Iranians warn that distrust could replace sanctions as obstacle to business

http://www.theguardian.com/world/iran-blog/2015/jun/02/iran-sanctions-business-culture-obstacles

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With relatives and friends returning to Tehran in search of opportunities ahead of the expected lifting of economic sanctions, Haj Hossein holds court at his Grand Bazaar shop and doles out business advice.

He warns his cousins, nephews and old acquaintances returning from abroad about corrupt judges and scheming entrepreneurs. “I tell them not to believe and not to trust anyone,” stresses the 70-year-old merchant, who primarily sells rugs but trades anything that comes his way. “They think they are still in Europe or America, but this is a different country, with very different rules.”

Related: Bulk of Iran sanctions to be lifted upon fufilment of Lausanne conditions

Decades of economic isolation have made Iran’s business scene difficult to navigate for outsiders accustomed to playing by globally accepted principles. Attempts to shift state-owned property to private hands have led to the creation of a complex conglomerates with shadowy ownership structures. The corrupt legal system also favors the well-connected, giving rise to an environment of distrust. “You have to bribe,” says Haj Hossein, “but also make sure you are paying the bribe to someone who can actually help you.”

The number of breach-of-contract cases has skyrocketed since the start of nuclear negotiations in 2013, when foreign investors began to reset their sights on the Iranian economy, says Alireza Darbandi, a corporate lawyer who handles dozens of cases in Tehran as well as provincial courts.

“Many Iranians will return to the country to invest, but will be the victims of schemers and charlatans,” Darbandi predicts.

Alireza Keyvani, an engineer and entrepreneur, moved back to Iran from North America last year to start an acquisitions company focused on the burgeoning hi-tech scene. “I thought I would be in everything from robotics to medical equipment,” he says.

After signing several contracts laying out his business plan, Keyvani says that he learned that one of the partners had cut his company out of the deal and was receiving a commission directly from the client. Keyvani sought legal action, but his lawyer warned him against taking the case further. Keyvani’s former business partner would likely try to bribe the judge or produce forged documents, the lawyer argued. “I had to wake up to see Iran as it really is,” Keyvani recalls.

The absence of rule of law has allowed impostors to thrive. Darbandi says most of his cases involve “someone pretending to be an intelligence officer or a Revolutionary Guard Corps commander”, who intimidates and manipulates the investor. Later, it is difficult to prove that the perpetrator had used false identity. While he advises potential investors to protect themselves by seeking legal advice, Darbandi says he “cannot guarantee a peaceful and productive business experience” in Iran.

The atmosphere of distrust has raised the cost of financial transactions, most of which only take place after extensive negotiations and legal guarantees, says Ahmadreza Mohammadi, a business analyst in Tehran. Even these do not guarantee a desirable outcome, however. Mohammadi says he witnessed many cases in which “both sides find a way to create difficulty”.

Related: End of Iran sanctions will open gates to companies keen to enlarge markets

As foreign investors await Iran’s economic opening pending the nuclear deal, businessmen such as Keyvani are discovering that the country lacks the necessary legal system to protect the interests of private investors. The Islamic republic ranks 130th on the 2015 Ease of Doing Business index (pdf) of 189 global economies, below Mozambique, Pakistan and Lesotho. Iran’s standing in the index improved by two points since 2014, but remains among the region’s lowest. GCC countries remain the primary destination for many potential investors.

“If the business practices in Iran are unethical, it is partially because of the sanctions, which provided great opportunities for corruption and created monopolies,” says Keyvani. “To have global business ethics, one has to be part of the global community.”