Major European companies Invest in Iran, Undeterred by Tensions
Bloomberg - European News
Aug 21, 2003
The Fifth Tehran International Auto Fair, a five-day event that closed July 5, drew companies such as Renault SA, PSA Peugeot Citroen, Mazda Motor Corp., DaimlerChrysler AG's Mercedes-Benz, Fiat SpA and Volkswagen AG.
Many foreign companies continue to invest in Iran even though U.S. President George W. Bush described the country as part of an ``Axis of Evil,'' along with Iraq and North Korea.
Some foreign investors, such as Japan, are delaying projects. Yet most of the about 200 companies present in Iran, such as Ericsson AB, the world's largest maker of mobile-phone equipment, and Alcatel SA, the second-biggest producer of telecommunications gear, are staying put though adopting a low profile. Others, like Statoil ASA, Norway's biggest oil company, and Technip SA, Europe's largest provider of oilfield services, state openly that they're in the country for the long term.
``When the political temperatures go up, companies take a low profile,'' said Siamak Namazi, managing director of Tehran-based Atieh Bahar Consulting, an adviser to companies such as BP Plc, HSBC Holdings Plc and Alcatel. ``But we haven't heard of any that have cut their investments.''
As the U.S. raises political pressure on Iran over a suspected nuclear-weapons program, student demonstrators have been calling for more democracy and for the supreme leader Ayatollah Khamenei to give up his special powers. Many Iranians are unhappy with the slow pace of political change initiated by President Mohammad Khatami.
Abraham's Talks
U.S. Secretary of Energy Spencer Abraham was in Europe last week and held separate discussions on Iran with Dutch Economic Affairs Minister Laurens-Jan Brinkhorst and Italian Industry Minister Antonio Marzano, a Department of Energy spokesman said. He declined to disclose details.
``They only talked about Iran in general terms,'' Dutch Economic Affairs Ministry spokeswoman Paula de Jonge said. ``The subject of investments didn't come up.'' Italian officials refused to comment.
``Iran is one of the most resource-rich countries in the world but its political risk is among the highest of any rated sovereign nation,'' said James McCormack, a senior analyst at ratings company Fitch, which rates Iran's foreign debt as B+, on par with Romania and one notch below Azerbaijan.
After years of shunning Western investments, Iran is now actively seeking funds from abroad. In the five-year plan covering 2000-2004, the government is seeking $4.5 billion to $5 billion in direct foreign investment.
VW Project
VW, Europe's biggest automaker, sent its regional manager, Peter Poersch, to Tehran. Kerman Car Manufacturing, Iran's No. 3 car company, said at the fair that it signed a preliminary agreement with VW to produce four models in Iran, according to Iranian state news service IRNA.
If the accord goes ahead, the first model would come off assembly lines in the third quarter of next year with a goal of eventually producing some 200,000 units. Iran has plans to produce 600,000 cars by 2004, primarily to meet domestic demand.
``Nothing has been decided up to now,'' VW spokesman Hans Peter Brechinger said.
Iran has the fifth-largest proven oil reserves, holding about 90 billion barrels, or about 9 percent of the world total. It holds the world's second-largest reserves of natural gas, surpassed only by Russia.
Since 1995, the U.S. has tried to put an economic noose around Iran and slow the development of its energy potential. Then- President Bill Clinton banned U.S. companies and their foreign subsidiaries from conducting business with Iran.
Sanctions
The following year, under the Iran-Libya Sanctions Act, the U.S. imposed mandatory and discretionary sanctions on non-U.S. companies investing more than $20 million annually in the Iranian oil and natural-gas sectors.
In the post-Iraq War period, Bush has renewed calls for tough sanctions because of Iran's alleged nuclear plans.
``The international community must come together to make it very clear to Iran that we will not tolerate the construction of nuclear weapons,'' Bush said in June after the International Atomic Energy Agency reported that the country didn't properly report some of its activities as required by the Nuclear Non- Proliferation Treaty. ``Iran would be dangerous if they have a nuclear weapon.''
Low Profile
Iran has denied that it is developing nuclear weapons and says the program is designed to generate electric power to spur the economy. The country has an 18 percent unemployment rate and inflation is 25 percent.
Keeping a low profile is the best strategy for companies dealing with Iran, says Patrick Clawson, deputy director of the Washington Institute for Near East Policy. ``When companies ask my advice, I've had to tell them candidly that so long as they can keep the investments off the front pages of the newspapers, it's likely that the United States government will do very little,'' he said.
Case in point: General Electric Co. and Halliburton Co. are coming under pressure from pension funds such as those for New York City's police and firefighters that have more than $205 million of investments in GE and $18 million in Halliburton.
New York City Comptroller William C. Thompson Jr., has submitted shareholder resolutions calling for board committees to examine risks posed to the companies by dealings in Iran and Syria. California Public Employees' Retirement System, the U.S.'s largest public retirement fund, has asked Congress and administration officials to identify companies that might unwittingly support terrorism.
`Clear Guidance'
General Electric, the biggest maker of medical-imaging machines and power-generation equipment, is active in Iran through its Canadian subsidiary, while Halliburton, based in Houston, has an office in Iran opened in 2000 by a Cayman Islands subsidiary, Halliburton Products & Services Ltd.
``As we said in our proxy this year, U.S. law, regulation and policy contemplate that U.S. companies will do business in Iran and elsewhere through foreign subsidiaries and provide clear guidance on how those activities are to be conducted,'' said GE spokesman Gary Sheffer.
Some companies are reacting. In May, ThyssenKrupp AG, Germany's largest steelmaker, paid 406 million euros ($473 million) or three times the market price for shares in the company that were owned by Iran to avoid potential U.S. economic penalties. The move reduces Iran's stake in ThyssenKrupp to 4.4 percent from 7.79 percent.
Japanese Retreat
Japan's government was close to an agreement to invest $2.5 billion to develop Iran's biggest oil discovery in 35 years before getting cold feet after the U.S. opposed the investment.
``This would be a particularly unfortunate time to go forward with major new oil and gas deals,'' State Department spokesman Richard Boucher said July 1, in a statement in Washington.
That prompted the Japanese to delay the agreement. ``Suspicion about Iran's nuclear development is not an issue affecting only our country,'' Yasuo Fukuda, Japan's chief cabinet secretary, told reporters in Tokyo last month.
``The U.S. has done its best to prevent the Iranian economy from growing,'' said Tahmasb Mazaheri, Iran's minister of economic affairs and finance who was in London to attend a conference in June as the U.S. put pressure on Japan.
Energy
Still, the Japan incident was a rare victory for the U.S., which since 1998 has seen European and Asian companies such as Eni SpA and Total SA disregard its call for sanctions. Secretary of State Madeleine Albright in 1998 granted a waiver to Total and partners OAO Gazprom and Malaysia's Petroliam Nasional Berhad when it became apparent they planned to bypass the U.S. sanctions to help develop the South Pars natural-gas field. Other European and Asian companies have since asked for, and received, waivers.
``Over 200 publicly traded companies are doing business in Iran,'' said Roger Robinson, chief executive of Conflict Securities Advisory Group, based in Washington, which provides research reports on companies dealing with potentially hostile regimes. ``The bulk of them are in energy.''
In testimony to a subcommittee of the U.S. House International Relations Committee in June, Robinson said 41 companies have invested more than $20 million each in Iranian energy projects.
Jobs
Around 80 percent of Iran's total export earnings and as much as half of the government budget is based on oil exports. Still despite the high oil revenues Iran needs to attract investment in areas other than energy to ease the high unemployment, said Fitch's McCormack,
``The oil industry creates foreign currency but doesn't create jobs,'' McCormack said.
Total of France in 1995 became the first foreign company to sign a petroleum development agreement with Iran since the Islamic Revolution 16 years earlier. Two years later it signed another contract for South Pars, the Persian Gulf's biggest gas field, which holds about 6 percent of the world's supply. Total executives declined to comment.
Royal Dutch/Shell Group, the biggest gasoline retailer in the U.S., won a contract in 1999 to develop the Soroosh-Nowruz offshore oilfields, pledging to invest $800 million.
`Long-Term Strategy'
Italy's Eni, Statoil and Russia's Gazprom are also developing oil and gas fields. Statoil is seeking to boost its $300 million investment in Iran.
``We will continue to monitor the political situation closely, but our long-term strategy is to increase our business in the country,'' said Inge Hansen, Statoil's chief financial officer.
``Iran is keen to make more deals and the oil companies are interested to put more money in,'' said Caroline Cook, an analyst at Deutsche Bank AG and one of the authors of a report on Iran. ``The American oil companies are the ones losing out.''
BP, Europe's second-biggest oil company, is negotiating to develop the Bangestan fields, which hold more than a billion barrels of oil.
Still, BP, the largest natural-gas producer in the U.S., is eager not to antagonize the U.S., says Cook.
With good reason. A subcommittee of the House International Relations Committee in June asked a panel of experts how the U.S. could bolster the Iran-Libya Sanctions Act and stop granting waivers to European and Asian companies.
Risks
``Taking risks is a price of doing business in the Middle East,'' said Sylvie Hallemans, spokeswoman for Technip, Europe's top provider of oilfield services.
Technip, which has been trading with Iran for 25 years, is building the largest ethylene plant, with an output of 1.4 million tons a year, at a cost of 300 million euros.
If the financing is there, Technip said it has no problems providing engineering services in Iran.
``We are not very nervous people. About 70 percent of our work is outside of the quiet regions of Europe and America,'' Hallemans said. ``We know how to handle risk, otherwise we'd be nervous every day.''
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