Iran is the biggest new market to re-enter the global economy in decades. But foreign businesses and their advisers still face formidable obstacles, reports Marialuisa Taddia.

A year ago Iran opened to international business, after almost a decade of economic isolation, following the lifting of nuclear-related sanctions. Iran had met its obligations to unwind its nuclear programme under the Joint Comprehensive Plan of Action (JCPOA) agreed on 14 July 2015 between Iran, the United Nations Security Council, Germany and the EU.

The implementation of the nuclear deal focused the minds of foreign investors on Iran’s huge potential. With a young and urbanised population of 80 million (nearly two-thirds live in urban areas and 60% are under 30), Iran is the second-largest economy in the Middle East, with a GDP of $393.7bn in 2015. Although oil and gas remains the largest sector, Iran has diversified its economy through decades of self-reliance.

There has been no ‘big bang’, but incremental developments are encouraging. These include: the re-establishment of the British Embassy in Tehran; British Airways resuming direct flights to the capital; a €5bn agreement with Italy’s Ferrovie dello Stato to develop the rail system; and a $4.8bn preliminary deal signed in November between the National Iranian Oil Company and a consortium led by France’s Total to develop the South Pars giant offshore gas field. The latter is Iran’s first big energy agreement with a western group since the nuclear accord.

Doing business in Iran remains difficult, however. US sanctions arising from Iran’s alleged support of terror and human rights violations remain and are wide-ranging, with a few exceptions such as the sale of civilian aircraft. ‘US Persons’ (a category that includes US citizens and residents, and US companies and their foreign subsidiaries) are still prohibited from engaging in transactions with Iran or an Iranian national. The sanctions also apply to non-US persons with property and assets in the US.  

A case in point involves America’s Boeing and France’s Airbus. President Barack Obama’s administration gave the aviation giants permission to sell passenger planes to Iran, but in November the Republican-controlled House of Representatives passed a bill blocking the sale amid concerns the passenger aircraft could be used for military purposes (potentially scuppering a $25bn deal). Airbus needs US Treasury approval because at least 10% of its planes’ components are manufactured in the US.

It is no surprise that, as DLA Piper’s head of international trade John Forrest says: ‘There has been an ebb and flow of confidence in becoming involved in Iran-related business.’ After the ‘initial enthusiasm’ there was a ‘dip’ as investors began to assess that ‘not all sanctions have been lifted… a significant number remain in place’.

Iran-related bank transactions are not permitted to pass through the US financial system, making payments into and out of Iran difficult. This is not just because US banks are banned from dealing with Iranian counterparts. European and Asian financial institutions are cautious about returning to Iran because of the multi-billion-dollar fines imposed by the US Department of Justice on the likes of Hong Kong’s HSBC and France’s BNP Paribas for alleged sanctions violations since 2010.     

‘In terms of what a US bank can do in relation to facilitating Iranian-related transactions, the picture post-January 2016 is exactly the same as it was pre-January 2016,’ Forrest says. ‘For good reasons, a number of non-US financial institutions have a policy that they will not get involved in any of these transactions. A number of others will simply assess the opportunity on a case-by-case basis, having done their own due diligence and sought legal advice.’     

Dubai-based Nazanin Maghsoudlou of Everys Solicitors says investors are also concerned about the ‘snapback’ mechanism which automatically reintroduces UN sanctions if Iran breaches the deal.

And then there is Donald Trump. ‘There is a degree of uncertainty as to what approach [the] new Trump administration will take to Iran,’ Forrest says. During his campaign last year, the US president-elect said that if he won he would rip up the nuclear accord.  

Foreign law firms

Despite ongoing uncertainty, businesses are waking up to ‘realistic commercial opportunities’ in Iran, Forrest says. ‘The number of enquiries we are getting from clients looking to do business in Iran is increasing.’

Foreign law firms are responding by opening branches, forming associations with local firms or boosting their in-house Iran expertise.

Shortly after the UN sanctions were lifted CMS became the first major international law firm to open a dedicated office in Tehran, to exploit opportunities in energy, technology and automotive. The firm had set up a ‘taskforce’ to establish connections in Iran after president Hassan Rouhani’s election in 2013 and the start of negotiations with the west.

The Tehran-based team includes associates admitted to the Iranian Bar and is led by partners of CMS Hasche Sigle (Germany): Shaghayegh Smousavi, managing director of the CMS Pars office in Tehran, and board member Jürgen Frodermann. Smousavi is a German-Iranian partner who speaks several languages, including Persian, Iran’s national language.

CMS has eschewed the more common ‘Iran-desk’ approach of other foreign firms because of ‘strong interest’ among its international clients in entering the Iranian market, Frodermann and Smousavi tell the Gazette. Thus a local office is ‘a necessity in order to provide high-quality services and responsiveness’.

Iran’s economy is still dominated and heavily regulated by the state, and the country has a complex bureaucracy with slow administrative processes. ‘In a country like Iran, it is of the utmost importance to be in close contact with local administrations and organisations so as to better serve clients with practical legal services,’ Frodermann and Smousavi say.  

Devon- and Somerset-based private client and commercial firm Everys Solicitors signed a deal to open a branch office in Tehran on the day of the JCPOA. The office is headed by Iran-qualified lawyer Saeid Salari and assisted by UK-qualified lawyer and corporate specialist Maghsoudlou, who divides her time between Tehran and Dubai.

Maghsoudlou says managing partner James Griffin saw Iran as ‘a big opportunity’ for the firm well before the July 2015 nuclear deal. Despite geopolitical turbulence, including eight years of war with Iraq and international sanctions, Iran has shown economic resilience, she argues. ‘The country on its own has managed to survive, and that tells us that it is a good and strong market [to invest in],’ she says. Years of sanctions dating back to the 1979 revolution that established the world’s first Islamic state have forced Iran to diversify away from export-oriented oil and gas. Compared with the rest of the Middle East, where law firms are relatively well embedded, Maghsoudlou suggests Iran is a largely untapped market.

Foreign firms continue to trickle in. In September, Dentons Europe allied with Tehran-based firm Arman Pirouzan Parvine Legal Institute (APP). Only the European arm of the global firm, which also operates in north America, entered into the association. APP’s team of 10 Iranian lawyers is led by Iran- and US-qualified partner Navid Rahbar-Sato.

‘We have worked with many Iranian firms in the past 18 years,’ says Pirouzan Parvine, head of Dentons Europe’s Iran practice, but that approach changed after the UN sanctions were lifted. ‘We need to ensure that Iranian lawyers who work with us are fully dedicated to the needs of our clients, including our work methodologies and ethics.’

Building relationships

The Law Society believes the opening of the Iranian economy from January last year offers both opportunities and challenges for the legal profession.

President Robert Bourns says: ‘The Society believes that an independent legal profession and respect for the rule of law are essential to any effective judicial system.

‘We work in Iran and in other countries that face challenges when it comes to human rights and rule of law. The reason we do is to build relationships with the legal communities and other stakeholders in these countries which can help strengthen legal frameworks and build foundations to support international trade and cooperation. In any such engagement, the Society operates with a mandate to represent, promote and support solicitors, while upholding the rule of law, legal independence, ethical values, and the principle of justice for all.

‘The England and Wales legal profession has a great deal to offer clients – British, Iranian and international – to mitigate any risks and maximise opportunities. We also want to support solicitors of England and Wales and their counterparts in Iran to exchange ideas and expertise, and we are working with the Central Bar Association of Iran to this end.’

Other firms are also strengthening ties with Iranian firms. Eversheds International has ‘an excellent working relationship’ with a preferred law firm in Iran, says Iraq managing partner Tawfiq Tabbaa: Sanglaj International Consultants led by Dr Moshkan Mashkour.

Eversheds has also set up an Iran Group ‘to facilitate a centralised approach to Iran-related work’, Tabbaa adds. It is a cross-border, multi-disciplinary team comprising 12 attorneys across three offices (Paris, London and Dubai).

DLA Piper established a similar internal working group, shortly after the signing of the nuclear accord. It meets up fortnightly and is chaired by Bob Bratt, DLA Piper’s chief operating officer.  

‘The aim of the group is to provide clients not just with legal advice, but also to share our own experience of the practical considerations of doing business in Iran,’ DLA’s Forrest says. ‘Through the Iranian working group we are beginning to establish partnerships with firms on the ground,’ he adds, though the idea of opening an office ‘hasn’t been taken forward too far’.

Stephenson Harwood does not have an Iranian office but it does have a number of long-established local partners. The firm’s Iran team is 15 strong, with eight partners across six international offices. It is led by Dubai managing partner Rovine Chandrasekera and London-based partner Sue Millar.

Chandrasekera says: ‘We are confident that we have the resources for our Iranian practice to continue to thrive, being managed outside of Iran and from our array of international offices.’

Pinsent Masons has 15 people focused on Iran in the UK, continental Europe, Asia and Dubai, and ‘works closely’ with several lawyers in Tehran, says Dubai-based energy partner Jason Rosychuk.

Ducks in a row

Before last year, Iran was not a totally closed market, particularly for non-US companies in sectors that have not been subject to sanctions, such as consumer goods, hotel and leisure, and retail.

‘As a firm we been actively involved in the Iranian market for the past 40 years. Our sanctions and advisory work continued and increased during the period of sanctions,’ says Chandrasekera. ‘We continued to advise our Iranian clients throughout the period of sanctions, including in relation to their litigation and arbitration requirements in multiple jurisdictions, using our network of international offices and relationships with local lawyers. We acted on some of the most high-profile and complex challenges to sanctions in the UK and EU courts.’

But investors remain cautious and firms’ experiences reflect that. ‘Since implementation day [of the nuclear deal] on 16 January, a large volume of our work out of Dubai has been advisory as international companies get their ducks in row, in anticipation of entering the market,’ Chandrasekera says. ‘We expect movement throughout 2017 and would hope that this initial advisory work becomes transactional as we help ease our clients back into Iran. Our London and Paris offices have also been very active over the last year.’

So what legal advice do foreign businesses need in Iran? And in which sectors?

Advice covers sanctions and compliance, company incorporation, foreign investment procedures and protection, finance, labour and commercial agency, Tabbaa says.

‘One of the fantastic things about the Iranian economy is that it is wonderfully diverse,’ Forrest says. DLA Piper gets enquiries from clients in sectors ranging from automotive and consumer goods, to retail and financial services. Parvine adds to this sector mix life sciences, luxury, private equity, capital markets, and hotel and leisure. He has been surprised by the ‘wide range of client work’ that followed the lifting of sanctions.

A Dentons Europe team, including transactional lawyer Parvine, advised the first western group to enter Iran since 1979. In the wake of the nuclear deal, French hospitality group AccorHotels signed a contract with Iranian company Aria Ziggurat (a branch of Iran-listed Semega) to open its first two hotels in Tehran.

‘Hospitality has been pushed as the Iranians see this as a good way to raise foreign currency,’ Rosychuk says. ‘We are also seeing a renewed interest in retail and technology.’

Stephenson Harwood also advises companies across the spectrum of the economy including Iranian banks, shipping companies and those linked to aviation. Chandrasekera expects the transport sector to expand rapidly – Iran has 54 airports and an air fleet in need of significant investment.  

‘We have already seen substantial growth in the aviation sector following the lifting of sanctions,’ he says. ‘If Iran wants to compete on an international stage then there is a real requirement for their assets and services to be updated to a level comparable to some of its Middle Eastern neighbours.’

He highlights opportunities for infrastructure development – the firm’s offices in Dubai, Korea and China are working on ‘cross-sector’ projects.

Iran is expected to need more than $1tn of infrastructure investment over the next 10 years. As Rosychuk observes, developing social infrastructure (transport, healthcare and housing) is ‘important [for the government] to show the economic benefits of the nuclear deal’.

Eversheds is receiving instructions in these and other ‘strategic sectors’ such as telecoms and energy, including renewables, Tabbaa says. To support economic growth, the government plans to increase Iran’s power generation capacity from 74GW currently to over 120GW by the end of 2025, with renewables contributing a substantial portion of new energy generated. Eversheds is advising: a Spanish solar power company on corporate structures, employment issues, investment protection and taxation with a view to their entry into the Iranian market; and oil and gas service providers from Singapore and the UK.

Iran’s oil and gas reserves are the world’s fourth- and second-largest respectively. As Rosychuk observes: ‘Oil and gas is the obvious big sector of the economy that has become available to foreign investment since the lifting of sanctions.’ The government aims to produce 5m barrels of crude per day by 2020 and needs $200bn in foreign investment to modernise the industry.  

Yet, as Chandrasekera observes: ‘Investment in the oil and gas sector continues to be slow and we anticipate it will still be some time before it really comes to fruition, partly because of the larger amount of spending required and the long-term commitment of entering operating concessions.’

Investors are deterred by low oil prices, US sanctions and government delays in finalising a new oil investment contract for foreign companies that would replace unfavourable buy-back terms.

Nevertheless, a number of oil and gas companies have recently sought ‘high-level legal and commercial advice’ on doing business in Iran. ‘We view this as a positive sign for that sector,’ Chandrasekera says.  

Iran allows 100% foreign ownership except in industries such as nationalised oil and gas, parts of real estate, and banking and insurance. CMS’s Tehran office mostly advises international companies and their Iranian affiliates on their inbound activities. This includes setting up companies and branches, obtaining licences, joint ventures agreements and acquisitions of Iranian companies. ‘Most of our work revolves around corporate and commercial legal advice,’ the partners say. CMS is assisting ‘one of the biggest German plant manufacturers’ with four joint venture projects with Iranian companies, and has already advised on a cooperation agreement between Daimler and Iran Khodro Diesel.  

Maghsoudlou says Everys’ clients fall into two main categories: those that have been doing business with Iran for a long time and now want to set up on their own; and those seeking advice for ‘maybe later on when the banking system is a bit more flexible’. In both cases, Everys advises on: Iran’s free trade zone, tax and customs, intellectual property, the Foreign Investment Promotion and Protection Act 2002 (FIPPA), and OFAC- and JCPOA-related issues.

Who is seeking advice? ‘Clients from a range of jurisdictions have expressed an interest in Iran, particularly from continental Europe (Germany, Italy and France) and Asia (China and Korea),’ says Rosychuk, echoing the experience of other firms. ‘The UK has been less robust in pushing the message of investment in Iran, but the government is sending a stronger message now and we can see that in the requests coming from the UK.’

Remaining hurdles

The hurdles foreign lawyers have to clear in Iran broadly fall into two categories: US sanctions and related banking restrictions; and aligning the country’s legal practice with international standards.

Forrest says that US lawyers and firms ‘advising from a transactional perspective need to give very serious consideration’ to the risk of US sanctions violations.

‘Another important challenge when advising clients in Iran is the banking restrictions that are still in force,’ Frodermann and Smousavi say. US banks cannot deal with Iranian counterparts, while European and Asian financial institutions do not want to risk hefty fines. Upon the nuclear deal, US secretary of state John Kerry encouraged European banks to trade with Iran, but reportedly failed to provide assurances that the DoJ would not fine them: ‘It means that clients are still having difficulties in transferring funds to Iran via their banks in other countries.’

‘Banks are waiting for a clear instruction from the US that if they do any transactions with Iran they are not going to receive a big fine,’ says Maghsoudlou. ‘Getting a letter of credit is an issue for some of our clients, for example, because they cannot find big banks outside of Iran [to do that],’ she says. But there are ways around it: Iranian banks such as Bank Melli and Bank Sepah have foreign branches.    

The inability to conduct business in US dollars is compounded by Iran’s dual-exchange rate system; high inflation has led to a big gap between the two rival rates (market and official).    

Foreign law firms’ main challenges in Iran are ‘practical and commercial’, and primarily involve ‘obtaining banking and insurance support’, Rosychuk argues: ‘Residual sanctions remain a legal and administrative hurdle, though they are very manageable from a legal perspective.’  

An added difficulty faced by foreign firms and their clients is corruption: Iran ranked 130 out of 168 countries and territories in Transparency International’s 2015 corruption perceptions index. As one lawyer says: ‘There is a lot of corruption. It is a big hurdle for foreign investors because the system is not transparent.’  

Then there are issues specific to the legal profession. Iran has long been deprived of foreign direct investment, meaning that ‘one challenge is to train local lawyers to catch up with sophisticated cross-border transactions’, Parvine observes, adding that training is needed to change their practice from generalist to specialist.

Frodermann and Smousavi highlight the ‘lack of access to suitable legal databases. Apart from limited online resources, rules, regulations and precedents are unavailable or difficult to access’.

A year on from the lifting of sanctions Iran remains an alluring prospect but the country could disappoint if president-elect Trump revokes the US participation in the JCPOA. And so the deal-making bonanza may still be a while off, even if uncertainty is sure to keep foreign investors’ legal advisers busy.

Marialuisa Taddia is a freelance journalist