Western companies see potential in reaching Iran’s consumers after nuclear deal

A country of 80 million has been all but cut off from global trade for years.

DUBAI—In a sanctions-free Iran, Western energy companies would likely be the biggest foreign first-movers: Iran has the world’s fourth-largest proven oil reserves and second-largest natural gas reserves.

But those big-ticket investments overshadow what some investors and consultants say could be a more enticing natural resource: Iran’s 80 million people, who have been all but cut off from global trade and transactions in recent years.

“Iranians love to eat, consume and shop, and they have continued to surprise domestic and international brands with their resilience,” said Ali Borhani, the founder of Incubeemea, a Dubai-based advisory firm that works with multinationals looking at Iran. “In a post-sanctions world, on the back of a multifaceted economy beyond hydrocarbons and oil and gas, Iran can be the most exciting frontier market.”

European companies may have an edge on U.S. competitors at first, lawyers say, because the European Union sanctions regime hasn’t been as restrictive, and U.S. companies tend to be more wary.

But Mr. Borhani said Iranians are nostalgic for American products, which may give U.S. multinationals an edge in the longer term. Many Iranians remember driving Chevys, Cadillacs, Buicks and Mustangs before the 1979 Islamic revolution.

“Tissues still in Iran are called Kleenex after 37 years,” he said, referring to the brand manufactured by the Irving, Texas-based Kimberly-Clark. “There’s a tremendous amount of brand loyalty.”

Adding to the potential, Iranian consumers have very little debt, Mr. Borhani said. Some wealthier people have debit cards, but there is no MasterCard,Visa or American Expressin Iran and few foreign banks are active there.

If foreign banks get back into Iran—a process expected to be slow, given the billions of dollars in fines levied for sanctions violations—consumer borrowing and spending could spur economic growth that foreign investors could tap into.

Even under sanctions, Iranians spent $77 billion on food, $22 billion on clothes and $18.5 billion on outbound tourism in 2012, Mr. Borhani said.

Despite the economic potential of a sanctions-free Iran, lawyers, consultants and investors say they are looking at the country with a dose of skepticism.

Under Thursday’s framework deal, the parties have until June 30 to agree on the details. European Union, U.S. and United Nations sanctions would then be withdrawn only if Iran meets its transparency and nuclear-production commitments—and could snap back into place if it doesn’t. That means legal risks of doing business in Iran will remain.

“Your investment becomes less valuable if Iran fails to hit those targets or achieve those milestones,” said Patrick Murphy, a lawyer at Clyde & Co. in Dubai who has worked with traders and companies dealing with Iran. “The worst-case is if sanctions are reimposed because of noncompliance. You could run a risk there.”

Some foreign companies not involved in industries subject to sanctions—especially European consumer-goods firms—have continued operating in Iran despite growing sanctions pressure. Many have been successful.

Paris-listed Groupe Danone S.A., for example, has a long-standing joint venture that produces Damavand mineral water, Iran’s biggest bottled water brand. Danone increased its stake in that venture to 70% from 40% in 2010. Danone didn’t respond to a request for comment.

Yet even for such companies, sanctions that effectively excised Iran from the global financial system three years ago have caused problems.

The Swiss food and beverage company Nestlé S.A. had to scale back in Iran two years agowhen it had trouble moving money out of the country, Iranian traders and a banker told The Wall Street Journal at the time. A Nestlé spokeswoman said the company had around 530 employees in Iran and was there to invest for the long term.

South African mobile phone operator MTN Group took a 49% stake in Irancell in 2005, but weakness in the Iranian rial has hurt its profit, and it has had difficulty repatriating hundreds of millions of dollars of earnings there. MTN Group didn’t return a request for comment.

Etihad Airways recently said it would increase the frequency of flights between Abu Dhabi and Tehran from three times a week to daily.

The decision appeared to be an attempt to take advantage of greater Iran-U.S. travel, in anticipation that sanctions would end. Daily flights would give Iranians more direct access to dozens of major U.S. cities, said Kevin Knight, Etihad’s chief strategy and planning officer.

U.S. sanctions are stricter than those imposed by Europe, curtailing almost all dealings with the country. But even some U.S. companies have started to scope it out.

Iranian companies in Dubai have received draft contracts to be official resellers ofHewlett-Packard laptops in Iran, according to Iranian businessmen. And late last year, Dubai-based managers of Hewlett-Packard Development Company L.P. traveled to Tehran to prospect the market and meet Iranian distributors, they said.

HP would be allowed to sell laptops to Iran under a U.S. exemption for consumer electronics decided two years ago, but a thaw between Iran and the West could ease the endeavor. HP declined to comment.

In the event of a final nuclear agreement, lawyers and company executives say the most likely scenario is a gradual but significant inflow of foreign investment. Outsiders not already in Iran will need time to research the market, find local partners and understand the legal environment.

Iran is set up legally for foreign direct investment. Foreigners are allowed to own 100% of their ventures and there are laws to protect them, but the system hasn’t been tested much during the sanctions era.

“There is nothing we can do for the moment and nothing we intend to do before the sanctions are lifted because we don’t want to be in breach of any sanctions,” Albert Momdjian, the founder and chief executive of SOKOTRA Capital Ltd., a Dubai-based private investment firm focused on frontier markets, said Monday. “We’re purely scouting, doing our desktop due diligence in order to better understand and feel the market without investing there yet.”

Mr. Momdjian said the hospitality, tourism, logistics, food and mining sectors in Iran looked particularly attractive.

“Everything needs to be developed,” he said. “The question is to remain focused and have the right local partners.”

By The Wall Street Journal