Off to Iran? What you should know before you enter the market 2016 International Business
Lifted trade barriers, great prospects: Iran is where it s at The country between the Caspian Sea and the Persian Gulf offers much more than mineral resources. That s why Iran has caught the attention of many investors. So: is trade with Iran really only a stone s throw away? In mid-january the United States and the EU lifted sanctions against Iran. After years of isolation, Iran can now once again participate in global trade and access hitherto frozen accounts, worth billions: this market is now also open to investors. But why should German companies invest in Iran now? And why should they do this quickly and consistently? Nominal GDP of selected countries in billions of US dollars (purchasing power parity) Turkey Iran Excellent Market Opportunities Iran has a population of some 78 million inhabitants, the majority of whom are young and well educated. Thus the country fulfils one of the key requirements for long-term growth. But the country offers additional opportunities in the medium term. With GDP currently at 1,383 billion US dollars in purchasing power parity and annual growth forecasts of some five percent until 2020, the Iranian market is bigger than South Africa and Thailand, for example. Imports are set to increase by an average of approximately eleven percent in the next few years. Thailand Egypt Philippines South Africa Vietnam 0 500 1,000 1,500 2,000 2,500 2015 (estimate) 2020 (forcast) Source: EIU Data tool, 2016, authors own diagram 2
Trade relations managed in the traditional way won t be enough In Iran, German products are associated with high quality. Many Iranians are familiar with German products from the time before the economic sanctions, as ten years ago, according to the World Bank, the volume of German exports to Iran was second only to the United Arab Emirates. As a result, around 30 percent of the industrial infrastructure originated from the German Federal Republic. And the interest in German products remains just as keen. The potential for German companies is enormous manufacturing plants, in particular, need renewing. All sectors stand to benefit from a renewal of manufacturing, in which German exporters are extremely strong; in mechanical engineering, aeronautical, as well as logistics, automotive and construction. The petrochemicals industry and agriculture also offer great prospects for German companies. Although German companies have a competitive edge over companies from other countries, business people from Germany should not rely on relationships that owe their strength to historical links. France and Italy were also important trading partners to the Islamic Republic and succeeded back in January in signing declarations of intent worth several billion US dollars with President Hassan Rohani. If business people stick around too long, they may, despite historical relationships, find that the entrance to the Iranian market has become much narrower due to tough competition. Forecast of average annual growth rates of real GNP for selected countries 2016 2020 as a percentage Vietnam Philippines Iran Egypt Turkey Thailand South Africa 20 10 0-10 -20-30 0 1 2 3 4 5 6 7 2011 2012 2013 2014 Source: EIU Data tool, 2016, authors own diagram Change in Iranian imports between 2011 and 2020 as a percentage 2015 2016 2017 2018 2019 2020 actual values estimated value forecast values Source: EIU Data tool, 2016 3
Special economic actor: The Revolutionary Guard Since the Iranian Revolution in 1979, the Revolutionary Guards, which used to be a parallel force to the regular Iranian military, have taken on an increasingly important role in economic affairs. Today, the Revolutionary Guards control large portions of the oil and gas sectors, the import business and the construction industry. Estimates put the proportion of GNP that directly or indirectly can be attributed to economic activity by the Revolutionary Guard at 30 percent. However, this market is currently off limits for German companies, because business with the Revolutionary Guards is still prohibited. In addition, the Revolutionary Guards should be recognised as a competitor, who has hitherto turned the cold shoulder to western companies. New wind in the sails of industry All sanctions have been lifted in the mineral oil and natural gas industries and in the petrochemical industry. Most of the sanctions have also been lifted in automotive, shipping and air transportation. Commodity trading in gold and precious metals and the delivery of bank notes and coins are no longer subject to restrictions. A few metals, such as graphite, nickel and titanium can now be imported into Iran, but must be approved by the German Federal Office of Economic Affairs and Export Control. Likewise goods and services that are connected with the enriching of uranium must also be approved. Companies must additionally investigate whether goods, software and machines, no matter which sector they are destined for, can be used for other purposes than those they were designed for, such as military or nuclear-technological purposes, as in this case they require approval or may be banned. Parts of the financial sector remain under sanction Financial transactions with Iranian banks may be possible in principle; however, there are tough restrictions. In particular, it is best to avoid transactions in US dollars to Iran. This also applies to financial services which are provided via the USA, such as credit cards, for instance, or the online payment system PayPal, which are still prohibited (according to the website of the Office of Foreign Asset Control of the US Department of Treasury, 2016). The Revolutionary Guards are not allowed to have an interest, either directly or indirectly, in financial transactions. In addition, certain individuals and banks are subject to sanctions. This includes the following: Ansar Bank, Bank Sedarat Iran, Bank Sedarat PLC and Mehr Bank (in compliance with EU Regulation no. 267/2012; EU Implementing Regulation 2016/74). Bilateral US sanctions affect German business with Iran In addition to restrictions on trade in weapons and on the missile industry, the US has placed an embargo on bilateral trade with Iran which remains effective for the most part. Because of US re-export control laws, certain goods, technologies and software which originate in the amount of ten percent or more from the United States, cannot be exported to Iran, if the company importing the goods is based outside of the US. This also applies, for instance, to privately owned computers and to software installed on them. Visiting Iran can also mean that travelers are subject to restrictions with regard to any subsequent travel to the USA, as visa-free entry to the US via the electronic system for travel authorizations ESTA is no longer possible (see website of the US Department of Homeland Security, 2016). In particular, companies with branch offices both in the US and in the EU must check the developments in the sanction lists regularly and thoroughly investigate which deals are possible with which country. Not an easy market, but a highly structured one The World Bank Doing Business Index provides information about how easy it is to do business with a certain country. Iran is rated 118 of a total 189 countries which confirms that Iran is not an easy place to do business. The national banks are severely in debt due to many years of sanctions, according to the Economist Intelligence Unit (EIU) and the job market, although large, is relatively inflexible. Investors must also be aware that the Iranian state plays a decisive role in almost all large and strategically important companies. 4
Nevertheless, foreign firms and individuals are not at a disadvantage. Value added tax is levied at the standard rate of nine percent, corporation tax stands at 25 percent. Iran has a double-tax agreement with Germany. In addition, the Foreign Investment Promotion and Protection Act (FIPPA) grants foreign investors for the most part the same rights on approved projects as Iranian investors. Iranian courts also grant equal treatment to foreign investors. FIPPA guarantees full compensation in the case of expropriation, interruptions and delays of projects. What is more, there is no legally stipulated limit to the volume of investments, that is, the size of the shareholding on joint ventures. It should be noted, however, that the percentage of foreign production for the Iranian market, and for oil and gas exports, may not exceed a total of 25 percent per industry sector. Investment proposals are reviewed by the Organization for Investment and Economic & Technical Assistance of Iran. Processing takes a maximum of 45 days, according to FIPPA. Here it is important to mention that although foreign companies and individuals can own real property such as buildings, machines or production plants in Iran, but can never become owners of Iranian land. Allow sufficient time for approval procedures It remains to be said that many business opportunities in Iran may have only become possible with the lifting of sanctions, but that does not mean that business is any less complicated. It is also important to remember that with regard to goods requiring a permit, sufficient time must be allowed for the approval procedure. Interested companies should therefore gather required information in good time and have an assessment conducted as to whether their products and services are affected by the new regulations. The financial risk of any possible snapback mechanisms, i.e. the renewed imposition of sanctions, if the treaty should be significantly violated should be factored in at all costs. Important laws with respect to existing sanctions Iran Embargo Regulation (EU) 267/2012 Council Regulation of 23rd March, 2012 in versions no. 1861/2015 and no. 1862/2015 of the EU regulations Regulation (EU) Nr. 359/2011 Council Regulation of 12th April, 2011 (Iranian Human Rights Abuses Sanction Regulation) Dual Use Regulation (EC) no. 428/2009 German Foreign Trade and Payments Act and Ordinance (AWG/AWV) 5
Four industry sectors offer exceptionally high potential Energy and Petrochemical The oil and gas sector was severely affected by sanctions. The level of production is now set to be raised once again a great opportunity for German mechanical engineering, as production plants are technically outmoded. The chemicals industry, on the other hand, offers excellent conditions for production. Crude oil production in Iran in millions of barrels a day 5 4 Opportunities Investment backlog of some 100 billion US dollars. 30 billion US dollars are due to be invested in the short term A strong presence confirms good historical relationships: three quarters of the machines installed come from Germany, according to the Institute for German Economy 3 2 1 Excellent production conditions for the petrochemicals industry: huge ethane gas fields and subsidised prices 0 Challenges 2007 2009 2011 2013 2015 2017 Trade has completely shifted to Asia; shift back to Europe difficult and will take a long time actual values forecast values Strong China: market share increased while sanctions were effective; Chinese determined to defend this position Source: Website EIA (U.S. Energy Information Administration), 2016, authors own diagram Outmoded infrastructure and machines for exploitation of ethane gas; bottlenecks in times of increased demand possible in future 6
Automotive The number of car registrations in Iran will increase dramatically. Since German cars have an excellent reputation in Iran, prospects for the German automotive industry are good. New car registrations in Iran (in thousands) 2,500 Opportunities Largest car production in the region Iranian production of strategic relevance for the whole region French competitors that were successful prior to the sanctions will start from scratch Good reputation of German cars (On Device Research, 2015) 2,000 1,500 1,000 500 Challenges Export peak for German cars prior to the sanctions was just 2,500 units per year, according to the German Association of Automotive Industry (VDA) 0 2005 2007 2009 2011 2013 2015 2017 2019 Fierce competition from China, primarily in the low-price segment French manufacturers have good relationships at their disposal actual values forecast values Source: EIU Data tool, 2016, authors own diagram Long hesitation could jeopardise successful market entry 7
Mining Iran is rich in mineral resources; the potential for exploitation of raw materials will not be exhausted for many years to come. Thus there is enormous growth potential in mining. Current and forecast copper production in Iran 2013 2020 600 Opportunities Mining could be more important in the long term than oil production, at well over 30 billion US dollars in turnover a year The government aims to realise growth rates of ten to twelve percent over the next ten years although they are departing from a relatively low point Iran has over seven percent of the world s deposits of important resources in particular, iron ore, copper, bauxite, chromite, magnesium, lead, gypsum and pumice currently worth a total of 700 billion US dollars 500 400 300 200 100 Challenges Declarations of intent worth a total of 20 billion US dollars from France, Italy, China and Japan have already been signed Risk of logistics bottlenecks due to limited capacities of rail cargo network 0 actual values 2013 2016 2018 2020 forecast values Source: U.S. Geological Survey / Bloomberg, 2015 Investment incentives could be undermined in the short term due to low prices of raw materials 8 2016 KPMG AG Wirtschaftsprüfungsgesellschaft, ein Mitglied des KPMG-Netzwerks unabhängiger Mitgliedsfirmen, die KPMG International Cooperative ( KPMG International ), einer juristischen Person schweizerischen Rechts, angeschlossen sind. Alle Rechte vorbehalten.
Infrastructure and Construction The key to the future upturn lies in the infrastructure, which however suffered greatly under the sanctions and needs comprehensive overhaul. Logistics Performance Index: Quality of trade and transport infrastructure in the Middle East (1 = low to 5 = high) Opportunities Modernization of the dilapidated infrastructure cannot be avoided in the medium term if the economic upturn in other sectors is to take hold Rail network in need of renewal: 50 percent of the roads are not asphalted Saudi- Arabia Turkey Iran Ports and airports need to be modernised Expected average annual growth of over four percent until 2020, according to BMI Research Challenges Possible postponement of investments by the government due to the low price of oil Existing sanctions on the financial sector may restrict alternative financial options Egypt 0 1.0 2.0 3.0 4.0 2007 2012 Source: World Bank Database, 2016, authors own diagram 9
Contact KPMG AG Wirtschaftsprüfungsgesellschaft Andreas Glunz Managing Partner International Business KPMG in Germany T +49 211 475-7127 M +49 172 6767110 aglunz@kpmg.com Kaveh Taghizadeh Partner, Head of Country Practice Iran KPMG in Germany T +49 89 9282-1628 M +49 162 250 4174 ktaghizadeh@kpmg.com www.kpmg.de www.kpmg.de/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. member firms affiliated with KPMG International Cooperative ( KPMG Inter national ), a Swiss entity. Printed in Germany. The KPMG name and logo are registered trademarks of KPMG International.