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US companies move quietly into Iranian markets

October 5, 2000

by Edward Alden and Guy Dinmore,
Financial Times (London), 5 Oct 2000

US companies are quietly strengthening their presence in Iran, circumventing US sanctions in the expectation that improved relations between the two countries will lead to a lifting of Washington’s unilateral trade embargo within a year.

In a calculated gamble that Washington will not raise objections, the companies have found ways to use foreign subsidiaries or Iranian middle-men to sell to Iran without technically violating the sanctions regime.

But European businesses exhibiting at Tehran’s trade fair this week accused Washington of double standards, saying the US is turning a blind eye towards its own companies dealing with Iran, while harassing foreign groups operating in the Iranian market when they seek business in the US.

The double-standard is indicative of Washington’s current ambivalence towards Iran. The Clinton administration has signaled repeatedly that it would like to see warmer relations with Tehran.

Observers say that President Bill Clinton is eager for an opening to Iran that could become part of his foreign relations legacy, alongside the recent trade deals with China and Vietnam. “There’s no question that both sides are looking to do something,” said one former US official with close ties to Iran.

But Iran remains a political time-bomb in the US. The recent convictions of 10 Iranian Jews on espionage charges has angered the powerful US Jewish community and its congressional supporters, certainly blocking any chance of even a modest US initiative until after the November elections.

President Clinton, citing Iran as a threat to national security, signed an executive order in 1995 that barred US business dealings with Iran. In 1996, the US Congress passed the Iran-Libya Sanctions Act, which allows for US sanctions against foreign companies participating in Iran’s oil industry.

However, none of these efforts is preventing American brand-name products from being widely available in Iran.

For example, Iranian police and other security services use Motorola radios that a government official said were procured in Asia.

Local manufacturer Noushab in Tehran sells an Iranian-made soft-drink, with imported flavourings, in Coca Cola bottles bearing the famous logo. Nissan Sharq in Mashhad does the same with Pepsi and told the FT it hoped to produce under license from Pepsi in the future.

Coca Cola supplies syrup to a plant in Iran, under an arrangement the company said is authorised by a special licence from the US Treasury Department. Pepsi is also trying to penetrate the market.

General Motors has also held discussions with Pars Khodro, an Iranian carmaker to get back into the Iranian market, Iranian officials say. General Motors owned Pars Khodro before it was national-ised after the 1979 revolution.

Products of Hewlett Packard and Intel are common sights on Jomhouri Street, Tehran’s most popular area for computer equipment.

Many of the products make their way to Iranian markets courtesy of Iranian middle-men, particularly in Dubai.

Iranian business consultants say Xerox and Kodak are both pushing into Iran through Dubai. Said one consultant: “The US is not monitoring things very closely. They must know that agents in Dubai are importing far more US goods than the local Dubai market can absorb.”

But more direct routes are also available. While the trade embargo prohibits foreign subsidiaries of US companies from trading with Iran under the direction of the parent company, this restriction is in practice easily sidestepped.

As long as the US parent does not “facilitate” the transaction or directly approve the actions of a foreign subsidiary, those subsidiaries are free to deal with Iran.

That channel has been particularly important for US oil companies, which fear they will be frozen out of participating in the development of Iranian oilfields. Conoco, the US oil group, has analysed seismic data for the National Iranian Oil Company through its British subsidiary.

Those transactions are under investigation by the Office of Foreign Assets Control, the US Treasury agency which enforces the trade embargo. Conoco has denied violating the embargo.

Senior Iranian officials say Halliburton, the US oilfield services company, supplies oil equipment. Dick Cheney, the Republican vice-presidential candidate and former Halliburton chief executive, has urged an easing of the US sanctions. Mr Cheney has said the company is allowed to operate legally in Iran through its foreign subsidiaries.

The uncertainty over enforcement of the sanctions regime has encouraged US companies to take risks. “A lot of companies are out there pushing the envelope because it is so grey,” said a US lawyer who counsels companies on trade with Iran.

The dealing is not limited to large US companies. This week, five small US companies had their wares displayed at the Tehran trade fair, using Iranian go-betweens.

Vahid Vafaee, a Dubai-based trader, was selling for Wilson Art International, a US-maker of household fittings. He said Wilson Art did not know he was exhibiting their wares. But the Iranian representative of Jergens, a US cosmetics producer, said that company was fully aware.

“It is a double standard,” complained the representative of one leading French company, who did not want to be named. “The US businesses are building market share, but their government can threaten to take action against you in your US market.”

While some US companies are positioning themselves for an eventual lifting of the US embargo, it is hard to ignore the opportunities already available. Iran has a market of over 60m people, and with crude oil prices at current highs, Iran is earning about Dollars 1bn a month more than had been budgeted.

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