Iran, Islam And Capitalism — Contradictions Set To Explode

In anticipation of international sanctions on Iran being lifted at the beginning of 2016, European executives are chomping at the bit to do business there. But how will a market economy play with the Islamic regime?

By Guillaume de Calignon
December 17, 2015
World Crunch

TEHRAN — The Islamic Republic of Iran is an astonishing country, seen from the enlightened Western world. It's a land where religion prevails over politics, where the agriculture minister starts his speech, "In the name of the merciful God," where a religious chant precedes interventions from officials, and where the portraits of the martyrs of a war that killed one million people flourish across the capital.

In the Imam Reza Shrine in Mashhad, the country's second-largest city, near the border with Turkmenistan, pilgrims strike their chests while singing invocations to the Shia saint. Women stroll in black chadors covering them from head to toe. This description confirms the prejudice we've been dwelling on for the last 35 years.

But of course, Iran is more than that stereotypical image. It's also a place where you can meet young people in their thirties such as the dynamic and trendy executives at Aftabnet, a Tehran-based advertising agency. With the latest iPhone in hand, they respect all of the Western dress codes, except for the women's veils. They even created their own theater company to break the regime's lead weight. Their plays are dark and violent, and their verses are delivered in Persian to the background of a South London DJ, Burial, and his syncopated music.

Iran President Hassan Rouhani, presented as a moderate when he was elected in 2013, decided to pacify his country's relationship with the West. The July nuclear deal signed in Vienna opens up new prospects for this Middle East giant, with its 78 million inhabitants and its multi-millenary history.

Opportunity knocking

With international sanctions ending at the beginning of 2016, Western companies from Germany, Spain, Italy and France are rushing to Tehran. At the end of September, 130 French executives from companies big and small traveled to Iran with the employer federation MEDEF.

"We used to be a thug state, a member of the axis of evil for 35 years, and now we've become the place to be," says Zahra Azmoudeh, a French woman of Iranian origin who created her own consulting agency in December 2013 to act as a bridge between French and Iranian companies. Executives are careful not to sign any contracts yet, though, not until the official end of the embargo, for fear of American reprisals. But they are networking and getting the lay of the land.

France has high expectations for this promising market in which it almost lost control. Last year, exchanges with Iran represented a mere 469 million euros ($503 million). The sanctions regime forced Paris to look for other supply chains in China, South Korea and Turkey. "We know there's going to be fierce competition among companies, especially among European companies, to secure new markets," Agriculture Minister Stéphane Le Foll said during his visit to Tehran with French entrepreneurs.

"But France can take advantage of its cultural ties with Iran, the result of previous relations,” he added. At the time of the Shah, French was the dominant foreign language, and France is betting big on this soft power. As proof of this proximity, the French embassy in Tehran is on an avenue called Neauphle-le-Château, the name of a small village not far from Paris where Ayatollah Khomeini took refuge in the late 1970s, before heading the Islamic Revolution of 1979.

"We're very happy to welcome France," says an enthusiastic Mohamed Satei, managing director of rail operator Sina Rail. "We love French cars. Just look at the streets." There's lots of Peugeot and Renault." There are indeed six million Peugeot in circulation in Iran, while the country's hands-down favorite car, the Peugeot 405, gives the heavily polluted city of 15 million people a bit of an 1980s vibe.

Against all odds

But except for this detail, Tehran is very much a 21st century city, with its impeccable highways and its 400-meter-high Milad Tower, built in the early 2000s. Despite 35 years of sanctions, the country's economy has done impressively well. Even former President Mahmoud Ahmadinejad's catastrophic policies haven't drowned the country.

Iran has two national car manufacturers, important steelworks and harbors. The country's level of development appears to be much bigger than that of its neighbors. An average of 700,000 students graduate from university each year. One Iranian women describes her country as "the Middle East's Germany" and praises its industrial culture. It's a bold prediction, but it might not seem so far-fetched 20 years from now.

Especially when we consider that Iran is sitting on a pile of gold, black gold. The country boasts the world's second-largest oil reserves — behind arch-enemy Saudi Arabia — enough to finance its much-needed modernization.

"Because of the sanctions, we haven't been able to upgrade our industry," explains Akbar Torkan, an adviser to Rouhani. "Our car production capacity is one million vehicles per year, but we're lagging behind in terms of design and technology."

But there is one short-term problem in this idyllic description of the future. Because the current price of crude oil is under $50 per barrel, revenues will be much lower than those expected by the government. Too bad. Iran has already found the perfect argument to "sell" its potential to the West. "Iran is a stability hub in an troubled region," Torkan says in reference to the wars raging in Iraq, Syria and Yemen.

Iran's transportation needs are immense, which is good news for Airbus, Peugeot and Alstom. Tehran is planning to purchase 400 commercial airplanes over the next 10 years, and intends to build 12,000 kilometers of new railways, to buy 1,000 locomotives and 5,000 wagons. These plans also include construction of a high-speed rail that will connect Tehran and the historical city of Isfahan, in central Iran, in two hours. In terms of automobiles, Iran wants to become a production leader by building three million vehicles per year, two million for its national market, and one to be exported.

But there are many pitfalls that Westerners should know. The first involves financing. There isn't a single Western bank working in Iran, and the record $9 billion fine BNP Paribas paid to the U.S. for having done business with Iran (among others) dampened any potenial enthusaism. For small and medium-sized businesses, this problem can be circumvented by creating a branch in Dubai. But this is too risky and inflexible a solution for bigger companies. In Paris, the Treasury and Foreign Ministry are working on the issue, which in fact amounts to interpreting U.S. law.

Another problem involves the disputes about international sanctions. Iranian authorities don't seem to resent France too much for Foreign Minister Laurent Fabius' tough stance in the nuclear negotiations, but the same can't be said for the companies that left abruptly in 2012. Peugeot is a perfect example. After the company left the country, Iran's Khodro continued to manufacture the 405 model, rebranding it Pars. Peugeot automobiles represent 30% of cars circulating in Iran, but the French company isn't making a cent from the country anymore. To remedy this type of situation, the Iranians have offered to create a joint economic commission. But Iranian officials have a sharp tongue and never miss an occasion to remind people of their disloyalty.

Finally, it isn't Iran's intention to be considered a big market where Westerners should come and help themselves. The Iranians prefer to play it like the Chinese and the Indians: Foreigners will have to invest in their country and accept the idea of transferring their technology.

Still, the crucial question for Iranians and for investors remains, what will happen to the mullah-run regime? A market economy and its consequences — consumption and individualism — are the world's most powerful weapons to destroy traditions, religion being first among them. The Ayatollahs might not survive it.

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Iran, Islam And Capitalism — Contradictions Set To Explode

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