Recent reports show that Russia is now Iran’s largest foreign investor with $2.76 billion invested in the current fiscal year. As per Iran’s Minister of Economic Affairs and Finance Ehsan Khandozi, Russia has invested in various sectors including the energy, mining, industrial and transport sectors. Both countries have increased their cooperation in trade and business in recent years and they have engaged closely to circumvent the sanctions imposed on them because of the crackdown on Iranian protestors and Russia’s invasion of Ukraine respectively. Iran is now looking at increasing foreign direct investment (FDI), especially in its energy sector.
As per reports, Russia has overtaken China in terms of FDI volume in Iran despite the strategic partnership between Iran and China and the expansion of trade ties between both countries. Iran’s Deputy Economic Minister Ali Fekri recently said that Iran is not satisfied with the volume of Chinese investment in the country. It is important to note that Beijing has increasingly invested in other regional countries like the UAE and Saudi Arabia. The latter received $5.5 billion in Chinese in the first half of the last business year.
US sanctions continue to significantly limit Iran’s potential to attract FDI, as is clear from Iran’s investment indices. Recent reports suggest that Afghanistan, Iraq, the UAE and China have also invested in Iran, although to a limited degree. According to the Tehran Chamber of Commerce, FDI in Iran saw some improvement in the 2015-2016 period after Iran signed the JCPOA, however, after the US withdrawal, it dropped in the country. As per from the United Nations Conference on Trade and Development, FDI in Iran touched nearly $3.37 billion in 2016, however, it decreased to $2.37 billion in 2018 and $1.5 billion in 2019 after the United States reinstated sanctions on Iran. The data further shows that Iran attracted nearly $1.42 billion in FDI in 2021 indicating a 6 percent increase compared to the previous year during which it stood at $1.34 billion, which still lags behind the economic target set by Tehran. As per the 2019 World Bank on the ease of doing business, Iran was ranked at 127.
The Foreign Investment Promotion and Protection Act (FIPPA, 2002), General Policies related to Clause 44 of the Iranian Constitution and various provisions in Iran’s Five-year Development Plan largely deal with the laws and regulations for FDI in Iran. FDI in oil and gas projects is, however, dealt with differently, with the Iranian government signing contracts with investors. Traditionally, Iran used to rely on buyback contracts for FDI in the country. Buyback contracts are service contracts through which international oil companies could develop an energy project in the country and accept remuneration in advance without any share in the profits drawn from the project and is conditional on the output achieved as forecasted and previously agreed upon. However, there were several limitations with such contracts and investors expressed dissatisfaction over the lack of incentives because of the short duration of such contracts. In 2017, the Iranian government introduced the Iranian Petroleum Contract which tried to address the drawbacks of buyback contracts like increasing the term of the contracts and changing the remuneration arrangement to attract international oil companies. However, the sanctions imposed by the Trump administration after its withdrawal from the JCPOA further impeded FDI prospects in Iran’s energy sector.
After the rapprochement between Iran and Saudi Arabia, there is growing speculation regarding Riyadh’s readiness to invest in Iran. Saudi Finance Minister Mohammed al-Jadaan recently said that if Iran adhered to the principles of the recently signed Saudi-Iran agreement, Saudi investments in Iran could happen quickly. Amid Iran’s active efforts to increase FDI, various challenges face its business environment as well as its potential to attract FDI. The attractive FDI opportunities in Iran are largely concentrated in its energy sector. Iran is particularly interested in attracting world-class technology, highly skilled professionals and large-scale investments to this sector in which Asian and European energy giants are keen to invest in. When the sanctions were lifted in 2015, major FDI went into Iran’s oil and gas sectors. Moreover, the Iranian government in recent years has been focusing on attracting more FDI to this sector, especially as international energy companies remain hesitant to invest in the country. Recently, Iran’s Oil Ministry declared the country’s[ra1] readiness to accept FDI in its energy sector, particularly from OPEC+ countries. Apart from oil and gas, petrochemical, renewable energy, automobile, infrastructure, healthcare and manufacturing are other possible sectors in which Iran is likely to explore more FDI options. The Iranian government in recent years has also established to promote FDI and boost the country’s manufacturing sector.
While Iran’s energy resources, strategic location, large consumer market and affordable labor costs are attractive for foreign investors, the lack of adequate infrastructure, excessive red-tape, problems in money transfers, banking and finance because of the sanctions and economic mismanagement and corruption remain major hurdles to increasing FDI in the country.