Published on November 13th, 2014 | by Esfandyar Batmanghelidj2
Stewarding the Deal: Business Diplomacy and Iran’s Private Sector
by Esfandyar Batmanghelidj
It’s no secret that business leaders worldwide are eagerly awaiting the announcement of an agreement on Iran’s nuclear program this month. “Apart from Mars and the Moon, Iran is the only remaining opportunity for [our] clients,” declared Sir Martin Sorrell, the CEO of British advertising giant, WPP, last month at the Europe-Iran Forum in London. Business owners in Iran are meanwhile looking forward to sanctions relief and a flood of foreign investment, as are average Iranians.
But the Iranian market presents a difficult proposition. The policies of the Islamic Republic, under an international sanctions regime for the better part of its 35-year existence, have resulted in state-affiliates controlling large swaths of the economy. Today the private sector, the natural target for foreign investment, controls just 17% of the economy. Still, many business tycoons and entrepreneurs are confident that hefty oil and gas contracts made possible by the rollback of sanctions would inject Iran’s capital markets with desperately needed liquidity, putting the gears of the wider economy into motion.
At least for foreign firms, Iran certainly offers attractive business prospects of rare size and scope. Indeed, despite the sanctions, oil giants like Total and Shell have publically indicated their interest in developing Iranian oilfields over the years. But the belief that a gold rush is just around the corner has allowed Iranian and foreign business leaders to adopt a wishful view of the results of a final deal on the country’s nuclear program— assuming Iran and the P5+1 (France, Germany, UK, China, Russia and the US) actually achieve one this year. While most business leaders understand that all sanctions won’t be removed immediately, they continue to see the potential deal, which could be concluded as early as the deadline of November 24, as the means to the end of Iran’s economic isolation. But by passively awaiting a kind of commercial deliverance, Iran’s private sector executives and shareholders, and their international partners, risk shirking their crucial responsibility to actively attract and facilitate foreign investment, and thereby steward the outcome of a deal.
While a final deal will come to life through political acts—negotiations, signatures, a historic photo-op—it will live and die by the measures of its economic impact. The legitimacy and political capital of Iranian President Hassan Rouhani, who was voted into office only a little over a year ago, hinges on promises to reform and reinvigorate the economy. He has done relatively well in his first year in office, stabilizing the currency and stoking the interest of foreign investors with a reassuring monetary and economic policy. But justifying the compromises required in a comprehensive agreement will only be possible if he has the economic returns to show for it—an especially daunting task given how falling oil prices are set to hit government budgets and the Central Bank’s ability to ensure access to working capital.
Similarly, US President Barack Obama will need to contend with a Congress dominated by Republicans who are eager to thwart any agreement. His ability to neutralize resistance from Capitol Hill will require bringing Wall Street into his corner and allowing US entities to pursue their economic interests in Iran without the inhibiting fear of violating US sanctions law. Empirical evidence meanwhile suggests that the greater American foreign investment in a country, the less likely the US will be to impose sanctions regardless of political conflicts. A recent paper in the journal Conflict Management and Peace Science employed panel data from 171 countries between 1971 and 2000 to examine the relationship between foreign direct investment (FDI) and US sanctions policy. Controlling for political factors, and discussing the emergence of the sanctions regime on Iran in relation to historical data, David Lektzian and Glen Biglaiser found strong support for the notion that a “high level of… US FDI as a percentage of the recipient county’s gross domestic product reduces the likelihood of the use of US sanctions.” Put differently, on Capitol Hill, money talks, and if major American firms can tap into significant profits in Iran, the political resistance to détente will ebb.
Yet Iran’s negative international reputation could be the ultimate barrier to foreign investment. In an international poll focused on the rise of negative views about Russia released by the BBC World Service in June of this year, Iran was still the most “unfavorably viewed country.” Of course, public opinion is rarely a barrier to corporate profit-seeking. In the case of Iran, however, decades of particularly corrosive media coverage (some of it well-deserved) aided by US think tanks and pundits have had serious implications for the country’s market prospects. The anti-Iran industry in the US has even seen the rise of hawkish advocacy groups like United Against a Nuclear Iran (UANI), which publicly names and shames corporations and banks for doing business with Iran, and then outs them to the US Treasury for sanctions enforcement. (Strangely, the US Department of Justice currently appears to be attempting to shield UANI from being forced to submit its source documents for one of its campaigns in a civil lawsuit).
Considering this background, even if a final deal over Iran’s nuclear program softens the country’s image and loosens the sanctions regime, would major firms suddenly cease balking at commercial engagement? Or would Iran continue to be overlooked by executives and shareholders in favor of safer (even if less rewarding) options? Not to mention the untested reputations and bona fides of the Iranian firms themselves. Having been isolated and reduced to playing the complex and sometimes dirty games of a cut-throat, rent-seekers’ economy, are Iranian businesses actually prepared to change their internal practices, put their best foot forward, and credibly partner with international firms?
Unfortunately, from accounting practices to office culture, many private Iranian firms are poorly oriented to inspire trust and confidence among international investors—even if the small private sector tends to be miles ahead of the state-owned and quasi-state enterprises. So even if foreign businesses became willing to put up with the legal and logistical challenges of trade and investment in Iran, which ranks 130 out of 189 in the World Bank “Doing Business” rankings, the reputational risks of affiliating with the wrong people and entities might exacerbate whatever allergic reactions many business leaders already have to engaging in Iran’s markets.
Stewarding the results of a final deal therefore requires the mobilization of time, energy, and resources towards projects that might not seem immediately in line with the profit-making motive of firms. It requires new skills and fluency in business diplomacy. Setting the stage for trade and investment means addressing Iran’s international reputation head-on. This requires foreign firms sponsoring business conferences (full disclosure, I am the co-founder of one such forum), cultural programming, sports competitions, and academic exchanges to bring Iran back into the outside world. In this way, the promotion of civil society exchanges could safeguard corporate image while also pressuring the government to adopt and implement friendlier and more open domestic policies towards its own citizens. Indeed, decades of punitive measures against Iran’s domestic policies have hardly had a positive effect on the average Iranian. Now may be the time to trade in the sticks for carrots.
With so much on the line, the current wait-and-see approach adopted by those who want to see Iran open up could ultimately prove counterproductive and even harmful. If Iran’s private sector firms and their foreign partners wish to reap the rewards of a growth economy, they must first meet their obligations to Iran’s moral economy. The common Iranian has already waited long enough for a champion in the international markets for goods, services, and capital—a champion who can empower citizens in their roles as customers, employees, and shareholders. Many Iranians want to take their rightful place as worthy and powerful contributors to the global economy. Iran’s private sector must carry this mantle.