, few can match Iran’s market size, its potential and its across-the-board demand for many of the goods and services Australia excels at providing. Iran was once an annual AUD 1 billion export market for Australia. It can be again if Australian companies are proactive in exploiting the synergies that exist between our two economies, as well as the demand- gaps that they are well-placed to fill.
As Iran continues to reintegrate with the global economy, more “ opportunities will present “themselves. I think it’s important that Australia is among one of the first movers here in Iran. – Australian Minister for Trade, Tourism and Investment, the Hon Steven Ciobo MP
12 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY “As Iran continues to reintegrate with the global economy, and New Zealand are key to diversifying the country’s more opportunities will present themselves,” Australia’s trading relationships, and are more important to Iran than Minister for Trade, Tourism and Investment, the Hon. many Asian countries due to the size and sophistication of Steven Ciobo MP said during a September 2016 visit to our economies.26 Tehran. “I think it’s important that Australia is among one of the first movers here in Iran.” Indeed, there are not only opportunities to expand the size of our trading relationship, but its diversity as well, Three Memorandums of Understanding (MoUs) where considering wheat accounts for the majority of Australia’s signed during Minister Ciobo’s visit to Iran – the first by an current exports to Iran. Australian Trade Minister since 2002 – to assist Australian companies in re-engaging with Iran. The first examples of diversification are starting to emerge, with Australia’s Blackmores reaching an agreement in One is aimed at facilitating engagement in water September 2016 with Iran’s Tasnim Pharma to sell ten of management; another is broader, and aims to facilitate its products in Iran over the coming year, and eventually engagement by Australian companies in not only water, increase this to 25 products.27 but agriculture, resources, health and education as well; the third is an MoU between Australia’s Export Finance and Going forward, the potential to expand our commercial Insurance Corporation (Efic) and the Export Guarantee relationship is vast. Iran is targeting AUD 10 billion in annual Fund of Iran. This third MoU is intended to assist businesses trade with Australia, a ten-fold increase on our previous in navigating remaining banking and finance complexities peak bilateral trade levels, according to Iran Chamber of with Iran (further discussed in Section 3 of this report). Commerce, Industries and Mines head Gholam Hossein Shafei.28 The Australian Trade and Investment Commission (Austrade) has re-established its Tehran office, which We highlight a few specific areas of potential in the had been closed since 2010, to further assist Australian agriculture, energy, resources and services sectors over companies in exploring untapped potential and navigating the following pages. the complexities of doing business in Iran.
Delegates on an Australian business mission to Iran led by Minister Ciobo in September 2016 were left with a strong impression of opportunity in the market, This mission to Iran was according to Austrade. All delegates reported that they expected to achieve commercial outcomes as a result of extremely well chosen and so their participation, and 80% of respondents to a post- very well timed (earlier than mission survey said they had developed new business relationships with key decision-makers and customers “I thought would happen!). in Iran. Two-thirds indicated that they raised their It is fantastic to see the organisation’s profile in Iran. government getting on The mission reinforced the view that while commercial opportunities exist for Australian companies in the front foot in facilitating agribusiness, health, education, mining, and the oil and strategic opportunities gas sectors, there are challenges in obtaining trade finance and ensuring adherence to remaining sanctions. (whether country-based or The re-opening of Austrade’s office in Tehran, with Mr Lino Strangis as Trade Commissioner, will provide support industry-based) for Australian to Australian companies seeking to do business in Iran. organisations. Obviously
In the medium-term, Austrade will develop networks and getting in early can mean more knowledge in priority sectors, provide market intelligence to the Australian business community and support firms obstacles might exist, but with market entry. Austrade will re-engage Iran through it generally also means that “ select sectoral missions that tie-in with major summits in Iran. In addition, Austrade will include information on Iran there will be more opportunity in the MENA seminar program in Australian capital cities around before it is taken off during November 2016, and invite Iranian delegations to Australia to participate in events such as the International the table by other countries Mining and Resources Conference (IMARC) in Melbourne, also in November 2016. trying to do the same. – Australian company delegate to a September During a visit to Australia in March 2016, Iran’s Foreign 2016 business mission to Iran Minister Mohammad Javad Zarif noted that both Australia
13 OPPORTUNITIES IN IRAN
AGRICULTURE, WATER MANAGEMENT, MEAT AND LIVESTOCK
Highlights:
• Iran is one of the largest food and • Iran has historically been a large export market beverage markets in the Middle East, and represents for Australian meat and livestock and has the a significant opportunity for Australian agricultural potential to regain this prominence, as the country and food exports, as well as Australian agricultural is forecast to become one of the world’s most technology and expertise. promising growth markets for the sector. • Iran has been the largest grain importer in the Middle • Australian skills and know-how in areas like water East, as well as a significant importer of Australian management are particularly in demand, especially wheat, which is currently the largest item in our with Australian experience in harnessing a comparably trading relationship. arid climate, and tackling drought through innovative practices and modern irrigation techniques.
Iran is one of the largest food and beverage markets • Processed food and beverages generated around in the Middle East, creating significant opportunity 3% of Iranian GDP in 2015, with double-digit growth for Australian agricultural and food exports, as well expected over the next decade.30 as Australian agricultural technology and expertise. • Markets for animal husbandry, agriculture and agri- Australian skills and know-how in areas like water products are all expected to double by 2025. management are particularly in demand. • The country also aims to further develop its dairy industry, A few highlights of recent developments and the Iranian which already enjoys strong export markets in the region. market’s potential include: Wheat dominates the commodities available for consumption • Gross household expenditure on food and beverages in Iran, followed by rice and sugar (see Figure 2.1). increased fourfold over the last decade, reaching USD 8,900 in 2014-15, up from USD 1,750 in 2005.29
IRAN TOP TEN COMMODITIES, AVAILABILITY FOR CONSUMPTION, 2011
1189 1200
1000
800
600
400 280 268 168 200 125 92 91 90 83 66 0
Quantity [kcal/capita/day]
Wheat and products Rice (Milled Equivalent) Sugar (Raw Equivalent) Soybean Oil Potatoes and products
Nuts and products Poultry meat Vegetables, other Milk – Excluding butter Butter, Ghee
Figure 2.1: Iran top ten commodities, availability for consumption, 2011 (Source: UN Food and Agricultural Organisation)
14 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN TOP TEN COMMODITY IMPORTS BY QUANTITY, 2011
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Quantity (tonnes)
Maize Cake of soybeans Sugar, raw centrifugal Soybeans Barley
Soybean Oil Bananas Palm Oil Oranges Meat – cattle, boneless (beef & veal)
Figure 2.2: Iran top agricultural imports by quantity, 2011 (Source: UN Food and Agricultural Organization)
Maize is also Iran’s largest agricultural product by quantity, Such challenges to domestic production increase Iran’s followed by soybean cake and raw centrifugal sugar (see demand for imports of agricultural and food products, Figure 2.2). including wheat, unrefined sugar and animal feed, as well as demand for water management capabilities and expertise. Meats are a big component of the Iranian agriculture Crops such as wheat, corn and oilseeds accounted for picture as well. Meat, excluding beef, is Australia’s third around 60% of Iran’s agricultural imports in 2014-1534, largest export item to Iran. However, it totalled just AUD 3 plugging a gap in domestic production created by drought. million in 2014.31 Around 75% of rainfall evaporates in Iran, and over 12 Iran is a large meat producer and exporter itself, sending billion cubic metres of water per year is wasted due to poor 1.8 million heads of livestock to neighbouring countries harvesting techniques and a lack of appropriate over the past two years.32 “We are ready for a big leap agri-processing industries.35 in the post-sanctions era…We hope by removing the shackles of sanctions from our farmers’ hands, we can Soil utilisation is also inefficient. Add to this a lack of see an increase in production and even exports,” says crop diversity and downstream agri-industries, obsolete Government Trading Corporation head of international technology and inappropriate distribution channels, and 33 trade Amir Hossein Shahmir. around a third of Iran’s crops and garden products go to waste. Iran’s natural environment poses challenges for it to meet existing demand or expand production. It is one of the All of these factors combine to make Australia and Iran driest countries in the world, with an average annual compatible trading partners when it comes to agricultural rainfall less than half that of Australia’s. and food products. In the post-sanctions environment, there is also emerging potential to trade in the technology The country is around 85% arid or semi-arid, leaving crop and expertise necessary to harness the similar agricultural production and growth vulnerable to drought. The challenges environments we share. presented by this dry environment are further compounded by a lack of irrigation – two-third’s of Iran’s 6.1 million hectares of wheat farming land is unirrigated, for example.
15 OPPORTUNITIES IN IRAN
Opportunity: Grain
Iran has been the largest grain importer in the Middle on-track to achieve its second consecutive year of self- East in recent years, as well as a significant importer of sufficiency, but may also be in a position to export its first Australian wheat – currently the largest item by a wide surplus in many years in 2016.36 margin in our trading relationship. This demand was driven by a protracted dry spell in the country which hampered Fortunately, Australia’s exports are of higher grade, domestic production. premium white wheat, protecting demand to a degree.
However, future grain demand may generally be subject Looking forward, Iran’s ongoing desire for self-sufficiency to boom and bust cycles in the Iranian market. At various in key economic areas should be monitored for potential times, these cycles have taken Iran from self-sufficiency demand shifts. Achieving self-sufficiency is part of Iran’s in wheat production, to being one of the largest grain broader efforts to reduce dependency on oil revenues, importers in the world. In the current cycle, Iran is not only protect its economy against international sanctions, and stimulate overall economic growth.
Opportunity: Water management
Water management is one of the biggest challenges appropriate government initiatives we are able to drive facing Iran as it ramps up its domestic agricultural capital to make sure that we produce outcomes that production. Drought and erratic agricultural practices reflect the priorities of business and people.” have taken their toll on Iran’s water tables, increasing the necessity of introducing best-practice knowledge, The University of Melbourne and the Sharif University of expertise and technology in the sector. Technology signed a Memorandum of Understanding (MoU) in August 2016 to establish a water research centre Much of Iranian agriculture is reliant on rudimentary to revitalise Lake Urmia in Iran.40 Once the largest lake in operations and processes, and is subject to the whims the Middle East and sixth-largest salt water lake in the of weather conditions. The country has lost an estimated world, Lake Urmia has shrunk to one-tenth of its former 30-40% of its renewable water resources.37 size due to damming groundwater depletion.
Iran hopes to change this and boost its water efficiency “We intend to exchange experiences with Iranian from around 36% to 70% over the next decade by counterparts in order to expedite resolution of water introducing modern irrigation technologies to 450,000 issues in Iran by achieving public participation as the hectares of farmland. It also plans to increase total strategic arm of the government and society,” says agricultural production from 90 million tonnes to 170 Michael Stewardson, Senior Lecturer at the University of million tonnes by 2025.38 Melbourne’s Department of Infrastructure Engineering.41
These goals create immense opportunities for Australia. The Iranian market for water management solutions could We have considerable success in harnessing a be worth “hundreds of millions”, according to Rubicon comparably arid climate with a lack of water resources, Water, an Australian water management technology firm.42 as well as in tackling drought through innovative practices and modern irrigation techniques that minimise water Companies like Rubicon – who specialise in water usage. irrigation solutions – can find significant opportunity to provide Iran with the technology and expertise necessary The foundation for cooperation in this field is already to improve its water management processes. These are being laid. necessary not only for agriculture, but many other sectors of the Iranian economy as well. A Memorandum of Understanding (MoU) on water resource management between Australia and Iran Australia is not alone in exploring potential collaboration was signed during Minister Ciobo’s visit to Tehran in and commercial opportunity with regards to water September 2016. management in Iran, as the country has also signed MoUs to cooperate in the sector with France, South Africa “There is much opportunity that lies at the core of this and Sweden in recent months.43 issue around water,” Minister Ciobo notes.39 “It is, of course, a humanitarian issue but Australia has also found Australian companies should therefore be proactive in through the application of market forces and the exploring opportunity and synergies in the field, mindful of both potential international competition, as well as the general risks and challenges of doing business in Iran.
16 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY Opportunity: Meat and livestock
The Middle East and North Africa is a large market for Australian meat and livestock – accounting for around one-third of Australian mutton and lamb exports, and nearly all our live sheep exports in 2014. [Iran] is a market that could be
worth up to 1.3 million head “Australia is renowned across the region for the quality and consistency of our product,” notes Meat and of sheep per year, and it gives Livestock Australia regional manager, David Beatty.44 “every person who lives on a More of this trade is likely to shift to Iran as sanctions lift farm, who’s a benefactor of “ and we reacquaint ourselves with the market. The first Iranian-Australian forum on meat and livestock was held in the export of live sheep and Tehran in February 2016, shortly after sanctions were lifted. cattle, another string to their Iran has historically been a large export market for bow and more money back Australia’s meat and livestock industry. Without the disruptions experienced in the past – whether due to through the gate. sanctions, regional instability and inspection requirements – the Iranian market may regain its prominence in – Australian Minister for Agriculture and Water Australia’s regional export picture. Resources, the Hon. Barnaby Joyce MP
Iran is forecast to be one of the world’s most promising emerging markets in terms of meat and livestock consumption growth, with beef in particular on a promising trajectory as Iranian incomes rise (see Figure 2.3).
IRANIAN MEAT PRODUCTION AND CONSUMPTION GROWTH
8
6
4
2
0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 –2 % change % –4
–6
–8
–10
–12
Poultry production Beef production Poultry consumption Beef consumption
Figure 2.3: Iranian meat production and consumption growth (Source: Meat & Livestock Australia, Business Monitor International)
The chart illustrates that beef production in Iran is unlikely Iran is projected to require 70,000 tonnes of red meat during to keep pace with future consumption growth, creating the 2016 Iranian calendar year (which began in March), taking a demand gap that Australia’s high-quality beef is well- into account domestic production and current stock levels.46 placed to fill. An increase in red meat exports will be a particular benefit The sector is likely to become increasingly competitive. of Australia’s lifting of sanctions on Iran, according to Countries like Brazil are keen to tap this opportunity Iran-Australia Joint Chamber of Commerce and Industries as well, especially after Iran ended a three-year ban on Chairman, Hamidreza Managhebi.47 Brazilian beef in late 2015.
Iran imported 137,000 tonnes of red meat in 2015, of which 105,000 was use for household consumption and the rest for industrial use.45
17 OPPORTUNITIES IN IRAN
Australia and Iran concluded a health protocol agreement on live animal exports in 2014, ending a 40-year boycott and clearing the way for Australian exports of cattle, goats and sheep to Iran.
The protocol agreement allows Australian exporters to have abattoirs and feedlots in Iran approved under the animal welfare rules of Australia’s Exporter Supply Chain Assurance System (ESCAS).
“We’ve had a lot of interest from Iran and that interest clearly understands our ESCAS system, so this is a good outcome all around”, Australia’s Minister for Agriculture and Water Resources, the Hon. Barnaby Joyce MP, said following the agreement.48
“Iran was the largest importer of Australian sheep and we hope that it could potentially return to those sorts of numbers”, Australian Livestock Exporters Council CEO Alison Penfold adds.49
Iran was Australia’s largest market for live sheep exports prior to the 1979 Revolution, and is now a market potentially worth AUD 20 million per year.50
Challenges include meeting Iran’s specific Halal conditions for sheep meat, including the need for an Iranian religious representative to oversee each slaughter.
The general lack (or poor state) of port facilities in Iran is a significant challenge for live export.
18 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY ENERGY
Highlights:
• Australia is well-placed to • Australian energy service and • Iran’s strong potential in provide the knowledge, expertise technology firms can capitalise renewable energy is virtually and technology necessary to on pent-up demand for foreign untapped, with significant bring Iran’s energy production technology and expertise to help opportunity for wind and solar and distribution infrastructure Iran become a greener and more technology in a country that is - which is in dire need of efficient energy producer. topographically well-suited to investment and modernisation – renewable power generation. up to international standards.
Iran is an energy giant, being home to the world’s second-largest natural gas reserves and fourth-largest oil reserves. Iran’s key energy statistics are summarised in Figure 2.4, and its oil and gas facilities are illustrated in Figure 2.5.
IRAN KEY ENERGY STATISTICS
Total primary energy Total primary energy Crude oil, Natural gas, production (2013) consumption (2013) proven reserves (2015) proven reserves (2015)
Quadrillion Quadrillion Quadrillion Quadrillion Rank Country Rank Country Rank Country Rank Country Btu Btu Btu Btu
1 China 99.878 1 China 116.718 1 Venezuela 298.4 1 Russia 1638.2
2 USA 81.747 2 USA 97.241 2 Saudi Arabia 268.3 2 Iran 1201.4
3 Russia 54.544 3 Russia 30.517 3 Canada 172.5 3 Qatar 871.5
4 Saudi Arabia 27.597 4 India 25.428 4 Iran 157.8 4 USA 368.7
5 Canada 18.938 5 Japan 20.37 5 Iraq 144.2 5 Saudi Arabia 293.7
6 Indonesia 15.999 6 Canada 14.194 6 Kuwait 104 6 Turkmenistan 265
7 India 14.902 7 Germany 13.776 7 UAE 97.8 7 UAE 215.1
8 Iran 13.032 8 Brazil 12.571 8 Russia 80 8 Venezuela 197.1
9 Brazil 9.692 9 South Korea 11.349 9 Libya 48.4 9 Nigeria 180.5
10 Qatar 9.622 10 France 9.622 10 USA 39.9 10 China 164
–– – 11 Iran 9.87 –– ––– –
Figure 2.4: Iran key energy statistics (Source: US Energy Information Administration)
19 OPPORTUNITIES IN IRAN
IRAN’S KEY OIL AND GAS FACILITIES
Yerevan Armenia Azerbaijan Uzbekistan Turkey Baku Turkmenistan
Tabriz Ashgabat
Neka Qazvin Mashhad
IGAT-2 under Tehran Sarakhs construction Shahr-e Ray
Kermanshah Arak Baghdad NAFT SHAHR
DEHLURAN Afghanistan
Esfahan Dezful Iran PARSI IGAT - 2 Ahvaz DARKHOVIN Bandar-e Emam GACH Khomeyni SARAN
Abadan IGAT - 1 IGAT - 3 Rafsanjan Kerman
NOWROUZ
Kuwait Shiraz Pakistan Kuwait Bushehr Dalan Saudi Arabia ABOUZAR Aghar ESFANDIAR North Pars Kangan FERIDOON Kangan Oilfield South Bandar ‘Abbas Pars Oil pipeline Gasfield Manama Gas pipeline BALAL North SIRRI Bahrain Field Refinery Oman Doha SALMAN Gas-processing plant Qatar
Tanker Terminal Abu Dhabi Agreed-upon maritime boundary United Arab Muscat Emirates Oman
Figure 2.5: Iran’s key oil and gas facilities (Source: University of Texas Libraries)
International sanctions have hampered Iran’s efforts to Sanctions also impacted Iran’s energy exports and develop these energy riches. An inability to access foreign revenue-generating capability. From 2011 to 2012, investment and technology has resulted in substantial sanctions resulted in a drop of nearly 1 million barrels per declines in crude oil production, slow growth in natural day (bpd) in crude oil and condensate exports, and oil gas production, and numerous project cancellations. and natural gas revenue fell almost 50% between fiscal year 2011/2012 and 2012/2013.51
20 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN’S MONTHLY EXPORTS OF CRUDE OIL AND CONDENSATE MILLION BARRELS PER DAY
3.5
U.S. imposes sanctions on Iran’s Central Bank 3.0
2.5 EU import ban in effect and Joint Plan of Action sanctions on shipping insurance is established in Iran’s oil sector enacted 2.0
1.5
1.0
0.5
– Jul 11 Jul 14 Jul 12 Jul 13 Apr 11 Jan 11 Apr 14 Apr 12 Oct 11 Apr 13 Jun 11 Jan 14 Jan 12 Oct 14 Jan 13 Oct 12 Jun 14 Oct 13 Jun 12 Jun 13 Feb 11 Feb 14 Feb 12 Feb 13 Mar 11 Mar Mar 14 Mar Mar 12 Mar Nov 11 Mar 13 Mar Aug 11 Sep 11 Dec 11 Nov 14 Nov 12 Aug 14 Aug 12 Nov 13 Sep 14 Aug 13 Sep 12 Dec 14 Dec 12 Sep 13 Dec 13 May 11 May 14 May 12 May 13
China India Japan South Korea Turkey other
Figure 2.6: Iran’s monthly exports of crude oil and condensate (million barrels per day), 2011-2014 (Source: US Energy Information Administration)
Figure 2.6 illustrates the impact of sanctions on Iran’s Iran hopes to attract around USD 200 billion in foreign monthly exports of crude oil and condensate during their investment in the sector over the next five years – around harshest period, between 2011 and 2014. This period saw USD 40 billion per year – USD 130 billion to meet upstream a total EU ban on Iranian petroleum imports, as well as capital demands, and USD 70 billion to meet downstream a ban on insurance and reinsurance policies on Iranian demands.54 vessels by European P&I Clubs – the underwriters of most insurance policies for the global tanker fleet – from July In addition to its expansive reserves and energy exports, 2012.52 Iran is also a very large energy consumer and boasts one of the world’s most energy-intensive economies. Domestic These restrictions impeded the sale of Iranian crude to all energy subsidies have encouraged domestic consumption customers, and left Japanese, Chinese, South Korean and and wastage in an economy where energy consumption Indian buyers searching for insurance alternatives. In many per capita is ten-to-fifteen times higher than that in Europe cases, these came in the form of sovereign guarantees for or Japan.55 vessels carrying Iranian crude oil, resulting in a mild export recovery in late 2012 – as seen in Figure 2.7 – but not to the Opportunities for involvement in Iran’s energy sector levels seen before the harshest sanctions were imposed.53 therefore include providing the expertise and technology necessary to improve its energy efficiency, upgrading its Iran’s oil and gas industries are therefore expected to energy infrastructure in general, and participating in the be amongst the biggest beneficiaries of the removal of exploration and development of its energy reserves. international sanctions under the JCPOA.
21 OPPORTUNITIES IN IRAN
IRAN’S MONTHLY EXPORTS OF CRUDE OIL AND CONDENSATE MILLION BARRELS PER DAY
U.S. imposes sanctions 4.5 on Iran’s Central Bank Joint Plan of Action 4.0 is established 3.5
3.0 net exports* 2.5
2.0
1.5 EU import ban in effect and sanctions 1.0 on shipping insurance in Iran’s oil sector enacted 0.5
0.0 Jul 14 Jul 12 Jul 13 Jul 11 Jan 14 Jan 12 Jan 15 Jan 13 Jan 11 Mar 14 Mar Mar 12 Mar Mar 15 Mar Mar 13 Mar Nov 14 Nov 12 Nov 13 Sep 14 Sep 12 Sep 13 Mar 11 Mar Nov 11 May 14 May 12 Sep 11 May 15 May 13 May 11
Petroleum & other liquids production Crude oil production Oil consumption
* Net exports is petroleum and other liquids production minus consumption. It encompasses crude oil. condensate, natural gas plant liquids, and refined oil products
Figure 2.7: Iranian petroleum and other liquids production and consumption (million barrels per day), 2011-2015 (Source: US Energy Information Administration)
Opportunity: Oil and gas
Iran is standing firm in its desire to recoup oil market NIOC plans to then increase production capacity to 4.3 share lost during the sanctions period. million bpd during the first quarter of 2017 and eventually to 5 million bpd in two-to-three years.59 “Iran will cooperate with OPEC on improving prices and the state of the crude market, but we expect our right These increases place increasing pressure on Iran’s to restore our lost market share in the market to be outdated export terminals and oil infrastructure in general. considered,” Iran’s Petroleum Minister, Bijan Zanganeh, To maintain peak production levels, facilities will need said in August 2016.56 sustained development, much of it dependent on foreign investment and technology. Iran’s oil production stood at around 2.9 million bpd when sanctions were lifted in January 2016, with most of it bound Most of Iran’s crude exports are handled through for customers in Asia – Iran’s largest energy market during terminals at Kharg, Lavan and Sirri island in the Gulf, the sanctions period. smaller crude terminals at Cyrus and Bahregansar, and one terminal along the Caspian Sea.60 Exports from Total output reached 3.85 million bpd by August 2016, the South Pars natural gas field are exported from the and oil exports doubled year-on-year to 2.7 million bpd – Assaluyeh terminal.61 buoyed by a 61% year-on-year increase in Asian imports of Iranian crude.57 Iran’s key oil infrastructure is mapped in Figure 2.5 and features of key terminals are broken down in Figure 2.8. The country is aiming to further increase production to 4 million bpd by the end of 2016, according to the National Iranian Oil Company (NIOC), restoring output to pre-sanctions levels.58
22 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN KEY OIL TERMINALS
Terminal Description Storage capacity
Kharg Island The largest and main export terminal in Iran, 28 million barrels processing all onshore production (including Iranian Heavy and Light Blends) and offshore production from the Froozan field (Froozan Blend)
Lavan Island Mainly handles exports of the Lavan Blend – Iran’s 5.5 million barrels highest-quality grade and one of the country’s smallest streams – sourced from offshore fields
Sirri Island A loading port for the Sirri Blend, produced from 4.5 million barrels offshore fields off the island
Neka Iran’s Caspian Sea port, constructed in 2003 1 million barrels (operations suspended in 2011) to receive crude oil imports from Caspian region producers – Azerbaijan, Kazakhstan and Turkmenistan – under swap agreements, to then be processed at refineries in Tehran and Tabriz and exported via Gulf terminals
Bandar Mahshahr and Abadan/ Export terminals which export refined product from N/A Bandar Imam Khomeini the Abadan refinery
Bandar Abbas Iran’s main fuel oil export terminal, located near the N/A northern end of the Strait of Hormuz
Figure 2.8: Iran’s key oil terminals (Source: US Energy Information Administration) Iran will cooperate with OPEC“ on improving prices and the state of the crude market, but we expect our right to restore our lost market share in the “market to be considered. – Bijan Zanganeh, Iran Petroleum Minister
23 OPPORTUNITIES IN IRAN
Iran’s significant domestic consumption has been satisfied by domestically-refined product during the IRAN’S LARGEST REFINERIES sanctions period, a shift from a previous dependence on imports of refined product – especially gasoline.62 Iran’s Crude distillation capacity (thousand Refinery refineries are listed in Figure 2.9. barrels per day)
Upgrading Iran’s terminals and overall oil infrastructure to Abadan 400 international standards, as well as providing world-class knowledge, expertise and technology, may be the biggest Isfahan 375 areas of opportunity for Australian participation in Iran’s oil sector. Bandar Abbas 330
Tehran 250
Arak 250
Figure 2.9: Oil refineries in Iran (Source: US Energy Information Administration)
24 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY COST OF PRODUCING A BARREL OF OIL AND GAS
Saudi Arabia
Iran
Iraq
Russia
Indonesia
US non-shale
Norway
US shale
Canada
Venezuela
Nigeria
Brazil
UK
0 5 10 15 20 25 3530 40 45
Cost (USD, as of April 2016)
Figure 2.10: Cost of producing a barrel of oil and gas (Source: The Wall Street Journal, Rystad Energy UCube)
Iran’s giant oilfields are cheap to develop and operate Iran launched a new contract for upstream energy by regional standards.63 At around USD 9 per barrel, projects, called the Iran Petroleum Contract (IPC), in Iran’s average production cost is higher than only Saudi October 2016.66 NIOC plans to hold several rounds of Arabia’s, and is less than half the cost of extra-regional tenders for exploration and production, and invites foreign producers like Russia, the USA or Canada (see Figure companies with relevant expertise to take part in the 2.10).64 qualification stages. Iran’s Petroleum Ministry hopes to sign USD 10 billion worth of contracts under the new However, the benefits of Iran’s low production costs are arrangements by March 2017. eroded once other export costs are taken into account, as the country’s outdated production technology, inadequate These new contracts allow companies a share of the oil logistics networks and outdated port facilities all take their they produce, which can then be sold on global markets, toll. while payment will be made in cash or in-kind based on a fee per barrel.67 Improving this infrastructure will not be possible without foreign investment and technology. This is a reality that The new contracts are also longer-term and valid for 20 Iran acknowledges in seeking international partners to years (with a possible extension to 25), making them more both revive aging oilfields, as well as develop new ones in attractive for international oil companies (IOCs).68 joint ventures between Iranian and foreign companies. The new contracts are expected to attract some of the Iran plans to tender 70 oil and gas fields projects to world’s major oil companies, such as France’s Total S.A. international companies, 52 in production and 18 and Italy’s Eni S.p.A., who have expressed interest in in exploration in the Gulf and Caspian Sea, offering further developing Iran’s energy sector.69 better incentives than those obtainable under buyback arrangements in the past.65
25 OPPORTUNITIES IN IRAN
Guidelines for IOC involvement in Iranian oil and gas upstream projects are featured in Figure 2.11; a list of priority fields are listed in Figure 2.12.
GUIDELINE FOR INTERNATIONAL OIL COMPANIES’ (IOC) INVOLVEMENT IN OIL AND GAS UPSTREAM PROJECTS
The following steps are approximate and may change. NIOC means the National Iranian Oil Company’s (NIOC) Development and Engineering Deputy, which will be the contact point for all IOCs.
1 IOC sends a letter of intent (LOI) to NIOC.
2 NIOC may arrange a meeting with representatives of IOC for primary negotiations.
3 NIOC provides a draft of the Memorandum of Understanding (MOU) and Confidentiality Agreement (CA) along with a list of oil and gas fields to IOC.
4 IOC selects and introduces its priorities according to the list.
5 NIOC selects maximum 2 fields to embed in the MOU and CA according to NIOC policies and IOC priorities.
6 NIOC and IOC negotiate to reach mutually agreed versions of MOU and CA in terms of wording and content.
7 Final versions of CA should receive NIOC CEO’s approval.
8 The final versions of MOU and CA are initialed by NIOC and IOC authorities.
9 A Joint Working Group (JWG) including members from NIOC and its affiliate companies from members from IOC should be formed and introduced before the Kickoff Meeting (KOM).
10 The initialed MOU and CA are signed by Managing Directors of NIOC and IOC at a Signing Ceremony
11 The Kickoff Meeting is held just after signing the MOU and CA in Tehran. Attendees are JWG, representatives from NIOC and its affiliated companies, and representatives are nominated technical team of the IOC.
12 The signed MOU is communicated by NIOC to its affiliate companies to commence the work.
13 NIOC through its affiliate companies provide the required information by IOC during negotiations and KOM.
14 JWG holds regular meetings every 45-60 days in mutually agreed places.
15 The outcome of the MOU is expected to become or result in a form of Master Development Plan (MDP) or pre-MDP proposed by IOC within 6 months after the starting date of the MOU.
16 NIOC reviews the proposed MDP or pre-MDP to make a go/no go decision.
17 The timelines (approximate) for the above steps are shown in the figure below:
Proposal LOI MOU signed 1st Received Received KOM JWG (MDP)
Primary Study Review Towards the Negotiations by IOC Proposal Next Steps
6 months
Figure 2.11: Guideline for international oil companies (IOC) involvement in oil and gas upstream projects (Source: National Iranian Oil Company Development and Engineering Deputy)
26 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY LIST OF PRIORITY FIELDS
IMPROVED OIL RECOVERY/ENHANCED OIL RECOVERY COMMON FIELDS
1 Cheshmeh Khosh South Azadegan
2 Paydar Farzad A & B
3 Ahvaz Bangestan-Asmari South Pars Phase 11
4 Mansouri Bangestan-Asmari Changouleh
5 Ab Teymour South Pars Oil Layer
6 Maroun Bangestan-Asmari Esfandyar
7 Bi Bi Hakimeh Bangestan-Asmari Arvand
8 Gachsaran Bangestan-Asmari Sohrab
9 Karanji-Asmari West-Paydar
10 Parsi-Asmari Dehloran
11 Shadegan-Asmari Aban
12 Pazanan-Asmari Naft Shahr
13 Rag Sefid Bangestan-Asmari Balal
14 Dalpari Salman Oil & Gas
15 Koupal Asmari-Bangestan Forouzan
Figure 2.12: List of priority fields (Source: National Iranian Oil Company Development and Engineering Deputy)
Opportunity: Energy technology, expertise A rise in oilfield services expenditure and demand for rigs and services is expected to be driven by an increase in the number of onshore wells drilled, including exploratory wells.73 Iran’s Australian energy service and technology firms can total active rig fleet is expected to increase from 73 units capitalise on pent-up demand for foreign technology and in 2015 to 91 units in 2019.74 expertise in Iran’s energy sector. Australian energy companies with the knowledge and This includes an energy efficiency drive that will require expertise necessary in Iran stand to benefit from this foreign technology in fields like improved oil (and gas) growth, as well as from more niche areas of opportunity. recovery (IOR) and enhanced oil (and gas) recovery (EOR) techniques.70 For example, Iran burns off (or “flares”), a substantial amount of its natural gas production – 1 Tcf of 8.1 Energy research firm Douglas-Westwood (DW) maintains Tcf produced in 2014.75 It surpassed Russia in 2013 the following growth projections for the Iranian energy as the world’s largest gas-flaring country, mostly due market over the next few years: to the lack of technology and infrastructure required to capture and transport gas associated with oil • Onshore and offshore hydrocarbons: 3-7% compound production.76 annual growth rate (CAGR); • Onshore rig growth: 6% CAGR Australian companies with expertise in the space can • Onshore oilfield services expenditure: 12% CAGR therefore find opportunity to assist Iran in becoming a more efficient and greener energy producer. • Offshore oilfield services expenditure: 2% CAGR through to 202071 DW expects demand for offshore rigs to rise significantly over 2016-17, and spending to peak around 2018, thanks to large projects like South Pars, Lavan and Abouzar.72 Marginal declines are expected thereafter.
27 OPPORTUNITIES IN IRAN
Opportunity: Renewables
Iran’s potential in renewable energy is virtually untapped, Despite the lack of a timetable for their launch, the with significant opportunity for wind and solar technology prospect has drawn significant international attention – in a country that is topographically well-suited to including from several major European companies in the renewable power generation. renewables space, according to WindEurope CEO Giles Dickson.81 Strategically located along major wind corridors with consistent currents, Iran’s wind power potential rivals Germany’s Siemens has already been named the preferred that of major developed countries like France and the supplier for a 62 MW wind project in northern Iran, and UK. Its northwest, southeast and southern regions Denmark’s Vestas – who have prior experience in the receive around 300 days of sunlight per year, an ideal market – is exploring the opportunity to exploit Iran’s environment to harness solar energy.77 “interesting” wind potential.82
Iran is heavily reliant on fossil fuels, both economically Denmark is also exploring the possibility of establishing and for power generation, and is keen to diversify in both a manufacturing plant in Iran for wind turbines, as well as respects. Natural gas and petroleum account for around the potential to utilise the country as an export hub for the 98% of Iran’s primary energy consumption (see Figure 2.13). technology to the wider region.83 Solar is another area of strong potential in Iran, and the country is seeking to develop 5 GW of combined wind IRAN’S TOTAL PRIMARY ENERGY CONSUMPTION, and solar capacity by 2018, according to Energy Minister SHARE BY FUEL 2013 Hamid Chitchian.84
International players are active in exploring Iran’s solar potential. These include including a German company which plans to establish 1.25 GW of solar power capacity across various regions of the country, and a consortium of South Korean, Indian and local Iranian companies who Petroleum 38% plan to develop an energy park consisting of 1 GW of solar power capacity in Iran’s southwestern Khuzestan 85 Natural Gas province. 60% Despite Iran’s ability to harness local human capital, expertise and technology in the renewables sector, it is still in need of specialised technology from foreign providers in order to fully tap its renewables potential – such as advanced semiconductors and inverters for Hydropower 1% voltage control.86 Coal < 1% Nuclear < 1% Development challenges in the sector include integrating Non-hydro renewable resources into Iran’s wider electricity grid, the renewables < 1% country’s underdeveloped and aging infrastructure, and its lack of expertise in specialised technologies.87 Figure 2.13: Iran’s total primary energy consumption, share by fuel 2013 (Source: US Energy Information Administration) There are some risks to be aware of, such as the degree of “Iranianisation” required, law firm King & Wood Mallesons cautions. This refers to the potential International interest in exploring the country’s potential consequences of local Iranian company management for renewables pre-dates the JCPOA, and Iran has sought making key decisions about the use and application of to encourage this enthusiasm by reducing bureaucracy, foreign technology, especially given the fact that IOCs are streamlining the licensing process, as well as presenting liable for the actions of their joint operating companies in competitive incentives to renewable infrastructure Iran.88 developers and equipment suppliers.78 Opportunities for Australian technology providers, Iran has developed indigenous technical capabilities in the engineering service providers, as well as and service renewables and the vast majority of components used providers more broadly nevertheless exist across nearly to develop its current crop of wind farms are locally all activities of the energy supply chain in Iran. These produced.79 opportunities should be judiciously explored by Australian Competitive tenders for large-scale wind projects are companies with relevant goods, services and expertise to expected to be introduced, with up to 1GW potentially offer. being offered to private investors, according to expectations as of September 2016.80
28 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY MINING AND MINERALS
Highlights:
• Iran is a mineral-rich country, • Given the geological and • Australian METS companies blessed with most elements environmental similarities can provide the expertise found in the periodic table and between Australia and Iran, Iranian mining companies need home to around 7% of the Australian miners and METS to bring local practices up to world’s mineral resources. companies stand to play a large international standards, as well role in further developing the as the technology necessary mining sector in Iran - especially to streamline processes and when it comes to drilling, pit- improve the efficiency of Iranian to-port infrastructure, mine mining and processing facilities. remediation, water management, and corporate social responsibility.
29 OPPORTUNITIES IN IRAN
Iran is a mineral-rich country, blessed with most elements found in the periodic table and home to around 7% of the IRAN MINERAL PRODUCTION RANKINGS world’s mineral resources – despite having just 1% of the world’s population.89 Mineral World ranking
Its resource reserves total around 43 billion tonnes Aluminium 17 and span 68 different minerals, valued at an estimated Aluminium oxide 26 USD 700 billion – ranking Iran among the world’s top 15 mineral-rich countries (see sector highlights in Ammonia 21 90 Figures 2.14 and 2.15). Arsenic 11 Mining could become a bigger revenue generator than Asbestos 9 oil for Iran, if the government places emphasis on further Baryte 6 developing its metals sector, according to Mojtaba Khosrowtaj, first deputy Minister in charge of trade at Bauxite 10 Iran’s Ministry of Industry, Mine and Trade.91 Bentonite 12
Boron 9
Celestite 6
IRAN MINERAL HIGHLIGHTS Cement 5
Chromium 5
• Iron ore Copper 12
– Production: 34 million tonnes (2014) Diatomite 20 – Reserves: 2.7 billion tonnes Feldspar 12 – Bulk of output from the Gol Gohar and Chadromalu mines Ferrochromium 14 Gold 66 • Steel Gypsum 2 – Production: 14.9 million tonnes (2014) – Targeting production increase to 52 million Iron 8 tonnes by 2025 Iron ore 9
• Gold Kaolin 12 – Reserves: 250 tonnes Lead 16 – Launched Zarshuran plant in 2014, the biggest Magnesite 13 gold processing operation in the Middle East Manganese 12
• Copper: Mica 9
– Production: 194,000 tonnes (2014) Molybdenum 9 – Reserves: 2.6 billion tonnes Natural iron 9 – Targeting production increase to 800,000 tonnes by 2025 Perlite 10 Quicklime 13 • Zinc: Silica 14 – Reserves: 11 million tonnes – Mehdiabad project one of the world’s biggest Silver 19 zinc deposits Soda ash 20 Sodium chloride 15 Figure 2.14: Iran mineral highlights (Source: Reuters, Iranian Mines and Mining Industries Development and Renovation Organisation) Steel 16
Strontium 5
Turquoise 1
Zinc 14
Figure 2.15: Iran mineral production rankings. August 2015 (Source: Hannam & Partners)
30 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY IRAN’S METALLOGENIC BELTS AND DEPOSITS
CU Line
Au Deposit/Prospect
Fe Deposit/Prospect
Cu Deposit/Prospect
Zn, Pb Deposit/Prospect
Kerman Cu Belt Malayner-Isfahan Pb, Zn Belt Esfandaghen – Faryab Cr Belt Taknar and Kavir-Sabzevar Cu, Cr, Au, Fe Belt Tarom-Hashtjin Cu, Pb, Zn, Fe, Au Belt
Figure 2.16: Iran’s metallogenic belts and deposits: Au Gold, Cr Chromium, Cu Copper, Fe Iron, Pb Lead, Zn Zinc (Source: Hannam & Partners)
Around 70% of Iran’s 7,000 mines (90% of which are Its national development plan calls for mining to be state-owned) are operational and the sector employs boosted to 4% of GDP, a fivefold increase over its current upwards of 620,000 people.92 0.7%.95
Most of the country’s operating mines are located in Around AUD 29 billion in projects are expected to be Khorasan, in Iran’s northwest, while Khuzestan, Kerman, opened to foreign investors over the coming years, Alborz and the Lut desert are also significant mining though it may take 3-5 years for new investment to regions.93 translate into substantial mining sector growth, according to industry estimates.96 Iran’s metallogenic belts and deposits are illustrated in Figure 2.16. Nevertheless, there is no shortage of attention being paid to Iran’s mining and minerals potential. Despite these riches, the value of Iran’s annual mining and mineral imports and exports is only around USD 11.5 Iran’s state-run Iranian Mines and Mining Industries billion, mostly steel.94 Development and Renovation Organization (IMIDRO) notes that discussions over new investment in areas like This has largely been due to the effect of sanctions, aluminium, copper, gold and steel have been held with which prevented Iran from accessing the foreign finance, Australia’s Rio Tinto, Germany’s Aurubis, and European technology, equipment and machinery necessary to fully giants Glencore and Trafigura.97 develop the country’s mineral wealth.
Post-sanctions, the Iranian government is seeking to attract the private investment needed to develop the sector through public-private joint ventures.
31 OPPORTUNITIES IN IRAN
Opportunity: Mining and minerals
Given the geological and environmental similarities A shortage of skilled labour is another issue in the industry, between Australia and Iran, Australian miners and METS as a brain drain of skilled and educated professionals companies stand to play a large role in further developing seeking more lucrative overseas opportunities has the mining sector in Iran - especially when it comes impacted the available human capital in Iran.103 to drilling, pit-to-port infrastructure, mine remediation, water management, and corporate social responsibility, Nevertheless, Iran’s resource wealth and strong demand according to the Department of Foreign Affairs and Trade for the knowledge, expertise and services that Australia (DFAT).98 can provide in the mining and minerals space should not be ignored, especially as our international competitors Australian METS providers can provide the expertise seek their own place in the Iranian market. Iranian mining companies need to bring local practices up to international standards, as well as the technology necessary to streamline processes and improve the efficiency of Iranian mining and processing facilities.99 IMIDRO PROJECT EXAMPLES IMIDRO hopes to attract investment for projects running the gamut from extraction and smelting, to steel making Ardestan Kooh Dom Gold Plant from scrap, as well as acquiring necessary equipment and technology. An example of some the projects IMIDRO Chabahar Aluminum Project hopes to attract investment for are listed in Figure 2.17. Chahfiroozeh Copper Concentration Plant Most Iranian mining companies are estimated to be operating at just 50-60% of capacity100, illustrating Daralou Copper Concentrator Plant the potential efficiency gains to be realised with the assistance of foreign METS providers. Hashuiee Mine Development Project Industry body Austmine sees particular potential for Hormozgan Pelletizing Plant Australian METS providers in the following operational areas:
• Autonomous mining systems; IRALCO Combined Cycle Plant • Developing best practice methods through education and consultancy; Jajarm Aluminum Smelter Project • Environmental management, including cleaner and Kerman Acid Plants Construction Project more efficient technology; • Mine closure and remediation; Pabdana Mine Development Project • Mineral processing; • Safety improvements, including training, consultancy, Persian Special Economic Zone Jetty Project equipment, communications and asset utilisation maintenance; Sarab Alumina Project • Software development; Savadkouh Coking Plant Project • Trucks and heavy machinery; • Water management.101 Sehchahun Pelletizing Plant
As with all opportunities in Iran, capitalising on these Shadegan Steel Company Expansion Project prospects will not come without challenges, especially in such a state-heavy sector that will require thorough due Tabas Parvadeh Coal Mine Development Project diligence to prevent running afoul of remaining sanctioned individuals and entities. Figure 2.17: IMIDRO Project Examples (Source: Iranian Mines and Mining Industries Development and Renovation Organisation) Most sanctions applicable to exports of mining and mineral products from Australia to Iran have been lifted, including restrictions on the export of bauxite and alumina, though certain semi-finished aluminium and aluminium alloy products are still restricted.102
32 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY EDUCATION AND SKILLS TRAINING
Iran is an education and credential-mad country, with both being criteria for success in the country’s professional and social circles. Highlights: It is home to one of the most highly educated populations in the Middle • Iran’s university-educated East, with the largest cohort of tertiary students in the region at around 4.5 population has grown faster million. Iranians spend around AUD 4 billion per year on higher education, than anywhere else in the the vast majority of which is paid out-of-pocket. Middle East, and the country is expected to be one of the Figure 2.18 illustrates the structure of Iran’s secondary and tertiary world’s fastest-growing markets education system. for postgraduate studies well into the next decade. • Iranians have a long history of OUTLINE OF SECONDARY AND TERTIARY EDUCATION IN IRAN pursuing education abroad, with around 150,000 Iranians studying overseas each year - Doctoral Degree an increasing number of which can be attracted to Australian 4 3 University institutions. 2 1 • Australian vocational education and training providers can assist Master Degree Iranian companies in upgrading 2 their workforce skills and University capabilities to compete in an 1 international market, addressing Bachelor Degree shortages of soft management and technical skills. 7 7 6 6 5 5 4 University 3 Higher Education 4 Kardani, Fogh Diplom. 2 Institution 3 1 2 Associate Degree 1
National Entrance Examination / Konkur
Pre-University Certificate 2 Higher Education 1 Institute 2 Technical 1 Institute Pre-University Year
First Class Second Class National High School Diploma Technician’s Technician’s Qualified Certificate Certificate Guidance Cycle Teacher (Rural)
Trade Certificate 11 Secondary Cycle 11 Secondary Cycle 11 Rural Teacher 10 Theoretical / 10 Vocational / 10 Training Centre 10 Vocational 9 Academic Stream 9 Technical Stream 9 9 School
8 7 Guidance Cycle 6
5 4 3 Primary School 2 1
Figure 2.18: Outline of secondary and tertiary education in Iran (Source: Institute of Higher Education, World Education Services)
33 OPPORTUNITIES IN IRAN
University enrolment has more than doubled over the The quality of domestic institutions is regarded as fairly past decade, with 58% of Iranians aged 18 to 24 studying uniform, and many schools are globally ranked. There at Iranian universities in 2013, well advanced toward the is roughly a 50/50 split between public and private government’s target of 60% by 2025.104 The percentage institutions in the country. of Iran’s university-educated population has grown faster than anywhere else in the Middle East.105 Rectors from Iran’s top ten universities meet regularly and advise the government’s Ministry of Science, Research Rapid enrolment growth has been facilitated by an and Technology on higher education policy. These ten unprecedented rise in part-time university study and universities are listed in Figure 2.19. distance-learning options over the past decade, with available spaces increasing from 383,000 to 1.1 million.106 In addition to domestic studies, Iranians also have a long history of pursuing education abroad, with around The growth trend looks set to continue as the country is 150,000 Iranians studying overseas each year. There is expected to be one of the world’s fastest-growing markets prestige associated with international qualifications, which for postgraduate studies well into the next decade. is valued in Iran’s status-conscious society.
Of the nearly 350 government-approved higher education institutions in Iran, popular study destinations include the public Payame Noor University, and the private, non- profit Islamic Azad University – one of the world’s largest. Each institution enrols over one million students, many in distance and part-time learning, and each operates hundreds of campuses across Iran, as well as in some international jurisdictions.
TOP TEN UNIVERSITIES IN IRAN
Name Location Enrolment (total)
Tehran University Tehran, Tehran 50,448
Sharif University of Technology Tehran, Tehran 10,502
Amirkabir University of Technology Tehran, Tehran 13,593
Tarbiat Modaras University Tehran, Tehran 7,970
Shiraz University Shiraz, Fars 20,000
Iran Science and Technology University Tehran, Tehran 11,957
Isfahan University of Technology Isfahan, Isfahan 10,000
Isfahan University Isfahan, Isfahan 16,553
Ferdowsi University of Mashhad Mashhad, Razavi Khorasan 26,000
Figure 2.19: Top ten universities in Iran (Source: Institute of International Education, university websites)
34 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY Opportunity: Education and skills training IRANIAN STUDENTS STUDYING ABROAD Iranians value tertiary education, and the expected increase in demand for Master’s and Doctoral programs is such that capacity concerns at Iranian universities are emerging. In 2011, just 6% of Iranian students applying to a Master’s degree program were accepted, and just 4% 107 Malaysia at the PhD level. 16% This is driving an increasing number of Iranian students to seek education opportunities abroad, a flow that Other Australian institutions can capitalise on. Around 55,000 Countries USA Iranian students are estimated to be studying abroad, 40% 13% led by enrolments in Malaysia and the United States (see Figure 2.20). Canada Iran has been one of the fastest-growing outbound 10% student markets in the world, with an annual growth rate Germany UK of around 18%, according to the British Council. By 2024, 6% 6% Turkey the Council expects the following countries to attract the 6% largest number of Iranian postgraduates studying abroad: Australia 3%
• US: 11,900, +4.3% annual growth rate; • Germany: 5,700, +3.6%; Figure 2.20: Destination countries for Iranian students studying abroad, 2012 (Source: Iran Ministry of Science, ICEF Monitor) • Canada: 2,800, +2.4%; • UK: 2,700108
35 OPPORTUNITIES IN IRAN
AREAS OF STUDY AMONG IRANIAN STUDENTS IN THE US
Engineering 56% STEM 80%
Business/Management Fine/Applied Arts Intensive English Other Physical/ Math/Computer Health Education Humanities Social Sciences Undeclared Life Sciences Science Professions
Figure 2.21: Areas of study among Iranian students in the US (Source: Institute of International Education)
As a barometer of subject demand, around 80% of Iranian Collaboration on joint educational research and students studying in the US are enrolled in STEM subjects, publication is a renewed opportunity for Australia in the with more than half studying engineering (see Figure 2.21). post-sanctions environment, and is an area Austrade is actively engaged in promoting. Australian education service providers stand to benefit from increased outbound student traffic from Iran, There is also significant scope for Australian vocational potentially growing the number of Iranians studying in education and training (VET) providers in Iran. Australia from the current 3,500 or so. In the post-sanctions environment, many Iranian Some in the industry forecast the largest post-sanctions companies need to enhance and upgrade their workforce’s impact on education to be a larger number of Iranian skills and capabilities in order to compete in an international students studying in Western countries.109 Despite the market. Though strong in entrepreneurial spirit, Iran proximity of Gulf universities, Iranian students tend to be generally lacks the management – especially middle more attracted to higher education in places like Australia, management – skills necessary in a modern economy. Canada, Europe and the US.110 Australian VET providers are well-placed to fill this gap, Beyond attracting Iranian students to our shores, opportunities and can provide the the necessary training and up-skilling for Australian education service providers extend to skills in technical and managerial areas across a number training and development, as well as to research and of sectors: from finance and energy, to tourism and collaboration partnerships with Iranian institutions. hospitality.
In terms of collaboration, a number of Australian Aligning VET provision with strategic sectors targeted for universities have re-established scientific and academic development by the Iranian government – such as tourism cooperation with Iran. development and resource production and extraction technologies – may be a lucrative avenue to pursue for Examples include the aforementioned collaboration Australian providers. between the University of Melbourne and Sharif University of Technology on water research, as well as a MoU between The VET sector is a traditional area of strength for Australia, Sharif and Curtin University to boost cooperation in bilateral and international competitors from European countries research in general, including in petroleum engineering.111 are already pursuing this opportunity. For example, TVET UK has opened an office in Iran via an Anglo-Iranian joint Iran is among the world’s leading scientific countries, venture with Global Elite Alliance, in order to pursue new and may rank fourth in the world in scientific research business opportunities in the post-sanctions market.114 articles and publications by 2018.112 Collaboration during the sanctions era between Iranian and Western Future Australia-Iran educational engagement may also researchers, such as those in the US, were constrained include the exchange of students and professors, the by misconceptions about Iran and whether the sanctions delivery of joint training and academic programs, and regime would penalise academic engagement.113 focusing cooperation in areas that marry Australian expertise with Iranian demand. For example, in energy, water and environmental management.
36 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY TOURISM Iran is one of the world’s largest untapped international tourism markets. Long periods of relative international Highlights: isolation, coupled with international sanctions and negative perceptions toward Iran, have left its tourism • Iran is one of the world’s largest untapped sector underdeveloped and in dire need of investment. international tourism markets, and long periods of isolation have left its tourism sector Iran’s tourism sector has opened substantially since the underdeveloped and in need of significant lifting of sanctions. Inbound tourism has seen a 10% investment. year-on-year increase in the first six months of 2016 – an • Australian investors and service providers increase more than twice the global average – and visa-on- can capitalise on a construction boom in arrival arrangements have been introduced for nationals of 115 the sector and leverage our expertise in the most countries around the world, including Australia. development and management of tourism The sector contributed around 7.5% to Iran’s GDP in 2015, infrastructure, including support services and this is expected to increase to 9% in 2016.116 such as contracting and surveying. • Opportunity extends to the training space, However, there are significant challenges to be where Australian education and training addressed in growing Iran’s tourism sector to meet its providers can capitalise on Iran’s need to up- potential. The sector is not internationally competitive, skill its tourism and hospitality workforce. ranking 97th out of 141 countries on the World Economic Forum’s Travel & Tourism Competitiveness Index.
This ranking places Iran 12th in the Middle East and North Africa region, ahead of just Kuwait, Algeria, Mauritania and Yemen. Despite its low overall ranking, there are some positive signs to build on. For example, Iran ranks close to the regional average in terms of safety and security, health and hygiene, as well as human resources and the labour market (see Figure 2.22).
37 OPPORTUNITIES IN IRAN
TRAVEL & TOURISM COMPETITIVENESS INDEX, MENA REGION
Human Regional Global Business Safety and Health and Country/Economy Resources and ICT Readiness Rank Rank Environment Security Hygiene Labour Market
Middle East and North Africa
United Arab Emirates 1 24 5.90 6.60 5.28 5.15 5.76
Qatar 2 43 6.05 6.61 5.97 5.23 5.44
Bahrain 3 60 5.53 5.33 5.17 4.71 5.76
Morocco 4 62 4.73 5.83 4.54 4.05 4.03
Saudi Arabia 5 64 5.21 5.99 5.10 4.46 5.29
Oman 6 65 5.29 6.38 5.37 4.27 4.83
Israel 7 72 4.61 4.85 6.06 4.81 5.25
Jordan 8 77 4.86 5.79 5.53 4.56 4.17
Tunisia 9 79 4.42 4.85 5.16 4.31 3.94
Egypt 10 83 4.11 3.40 5.40 4.12 3.80
Lebanon 11 94 3.76 3.81 6.04 3.99 3.62
Iran 12 97 3.85 4.89 4.71 3.95 3.36
Kuwait 13 103 4.69 5.76 5.43 4.26 5.01
Algeria 14 123 3.78 4.90 4.97 4.04 3.09
Mauritania 15 137 3.46 5.06 3.03 2.30 2.18
Yemen 16 138 3.58 2.86 3.84 3.31 2.29
Middle East and North Africa average 4.69 5.19 5.24 4.35 4.38
Middle East and North Africa standard deviation 0.82 1.10 0.79 0.70 1.15
Best Performer (global) 6.13 6.70 6.97 5.64 6.37
Figure 2.22: 2015 Travel & Tourism Competitive Index: Middle East and North Africa (Source: World Economic Forum)
IRAN TOURISM ESTIMATES AND FORECASTS
2014 2025
USD bn % of total Growth USD bn % of total Growth
Direct contribution to GDP 9,149.0 2.3 6.6 17,0 6 0.0 2.9 5.7
Total contribution to GDP 25,137.6 6.3 6.1 45,623.2 7.8 5.5
Figure 2.23: Iran tourism estimates and forecasts (Source: World Travel & Tourism Council)
38 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY In terms of potential in the short-term, Iran offers an International attention and investment is already increasingly accessible opportunity for intrepid travellers. increasing, beginning in 2015 when France’s Accor International airlines are either relaunching or launching became the first foreign company to manage a hotel new routes to Iran, tour operators are becoming more in Iran. prevalent in the market, and warming relations with the West are helping to defrost international opinion and This was followed by announcements from the UAE’s correct misconceptions toward the country. Rotana and Spain’s Meliá Hotels International, who became the first international five-star brands to Over the medium and longer-term, Iran’s ancient culture announce plans to enter the Iranian market.118 and relatively untapped potential is expected to drive windfall spending in the tourism sector. There is significant “We certainly think Iran has the right resources and the catch-up potential. For example, Iran is among the world’s people, along with the cultural approach. Everything is top-ten countries for the number of UNESCO World there to be a success,” said Maria Zarraluqui, Meliá Hotels Heritage cultural sites, yet in 2014 attracted just five million International global development managing director, at visitors – over eight times less than neighbouring Turkey. the time.119
The World Bank estimates Iran’s international tourism Turkish investors plan to build at least ten hotels in Iran receipts at just USD 1.5 billion in 2013, down from USD 2.5 – in Tehran, Isfahan, Shiraz, Tabriz and Mashhad.120 This billion just two years earlier, and behind countries like Albania, includes transferring Turkish knowledge and skills in Azerbaijan and Georgia.117 tourism training, planning, marketing and advertising to boost Iran’s capabilities to international standards.121 The JCPOA and warming relations with the international community are reversing a downward trend and pointing In terms of the Asian region, Iran plans to attract its share toward significant medium-term growth in the sector. of the 100 million Chinese who travel abroad annually as well, targeting 5% of China’s overseas tourists.122 Tourism’s contribution to Iranian GDP is expected to roughly double by 2025, both in direct and total terms, Both the quality and quantity of hotels and other tourism as is domestic, leisure and business spending (see infrastructure is insufficient to meet the demands of an Figure 2.23). expected transformation of Iranian tourism into a USD 30 billion industry that attracts 20 million people over the Iran’s tourism infrastructure will require substantial next ten years. investment and modernisation in order to cope with this expected influx. This includes physical infrastructure Both hard and soft tourism infrastructure is in strong like hotels, as well as soft infrastructure, like tourism demand in Iran, and a significant area of opportunity for management skills. Australian companies that can leverage well-regarded and recognised strengths.
39 OPPORTUNITIES IN IRAN
TRAVEL & TOURISM COMPETITIVENESS INDEX, MENA REGION
Cultural Ground Tourist Prioritsation International Price Environmental Air Transport Natural Resources Country/Economy and Port Service of T&T Openness Competitiveness Sustainability Infrastructure Resources & Business Infrastructure Infrastructure Travel
Middle East and North Africa
United Arab Emirates 4.97 2.77 4.95 4.39 5.91 5.06 5.46 2.51 1.97
Qatar 4.89 1.93 5.33 4.32 4.17 4.79 4.81 2.12 1.48
Bahrain 4.14 2.34 5.33 3.73 3.52 5.53 4.74 1.92 1.33
Morocco 5.27 2.56 4.94 4.09 2.86 3.48 4.44 3.11 2.51
Saudi Arabia 4.50 1.49 5.49 3.41 3.79 3.66 4.44 2.68 1.91
Oman 4.51 2.07 5.33 4.07 2.98 4.25 4.53 2.59 1.45
Israel 4.63 2.54 3.24 3.76 3.16 3.91 4.20 2.47 1.98
Jordan 5.46 3.24 4.63 3.92 2.61 3.25 4.37 2.05 1.27
Tunisia 4.91 2.38 5.61 4.22 2.53 3.02 4.54 2.36 1.58
Egypt 4.56 2.17 6.19 3.99 2.93 2.84 3.60 2.45 2.40
Lebanon 5.22 2.50 4.84 3.29 2.46 3.10 5.18 1.71 1.47
Iran 3.35 2.14 6.62 3.47 2.22 3.28 2.61 2.48 2.59
Kuwait 3.03 1.75 5.04 2.95 2.51 3.61 3.84 1.87 1.17
Algeria 2.74 1.51 5.50 3.51 1.98 2.56 2.03 2.04 2.05
Mauritania 3.12 2.94 4.82 4.15 1.59 1.96 2.37 2.12 1.11
Yemen 2.80 1.34 5.99 2.92 1.59 2.55 2.78 2.03 1.45
Middle East and 4.33 2.18 5.27 3.74 3.01 3.66 4.10 2.29 1.77 North Africa average
Middle East and North Africa 0.94 0.54 0.76 0.46 1.07 0.97 1.03 0.36 0.48 standard deviation
Best Performer 6.03 5.25 6.62 5.63 6.75 6.45 6.83 6.01 6.69 (global)
Figure 2.24: 2015 Travel & Tourism Competitive Index: Middle East and North Africa (Source: World Economic Forum)
Figure 2.24 illustrates Iran’s tourism infrastructure deficit must triple over the next decade to meet demand.123 compared to many of its neighbours. Iran’s Cultural Heritage, Handicrafts and Tourism While infrastructure is definitely a sore spot, these Organization (ICHHTO) plans to address this deficit rankings also illustrate Iran’s tourism potential – it ranks through the construction of 300 four-and-five-star highest in the region for “cultural resources and business hotels over the next five years, in cooperation with travel”, and highest in both the region and the wider world the private sector.124 Around 170 of these projects have for “price competiveness”. already begun.125
However, Iran notably lacks four-and-five-star facilities Incentives were introduced in March 2016 to stimulate which are up to international standards. Just 130 of Iran’s hotel construction, particularly in regional areas, including 1,100 hotels currently hold such a rating, a number which a five-year exemption on income tax.
40 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY Opportunity: Tourism
Around 1,750 tourism projects are currently underway in Iran’s deficit in these softer areas is already leading Iran, according to the ICHHTO, 820 of which are one-to-five to some innovative approaches by foreign companies star hotels and hotel apartments.126 operating in the market. For example, Accor plans to collaborate with local universities to help provide Australian investors and service providers can capitalise the middle management skills currently lacking in the on this construction boom in the sector and leverage our country.128 The French hotelier is also designing a training expertise in design, development and management of and leadership development program within its hotel, and tourism infrastructure. An estimated USD 10 billion will provides on-site English language training. be required to complete these tourism projects, including around USD 5 billion in loans from domestic and foreign While tourism was not a sanctioned sector, investments in institutions over the next five years.127 the industry still face challenges stemming from remaining sanctions and market risks. The opportunity for Australia extends to providing the services that support tourism infrastructure construction As a result, many of the recently signed agreements with projects, such as contracting, surveying, project and foreign companies involve local partners who are directly safety management. It also extends to the training involved in the finance and construction of facilities. For space, where Australian education and training providers example, Accor is providing hotel management but has can capitalise on Iran’s need to up-skill its tourism and not invested its own capital in Iran.129 hospitality workforce.
41
IN IRAN CHALLENGES This section provides an overview of the sanctions regime, as well as the remaining complications and potential risks facing Australian companies doing business in Iran.
42 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY While the majority of sanctions imposed by Australia and THE JCPOA the EU on trade with Iran have been lifted as part of the JCPOA (detailed in the box to the right), non-nuclear US The JCPOA is the most recent and substantial outcome sanctions remain in place – these are known as “primary” of the more conciliatory relations between Iran and the sanctions. West since President Rouhani took office in August 2013.
These primary sanctions have significant extra-territorial The years prior were marked by a series of UN and impact on the ability of companies around the world Western sanctions, a trade embargo, asset freezes to do business with Iran, considering the potential and severe restrictions on Iran’s access to international repercussions that would ensue from running afoul of the finance. strict American enforcement regime. The road to reversing this isolation began when the Beyond sanctions-related issues, Iran remains a very JCPOA was officially agreed upon in July 2015, following challenging market in which to do business for Australian two years of negotiations. The essence of the agreement companies. It has been a relatively closed country over involved removing most international economic sanctions, the last four decades, making it a relatively unfamiliar in return for increased international scrutiny over Iran’s market for foreign businesses in general. The sanctions nuclear program. period exacerbated this isolation, and compounded many of the challenges Iran also faces as a developing The agreement consists of five milestones: “Finalisation economy. Day”, “Adoption Day”, “Implementation Day”, “Transition Day” and “Termination Day”. While there are plenty of opportunities in Iran, exhaustive due diligence and a thorough understanding of remaining Finalisation Day and Adoption Day have passed, and sanctions regimes is a necessity for Australian companies involved the endorsement and implementation of the interested in the market. JCPOA, as well as Iran’s provisional application of the Nuclear Non-Proliferation Treaty’s (NPT’s) Additional Australian companies must have a clear idea of: Protocol. This allows for enhanced inspection of Iran’s nuclear facilitates. • who they are dealing with; • whether they are a designated entity or person and Implementation Day has been the most important therefore subject to remaining sanctions; milestone achieved so far. It occurred in January 2016 when the International Atomic Energy Agency (IAEA) • whether trade in their product is restricted with Iran; verified Iran’s compliance with the JCPOA, which and triggered the termination of UN sanctions, the termination • how and to whom payments are made. or suspension of EU nuclear-related sanctions, and the cessation of US nuclear-related sanctions. Professional advice and assistance should be pursued, whether it be financial, legal, or risk and investigation- Transition Day and Termination Day are forthcoming, and related. relate to the wind-down and termination of remaining sanctions and other transitional measures.
Transition Day occurs in October 2023, when all provisionally-lifted sanctions are removed permanently, and when Iran will seek to ratify the NPT’s Additional Protocol.
Provided UN sanctions have not since been reinstated, the UN will pass a resolution approving the termination of the JCPOA on Termination Day in October 2025, when the UN Security Council “will no longer be seized of the Iran nuclear issue”.130
The agreement does not represent the dismantling of Iran’s nuclear industry. It represents a partial roll-back of its nuclear capabilities, such as disconnecting or moth- balling nuclear enrichment hardware, and Iran submitting to increased international inspection and scrutiny of its nuclear activities.
Iran will continue to be a nuclear threshold state.
The US and the EU retain the right to reinstate sanctions if Iran fails to meet its commitments under the JCPOA, via “snap-back” provisions.
43 CHALLENGES IN IRAN
REMAINING SANCTIONS US citizens are prohibited from being involved in day-to- day business dealings with Iran. This includes US citizens US sanctions working for foreign entities owned or controlled by an entity incorporated in the US. Generally speaking, US companies remain prohibited from trading with Iran, as they were prior to the JCPOA. US persons and entities are also prohibited from most Small exceptions exist for US firms in food, medicine, dealings with individuals or entities on the SDN list. medical supply and civil aviation components. Nearly 400 individuals or entities were removed from this list following the JCPOA, but around 200 remain due to The US Treasury Department’s Office of Foreign Assets their connections with international terrorism or weapons Control (OFAC) administers and enforces US trade and proliferation. economic sanctions. Most transactions between the US and Iran require either a general or specific license from OFAC. US financial institutions remain prohibited from involvement in Iran-related transactions, and Iran-linked The JCPOA lifted the majority of secondary sanctions transactions must not be cleared through US banks. which apply to non-US persons and entities located abroad. These were aimed at discouraging foreign US sanctions on Iran relating to terrorism and human entities from doing business with Iran across a number of rights’ abuses remain in force. Many of these sanctions crucial sectors, including finance and banking, insurance, target entities associated with the IRGC. shipping, automotive, energy and petrochemicals. A complication in the US sanctions regime arises in that Primary US sanctions remain in force despite the JCPOA, and the JCPOA was executed as an executive agreement by prohibit nearly all US persons and entities from trading with Iran. President Obama, and therefore has no power over state Figure 3.1 outlines the definitions of US persons and entities. law unless accompanied by separate federal legislation – which is lacking in the JCPOA’s case.
Therefore, in addition to federal-level sanctions, 30 DEFINITIONS OF US PERSONS, American states and the District of Columbia have ENTITIES AND NON-US PERSONS enacted legislation restricting or prohibiting investment in Iran – including New York State, where most large financial organisations are based. US persons • US citizens or residents (including Iranian citizens who are US residents or citizens) Substantial international agreements like the JCPOA are • Entities incorporated under US law usually established through treaties, which pre-empt state law but require ratification by the US Senate by a two-thirds Entities Entities in which a US person: majority vote. The current Republican-majority Senate owned or • Holds a 50% or greater equity interest would be unlikely to ratify the agreement, considering controlled by vote or value in the entity by US the Party’s ongoing opposition to both the JCPOA and • Holds a majority of seats on the entity’s resumption of harmonious relations with Iran in general. persons Board of Directors • Otherwise controls the actions, policies or personal decisions of the entity In general terms, legal experts note that this leaves US states free to maintain current restrictions on Iran-related Non-US Any individual or entity excluding: trade and investment, as well as impose new restrictions person • Any US citizen or permanent resident alien – for Iran’s missile development programs, sponsorship • Any entity organised under the laws of the US, of international terrorism or money-laundering issues, for or any jurisdiction within the US example.132 These would be less broad than Congress- (including branches of foreign entities) imposed sanctions, but could for example restrict state- • Any person in the US controlled pension funds from investing in companies doing business with Iran.133 Figure 3.1: Definitions of US persons, US entities and non-US persons (Source: Ropes & Gray LLP) Australian companies must therefore be aware of US state-level legal restrictions on trade or investment Foreign subsidiaries of US companies are able to trade with Iran, in addition to the impact of US federal-level with Iran under the following conditions: restrictions.
• These subsidiaries do not source goods or services Further US sanctions information is available from the US from the US; Treasury Department’s Office of Foreign Assets Control • These subsidiaries do not process transactions (OFAC) website at: through US banks; and https://www.treasury.gov/resource-center/faqs/Sanctions/ • The entities in Iran with which these subsidiaries transact Pages/faq_iran.aspx are not more than 50% owned by sanctioned Specially Designated Nationals (SDNs), as per OFAC’s blacklist.131
44 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY EU sanctions
The EU has gone further than the US in removing As mentioned, certain sanctions remain in place, relating sanctions on Iran, lifting all but a small subset of sanctions to: relating to missile technology, nuclear-related transfers and activities, and provisions concerning certain metals • Restrictions on the export of arms and related material; and software subject to an authorisation regime. • Restrictions on some metals and software, such as graphite and software for integrating industrial This means European companies are generally free to processes of a kind specific in the Autonomous re-enter the Iranian market, subject to issues relating to Sanctions (Export and Import Sanctioned Goods – remaining US sanctions and their extra-territorial effect. Iran) Amendment Specification 2016; and The EU has substantially reduced the number of • Remaining designated Iranian persons and entities on designated persons and entities on its Consolidated the revised Consolidated List. List, with whom business dealings are banned. From 93 people and 467 entities, the List now consists of 29 Permits may be granted for activities that otherwise people and 94 entities. contravene remaining prohibitions under the UN’s sanctions regime, subject to a number of conditions As with the US regime, sanctions relating to terrorism and that can be found in detail on DFAT’s website. DFAT will human rights’ abuses remain in force. seek UN Security Council approval if required, once an application for a sanctions permit has been submitted, Australian sanctions and subject to the discretion of the Minister for Foreign Affairs. Most Australian autonomous sanctions on Iran have been suspended, including those targeting the banking, oil Permits may be granted for activities that otherwise and gas, and transportation sectors. Regulations under contravene remaining prohibitions under Australia’s Australia’s Autonomous Sanctions Regulations 2011 are autonomous sanctions regime as well, if DFAT deems it to being amended to permanently remove the suspended be in the national interest to do so. provisions. When unsure of whether a particular good or service The Australian Consolidated List, which names export is subject to Australian or UN sanctions, Australian designated individuals with whom Australian companies companies may submit an inquiry to DFAT’s Online may not conduct business, has also been amended to Sanctions Administration System (OSAS) website at remove a number of Iranian individuals and entities. sanctions.dfat.gov.au
More detailed information on Australia’s Iran sanctions regime can be found on DFAT’s the website, at dfat.gov.au/international-relations/security/sanctions/ sanctions-regimes/iran/Pages/iran.aspx
45 CHALLENGES IN IRAN
DUE DILIGENCE INSTITUTIONAL DEVELOPMENT AND TRANSPARENCY Australian companies should take a cautious approach Governance, regulatory and legal standards, as well as to exploring opportunities in Iran, given the risk of institutions can be very opaque in Iran, partly as a legacy running afoul of remaining sanctions, ongoing money of heavy state involvement in the Iranian economy. laundering and terrorism-financing issues, and the challenges of doing business in Iran in general. This The most pertinent challenges relate to banking and cautious approach starts with a thorough and effective access to credit, as well as the development and due diligence process. transparency of Iran’s legal system and institutions.
“The maturity of the market, presence of significant Banking and access to credit international players from China, Russia and elsewhere and a complex sanctions landscape means doing Navigating banking and finance issues is one of the business in Iran requires a sophisticated understanding biggest obstacles to overcome for Australian companies of the risks”, says FTI Consulting Senior Director Murray eyeing opportunity in Iran. Lawson. Internationally, the vast majority of first-tier international Severe penalties apply for companies doing business with banks, (including Australian banks), remain wary of re- entities or individuals still subject to international sanctions engaging with Iran or handling Iran-linked transactions. regimes – most of whom are affiliated with the IRGC. This is due to a fear of running afoul of remaining US sanctions – as well as any knock-on repercussions for Knowing who you are doing business with by identifying their operations in the US. beneficial ownership of Iranian companies, and being comfortable you have done so, is therefore absolutely Domestically, the banking system is the primary source of critical to doing business in Iran. finance for Iranian companies, due to the country’s weak capital and debt markets.134 The ownership structures of Iranian companies can at times be opaque and difficult to unravel, often requiring Iran’s banking sector comprises both state-owned enhanced due diligence efforts. Shareholders and and private institutions, the latter of which have seen directors can be difficult to identify, and large-scale significant growth since their establishment was allowed privatisation during the sanctions era has led to significant in the early 2000s. All public and private banks are asset acquisitions by quasi-state entities. supervised by the Central Bank of Iran (CBI).
Therefore, specialised risk and investigation firms such As of 2014, the 17 private banks in Iran maintained a as FTI Consulting can and should be engaged to assist network of around 2,780 branches around the country.135 with the due diligence process. The integrity of the Iranian financial system overall Steps taken as part of a comprehensive due diligence was eroded during the sanctions period as result of process should be documented to ensure both misallocated capital and closed financial markets. State- the integrity of the process, as well as to satisfy owned banks were directed to lend to state-owned firms, potential business partners, agents or vendors that svings and lending rates were imposed, and the third a comprehensive due diligence process has been highest proportion of non-performing loans in the Middle undertaken. East were accumulated, behind only Libya and Yemen.136 Estimates of the value of these non-performing loans Potential agreements with Iranian companies should also range as high as USD 40-50 billion, and comprise around be protected against the unlikely event of “snap-back” a quarter of all lending in Iran.137 provisions being activated, should Iran be found to be in breach of the JCPOA. In addition, most Iranian banks were prohibited from accessing the Society for the Worldwide Interbank As part of the due diligence process in any emerging Financial Telecommunications (SWIFT) system between market, the choice of a business partner will be one of the 2012 and 2016, severely limiting their ability to undertake largest contributors to success in Iran, Mr Lawson notes. cross-border transactions. “Taking the time to get educated about the country and any potential partners is essential”, he says. This forced up transactions costs, as Iran’s isolation created a need to employ middle-men as intermediaries to finance the country’s international needs.
SWIFT access has since been restored in the post- JCPOA environment, allowing around 30 Iranian banks to rejoin the system, including large institutions such as Bank Melli and Bank Mellat.138
46 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY CBI governor Valiollah Saif notes that two steps are now Other European banks have established working relations needed to restore Iran’s banking sector to a healthy with Iranian banks to open letters of credit for small state: reintegrating them with foreign banks, and bringing sums between USD 10 and 50 million, and to handle regulation and compliance into line with international transactions on behalf of European clients.145 These standards.139 reportedly include:
Instituting and adhering to international standards across • Austria: Raiffeisen Bank International, Erste Bank, the sector is one of the most important reforms Iran can Oberbank; undertake in order to reconnect with the world economy, • Belgium: KBC; says the IMF.140 • Germany: EIH Bank, KfW, AKA Bank, DZ Bank; Modern standards regarding disclosure, capital • Italy: Mediobanca, Banco Popolare.146 requirements, taxation and due diligence are largely lacking in the country, and anti-money laundering and In total, around 200 small and medium-sized international terrorism-financing laws need to be adhered to. banks have begun correspondent relationships with Iranian banks, according to the CBI.147 Given their size, The Financial Action Task Force (FATF) – the global however, these banks generally lack the resources to standard-setting body for anti-money laundering and finance larger projects in Iran. combating the financing of terrorism (AML/CFT) – has urged Iran in the past to increase its efforts to prevent Most larger international and first-tier banks remain money laundering and its tackling of suspicious wary of facilitating Iran-related transactions over a fear transactions. Iran’s full re-integration with the international of repercussions from remaining US primary sanctions, economy requires full compliance with FATF rules and or AML laws and regulations. Over USD 15 billion in regulations. penalties had been levied on foreign banks for Iran- linked transactions during the years prior to the JCPOA, As such, Iran has adopted and made high-level political including against a number of large international banks.148 commitments to an Action Plan addressing its AML/ CFT deficiencies, and is seeking requisite technical Beside remaining US sanctions, AML/CFT, risk 141 assistance to move forward. FATF has suspended its management, debt capital markets, and bankruptcy laws countermeasures against Iran for 12 months as a result are all issues that pose problems for Western financial of this progress, and plans to continue monitoring and institutions engaging with Iran.149 engaging with Iran going forward, though the country remains on its list of high-risk countries.
Iranian banks have been completing a number of international transactions in various currencies, including euros, Chinese yuan, South Korean won, Russian roubles and Turkish lira.142
Some Iranian banks have been explicit in stating their ability to comply with international banking regulations, such as Saman Bank and the Middle East Bank.143
Banking in Iran is still almost exclusively a domestic affair, though there has been some international activity. The
Industrial and Commercial Bank of China (ICBC) has reportedly applied to open branches in Iran, and Italy’s
Banca Monte dei Paschi di Siena has reportedly provided guarantees and letters of credit services to several Iranian banks.144 A well-designed and functioning compliance program is almost “ imperative for doing business in any emerging market. This is particularly so when doing business in Iran. Getting the policy and “procedures framework right in terms of anti-bribery and corruption can help to mitigate some of the risks once on the ground. – FTI Consulting Senior Director, Murray Lawson
47 CHALLENGES IN IRAN
Access to finance and credit is therefore very challenging for all businesses seeking to engage with Iran, not just CORRUPTION PERCEPTIONS INDEX 2015 Australian entities. Country Ranking (2015) A number of national export credit agencies are facilitating trade with Iran, in lieu of commercial alternatives. Denmark 17
Australia’s Efic and the Export Guarantee Fund of Iran Finland 2 signed an MoU in September 2016 to facilitate Australian Sweden 3 engagement with Iran. – – Minister Ciobo cautions that the MoU does not relieve Australia 13 the complexities surrounding finance in Iran for Australian companies. – –
“There remain challenges around banking facilitation in Qatar 22 dealing with Iran…I would just stress this is not a line United Arab Emirates 23 of credit between the two agencies, so it won’t in that – – respect mean that commercial export finance is easier to obtain,” the Minister cautioned. Saudi Arabia 48 – – Rather, Minister Ciobo explains, the MoU creates an arrangement where information on potential deals Iran 130 between Australia and Iran can be shared, allowing Figure 3.2: Corruption Perceptions Index 2015, select countries Australian companies “to receive assistance in verifying, (Source: Transparency International) as part of a due diligence process, what circumstances are on the other side.”150
Legal institutions and transparency
Iran’s long periods of international isolation mean the rule of law, investor protection, and transparency lag behind what Australian investors would expect in more developed markets.
Simple contracts between private entities are allowed for in Iran’s legal system, as are jurisdictional contracts. However, navigating the country’s opaque domestic environment can be a challenge.
Iran ranks 130th out of 168 countries on Transparency International’s 2015 Corruption Perceptions Index (see Figure 3.2), well behind its regional neighbours Qatar (22nd), the UAE (23rd) and Saudi Arabia (48th).
48 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY RULE OF LAW INDEX 2015
Category Regional Rank Global Rank
Constraints on government powers 7/7 94/102
Absence of corruption 6/7 64/102
Open government 7/7 99/102
Fundamental rights 7/7 102/102
Order and security 7/7 80/102
Regulatory enforcement 2/7 35/102
Civil justice 3/7 40/102
Criminal justice 5/7 60/102
Overall 7/7 88/102
Figure 3.3: Rule of Law Index 2015 (Source: World Justice Project)
Iran also ranks poorly on the World Justice Project’s “FIPPA makes specific provisions which, on paper, annual Rule of Law Index (see Figure 3.3), which relies provide the same legal status to foreign investment as on primary data and measures how the rule of law is to domestic investment…[but] is yet to be tested fully, experienced in practical, everyday situations. and appropriate legal advice should be gained by any investor as part of their due diligence procedures,” FTI’s Iran ranks last in the region on most of the Index’s Mr Lawson notes. indicators, except for “civil justice” and “regulatory enforcement”. In addition to FIPPA, Iran has 52 bilateral investment treaties in place, which provide foreign companies with The latter is promising from a foreign business greater legal protection than what is available under perspective, providing a degree of confidence in Iran’s FIPPA.153 These treaties cover Iran’s trade with countries ability to provide a stable regulatory environment. Not like China, France and Germany, but not Australia. only does Iran rank second in the region for regulatory enforcement – behind the UAE – but it ranks 35th in the Some point to the presence of these agreements as world as well.151 evidence of Iran being willing to offer real protection to foreign investment in the country. For example, the However, Iran’s business environment remains fairly agreement with Germany allows for disputes to be settled opaque, and the country has declined on most indicators through international arbitration, protects the international in the World Bank’s annual Doing Business Index from transfer of business profits, and facilitates money transfers 2015 to 2016 – ranking particularly poorly for paying relating to investment and profits.154 taxes, resolving insolvency, and protecting minority investors. There are therefore positive elements to balance the risks that come with the relatively opaque legal system Law firm Chadbourne & Parke LLP notes that while Iran’s and institutions, though Australian companies exploring Foreign Investment Promotion and Protection Act (FIPPA) opportunities in Iran should still seek appropriate legal provides attractive incentives, such as allowing 100% advice. foreign ownership as well as profit repatriation, the Act has not been significantly tested since its 2002 enactment.152
49
ADVICE
Post-sanctionsCONCLUDING Iran is a potential land of opportunity for international businesses, as restrictions on access to foreign finance and technology lift, allowing Iran to once again attract the goods, services and expertise necessary to modernise and further diversify its economy. With initiative, tenacity and a clear-headed assessment of the market’s challenges, Australian companies are well-placed to access their fair share of this opportunity. Home to best-in-class companies in sectors like agriculture, energy and resources, education and tourism, Australia can capitalise on a strong reputation to compete with the best the world has to offer in Iran.
50 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY Risks remain and Australian companies will still face REMAINING UNCERTAINTIES a number of challenges when doing business in Iran. Banking and finance are still difficult to access, and • Some degree of uncertainty over Iran’s relations with many US sanctions remain in place that impact not only the international community is likely to persist in the American but Australian and other foreign companies as short and medium terms, given sensitive political well. relations and continuing opposition from some quarters to renewed engagement with Iran. Some of these risks and challenges should abate over • US primary sanctions on Iran remain in place, creating time, as Iran adjusts and adopts international standards uncertainties around the potential consequences of and best practices, and as foreign businesses reacquaint running afoul of them – these too are likely to persist themselves and become more comfortable with operating without clearer guidance from American authorities, in in its market. particular the US Treasury Department. It is therefore early days for Australian companies • Access to finance for trade with Iran may remain the exploring the Iran opportunity, though first mover biggest obstacle for Australian companies interested advantage will reward companies willing to seize it. in the Iran opportunity in the short and medium terms, given a reluctance by large Australian banks to Iran is certainly a market worthy of serious consideration facilitate trade with Iran. by Australian companies, given its sheer size and demand for many of the goods and services Australia excels at providing. WHERE TO TURN: We conclude with some key points of advice for SANCTIONS INFORMATION Australian companies interested in the Iranian opportunity. • Australian companies unsure of whether a particular good or service export to Iran is subject to Australian SNAP-BACK or UN sanctions can submit an inquiry to DFAT’s Online Sanctions Administration System (OSAS) at • The likelihood of Iran “cheating” on the JCPOA and sanctions.dfat.gov.au. The good or service will be thus triggering snap-back provisions, which would see assessed and written advice will be provided as to sanctions reinstated, is difficult to gauge but is less whether it is permissible under Australian sanctions (rather than more) likely. law, or would require authorisation. • Iran fully complied with the interim agreement • Further information on the US sanctions regime can preceding the JCPOA for two years, and also be found through the US Treasury Department’s OFAC dismantled components of its nuclear program faster website at than observers had expected, which can be viewed as positive signs of Iran’s commitment to normalising its treasury.gov/re-center/faqs/sanctions/pages/faq_iran. international relations. as • Further information on the EU sanctions regime can be • However, Australian companies should consider scenarios and the risks a potential sanctions snap- found through the EU External Action Service website back would pose for their dealings in Iran, and make at eeas.europe.eu/ appropriate provisions when establishing contracts with Iranian companies. WHERE TO TURN: MARKET ENTRY ADVICE DUE DILIGENCE • Austrade re-established a permanent presence in Iran • A comprehensive due-diligence process is absolutely in 2016 and can provide on-the-ground assistance to crucial when doing business with Iran, considering the Australian companies seeking market entry advice and severe consequences of running afoul of remaining facilitation. sanctions on the country. • Further information can be found on Austrade’s • Engaging the services of specialised risk and website at http://www.austrade.gov.au/Australian/ investigation firms when conducting a due diligence Export/Export-markets/Countries/Iran/Market-Profile process would be useful, considering the opacity of as well as by contacting Lino Strangis, Austrade’s the market. Trade Commissioner in Iran at lino.strangis@austrade. gov.au • Iranian diaspora communities are driving interest in commercial engagement with Iran in many countries, including Australia, and can be a valuable resource for market insight and potential connections.
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52 | IRAN RE-EMERGES: A GENERATIONAL OPPORTUNITY Higher Education, January 22, 2016. Financial Times, May 10, 2011; “Iran’s 105 “Iran’s university enrolment is booming. Now ‘outdated’ banks hamper efforts to rejoin what?” ICEF Monitor, December 1, 2015. global economy.” Financial Times, January 20, 106 “The new business of education in Iran.” The 2016. Washington Post, August 19, 2015. 138 “Iran Unbound: A Land of Business 107 Ibid. Opportunity.” HKTDC Research, July 28, 2016. 108 “Iran’s university enrolment is booming. Now 139 “Iran’s ‘outdated’ banks hamper efforts to what?” ICEF Monitor, December 1, 2015. rejoin global economy.” Financial Times, January 20, 2016. 109 “End of Iran sanctions will not lead to a ‘sea change’ in the region for HE.” The Times 140 “Iran Must Fix Own Banks to Win Overseas Higher Education, January 28, 2016. Business, IMF Says.” Bloomberg, May 17, 2016. 110 Ibid. 141 “Iran’s engagement with the FATF.” Financial 111 “Iran’s Sharif, Australia’s Curtin universities in Action Task Force, June 24, 2016. ink MoU.” Mehr News Agency, September 25, 2016. 142 “Small banks help Iran slowly restore foreign financial ties.” Reuters, June 15, 2016. 112 “Could Iran’s new president give higher education a boost?” ICEF Monitor, August 1, 143 “Iran: Looking west.” Australia Department of 2013. Foreign Affairs and Trade business envoy. April 20, 2016. 113 “Reinventing Academic Ties: Opportunities for U.S.-Iran Higher Education Cooperation.” 144 “Iran Unbound: A Land of Business Institute of International Education, July 2015. Opportunity.” HKTDC Research, July 28, 2016. 114 “TVET UK’s new Iran office provides business 145 “Iran banking hobbled by Western reluctance opportunities for UK education providers.” to engage.” AFP, September 14, 2016; TVET UK, April 12, 2016. “Austria’s Oberbank and Raiffeisen Bank connected to Iran market.” PressTV, May 26, 115 “Incentives for Foreign Investors in Iran’s 2016; “Europe’s banks begin tentative return Tourism Industry.” Financial Tribune, October to Iran.” Financial Times, April 4, 2016; “Small 5, 2016. banks help Iran slowly restore foreign financial 116 Ibid. ties.” Reuters, June 15, 2016. 117 “International tourism, receipts (current US$).” 146 Ibid. World Bank, 147 “Small banks help Iran slowly restore foreign 118 “Melia looking to replicate Cuba’s success in financial ties.” Reuters, June 15, 2016. Iran.” Hotelier Middle East, April 28, 2016. 148 “Europe’s banks begin tentative return to Iran.” 119 Ibid. Financial Times, April 4, 2016. 120 “Turkish investors can build at least 10 hotels in 149 “Iran’s ‘outdated’ banks hamper efforts to Iran: tourism ministry official.” Reuters, May 13, rejoin global economy.” Financial Times, 2016. January 20, 2016. 121 Ibid. 150 “Blackmores signs up for a healthy Iranian 122 “Iran Overhauls Tourism Industry to Court deal.” The Australian, September 28, 2016. Chinese Tourists.” Huffington Post, February 151 “Iran.” World Justice Project – Rule of Law 22, 2016. Index 2015. 123 “Hotel groups eye Iran tourism potential as 152 “The Risks of Rushing into Iran.” Chadbourne & sanctions deal nears.” Financial Times, June Parke LLP, September 2015. 22, 2015. 153 “Iran back in vogue.” Moulis Legal, March 8, 124 “Incentives for Foreign Investors in Iran’s 2016 Tourism Industry.” Financial Tribune, October 154 Ibid. 5, 2016. 125 Ibid. 126 Ibid. 127 Ibid. 128 “Iranian universities want to partner with Accor.” Hotelier Middle East, May 24, 2016. 129 “Accor to Sign Iran Hotel Deal.” The Wall Street Journal, September 15, 2015. 130 “Joint Comprehensive Plan of Action.” 131 “Due Diligence and Caution: The Keys to Investing in Iran.” FTI Consulting, March 2016. 132 “The Lawless Underpinnings of the Iran Nuclear Deal.” The Wall Street Journal, July 26, 2015. 133 Ibid. 134 “Iran’s ‘outdated’ banks hamper efforts to rejoin global economy.” Financial Times, January 20, 2016. 135 “Can Iran’s private banks make a difference?” Al-Monitor, January 3, 2014. 136 “Iran Must Fix Own Banks to Win Overseas Business, IMF Says.” Bloomberg, May 17, 2016. 137 “Private banks open to assist Tehran insiders.”
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