ndtvProfit.com: ANALYSIS – Iran sanctions complicate life for EU firms

EXTRACT: But in a sign that not even potentially lucrative energy deal are immune from pressure, two European groups — Royal Dutch Shell and France’s Total — have indicated that international tension could influence new investment plans.

May 21, 2007

By Fredrik Dahl

TEHRAN (Reuters) – International sanctions and U.S. commercial pressure over Iran’s disputed nuclear programme are pushing up costs for European companies doing business in the Islamic state and deterring fresh investment.

But while executives and diplomats say increased political tension is likely to discourage new entrants, established Western businesses are trying to ride out the storm and keep a presence in the No. 2 OPEC oil producer.

“We have some problems of course,” said the representative of one major company operating in Iran, a country of 70 million people. “Politics is more and more involved in business.”

However, “it is still one of the few places in the world where you can make good money,” he said, like others speaking on condition of anonymity due to the sensitive situation.

Since December the United Nations has imposed two sets of sanctions on Iran for its refusal to suspend nuclear activities which the West fears are aimed at making atom bombs, and U.S. officials have warned of more such steps if Tehran remains defiant.

The U.N. measures so far are limited to targeting Iranian individuals and firms accused of links to the nuclear work and not trade in general, although the freezing in March of assets of Iran’s state-owned Bank Sepah is having a wider impact.

But the combined effect of the sanctions, U.S. efforts to isolate Tehran financially and concern that the nuclear row may escalate are making Western investors more cautious about Iran.

“Small and medium-sized companies which do not have a strong foothold here would not come to Iran at this moment,” a European diplomat in Tehran said. “Others with strong U.S. interests are very hesitant.”

CHOKING OFF CREDITS

The United States’ own trade with Iran is negligible due to a 27-year embargo following the 1979 hostage-taking at the country’s Tehran embassy, and U.S. officials see European economic ties with the Islamic Republic as a key lever.

A conservative U.S. think-tank said this month that firms and government agencies from mostly European and Asian countries have struck more than $153 billion in deals with Iran since 2000, primarily in the energy sector.

The American Enterprise Institute said French firms were the leading investor, followed by China, Germany and Italy.

Washington is putting pressure on its allies not to do business with Iran, including a drive to choke off government export credits, and urging international banks to stay away.

“Banks have withdrawn from the country already, others remain but keep a low profile,” said one European banker.

Swiss banking giant UBS cut ties with Iran last year and a senior U.S. Treasury official has said HSBC, Standard Chartered Bank and Commerzbank were among a number of other institutions limiting their exposure.

The European diplomat said Washington was going beyond U.N. measures in seeking to pressure Tehran, and some EU firms and governments were critical of this approach.

“There is a lot of unhappiness building up … Europe has to be very careful not to close the door to Iran,” he said.

Iran’s huge energy resources are a magnet for oil majors and government officials in Tehran have played down the effect of sanctions on the economy, which has reaped windfall gains from high crude prices and is growing at 5-6 percent annually.

INCREASING RISK

But in a sign that not even potentially lucrative energy deal are immune from pressure, two European groups — Royal Dutch Shell and France’s Total — have indicated that international tension could influence new investment plans.

“The relative isolation of Iran is not making things easier,” said Total Chief Executive Christophe de Margerie.

As a result of worsening Iranian-Western relations since 2005, Western executives say the cost of opening letters of credit, a vital export tool, is rising.

The yearly rate is now estimated at 5-6 percent or more of the contract value compared with about two percent previously, and it is also harder to get them confirmed by European banks, a prerequisite for doing business in Iran for many foreign firms.

“Technically, it is complicating transactions. Everything takes twice as long,” said one European company official.

In addition, Germany’s VDMA engineering trade body has said targeting Bank Sepah was hurting German firms awaiting payments from Iran, and the European banker in Tehran said he expected other Iranian banks to be hit in any new sanctions round.

“It is creating an atmosphere of uncertainty,” he said. “Everybody’s risk is increasing.”

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