Iran Deal – what will happen next?

Iran Deal – what will happen next?

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The moment that we have been waiting for, and working towards for the past seven years has finally arrived – the P5 + 1 (US, France, China, Germany, UK, Russia) and Iran struck a landmark deal that was announced on Tuesday 14.07.2015 in Vienna, Austria.

But what does this mean?

First of all the deal still has to be passed by the American congress and the Iranian parliament. This should be finalized by the end of September 2015 – most analysts and experts strongly believe that the deal will be passed.

The psychological effect of the deal could be felt the day after it was announced. Foreign delegations (such as the one led by German Economy Minister Sigmar Gabriel, and the one led by French Foreign Minister Laurent Fabiushave been streaming into the country, and many companies that have previously been active in Iran as well as the once that have not, are anxiously looking for ways to re-enter the market. The Iranian market has been a black box for most in the past years; nonetheless, they all see potential in the market. However, this is merely the psychological effect, sanctions will be in place for a while.

 

We believe some of the following to happen in the months and years to come:

 

Phase 1 (from now until beginning/middle of 2016) – until the beginning/middle of next year, companies will assess the market entry potential, and first big companies will move in fast and sign deals with Iranian counterparts and political players. In this category we are talking about companies such as a variety of oil and gas giants, as well as large multinationals, such as Mercedes Benz.

We predict that many companies that do not fall into the above category will already be discouraged by the ambiguity and cultural differences in the Iranian market in this first phase, harshly distinguishing reality from the psychological hype. They will soon understand that there is no fast money to be made in the Iranian market, as stated by our Managing and Founding Partner Hossein Nabavi in the Austrian newspaper Wirtschaftsblatt.

Smart companies will strategically position themselves, understand the market, and built partnerships and network in the months to come for the long-term.

Certain institutional ventures will start being more operational, such as the recently formed European-Iranian Chamber of Commerce. Most American companies will still not be allowed to conduct business in Iran, which is a big advantage for European businesses. However, also here things are moving faster than imagined – the official website of the US-Iran Chamber of Commerce started working last week.

 

Phase 2 (from the beginning/middle of 2016 until 2018) – once the sanctions are lifted by as early as the beginning of 2016, a lot of foreign companies will attempt to get a piece of the pie. However, the banking system will take longer to adjust (approximately 1 – 2 years), which will make business tough without trusted local partners. The market has been isolated from the rest of the world for many years, and this will not change from one day to the other. Iranian companies have adjusted to tough sanction conditions, and will be careful. Also, foreign competition will face restrictions and scrutiny, as government and local companies will try to protect themselves.

We predict a similar, controlled market opening process that China has been and still is undergoing.

Foreign companies will learn painful lessons about the peculiarities of the Iranian market, and they will have to get adjusted to the controversial image that Iran still will bring with it. First companies will start to establish subsidiaries in Iran. Foreign direct investment might start to pour into Iran during this time period as well, which would set off a chain reaction of economical growth.

 

Phase 3 (2019 and beyond) – foreign companies will have learnt their lessons, the market will be much more open, and the wheat will have been separated from the chaff. Large players might start to even invest into local production sites. The local demand of Iranian consumers will increase exponentially, as the overall economic situation of the country will have stabilized even more. Iran’s advantageous location within the Middle Eastern region, and already developed infrastructure (which will be improved with inflowing investments), might be utilized as a hub to penetrate many surrounding markets.

We realize that predicting the future can never be a precise undertaking, however, many development steps of markets with a much less educated labor force and fewer resources overall have shown similar patterns. Iran’s economy will benefit from the deal and so will foreign companies that are willing to enter a new market; however, flexibility and the willingness to adapt will be crucial for success. Now is the time for strategic positioning.

 

Written by
ILIA Corporation Managing and Founding Partner Marlon D. Jünemann

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