Iran Moves Hesitantly Toward Liberalization

By Colin MacKinnon

In early May Iran’s parliament passed two measures in fast succession that are steps of a sort toward opening the country’s economy to the rest of the world. On May 8 the parliament ratified the New York Convention, and a week later passed a new foreign investment law. Both measures are aimed at attracting foreign investment into the country and at easing Iran’s entry into the World Trade Organization.

The New York Convention

The New York Convention is an international agreement on enforcing arbitration awards. Sounds humdrum, but in fact joining the Convention was an important step Iran simply had to take before it could even think of building investor confidence.

By joining, Iran has agreed to do two things: it now will allow disagreements between foreign investors and their Iranian partners to be taken out of the country for settlement before an impartial international arbitration panel. Until now, investment disputes were to be settled in Iranian courts.

Secondly, Tehran has promised to recognize and enforce foreign arbitration awards. This means that if an Iranian company, or even some branch of the Iranian government, loses to a foreign partner in an overseas arbitration proceeding, Iranian courts will have to recognize that fact and award damages to the foreign partner.

Ratifying the New York Convention also puts Iran—or Iranian firms—in a stronger position to pursue their own claims against foreigners abroad.

The New Investment Law

Passing a new investment law was also a necessary step to build investor confidence. This particular law, however, is hardly a foreign investor’s dream. In fact, the new law is not all that different from one that has been on the books since 1955, although it does make comforting noises about protecting investments and eases restrictions somewhat on the repatriation of profits. Here’s what the new law would do:

It would require foreign investors to apply to a special high-level committee for permission to invest in Iran. The committee would be made up of officials from Iran’s Management and Planning Organization, the Central Bank of Iran, and the ministries of finance and foreign affairs and probably other ministries as well. Ultimately the minister of finance himself would have to sign off on the permission.

Foreign investors would be considered private companies operating under Iranian law, even if the investor were a foreign state-owned company.

Laws such as the Iran Libya Sanctions Act are clearly in violation of WTO principles.

The law confirms the right of investors to hold more than 49 percent of a local company, and promises that foreign investments would not be exposed to expropriation or nationalization. In a kind of double-speak, though, the law goes on to state that if the government decides, for whatever reason, to take over a company, the government and the company would have to come to terms before the government actually did so.

The foreign investor may bring in foreign exchange and conduct business in Iran. Funds brought in and not spent may be sent back out without interference. Profits earned after taxes may be transferred abroad.

As political cover, the law says that foreign investments will be not be given any preferences over Iranian companies and that no foreign company will be given a domestic monopoly.

All in all, the law doesn’t make much difference. Even before its adoption, the government approved most foreign investment and, in practice, has allowed foreign investors to own 100 percent of a local company. Iran even has promoted investment outside the framework of the investment law itself. Thus, an attractive technique known as build-operate-transfer (BOT), whereby an investor builds a project, collects revenue on it as payment, then turns it over to its Iranian owners, had been approved as well. The new law, which is short and simple, is silent on such techniques.

With such laws the devil is always in the so-called “implementing regulations”—that is, the rules the government draws up later that explain how the law is really supposed to work. It is anybody’s guess when the regulations for this law will see the light of day and what they will contain.

So, as it stands, the bill might help a bit to increase the flow of investment into Iran, but it is by no means a sea change in the investment regime. The law was passed on May 16 and sent to the Council of Guardians for approval.

Into the WTO?

Iran also is moving toward membership in the World Trade Organization (WTO), the international body based in Geneva that aims to foster multilateral free trade by setting up rules both for international trade and standards for the trade regimes of its members. Developing countries, the argument goes, can view the WTO as a useful referee in their trade relations with more powerful trading nations. Otherwise, outside the WTO, a developing country would have to trade with each of its partners on a bilateral basis, and that trade would be more influenced by economic and political power. By contrast, even the poorest, weakest WTO members have rights which are enforceable under the WTO.

Membership also gives liberalizers political leverage to reform trade regimes that they may find too protectionist (like high tariffs) or that might pose other barriers to trade and investment (equity restrictions and the like).

Iran’s bid to join the WTO is motivated by all the usual reasons, but there is an additional one: the Iranian government, or countries whose firms have invested in Iran, could complain before the WTO’s Dispute Settlement Body about U.S.-devised laws such as the Iran Libya Sanctions Act, which pretend to have extraterritorial reach. These are clearly in violation of WTO principles. Complaining governments would have no trouble whatsoever winning their cases and could have punitive action taken against the Americans.

Iran first applied to join the WTO in 1996, but its membership was opposed by the U.S., which so far has succeeded in keeping Iran out. That may change. A decision on whether to accept Iran into the WTO was to have been made in May, but has been postponed to July. The U.S. is apparently reviewing its policy.

Colin MacKinnon is a country analyst with the Syracuse, New York-based PRS Group.