The 14 July comprehensive nuclear agreement between Iran and world powers marks a historic breakthrough in the longstanding dispute over the Islamic Republic’s nuclear programme. The main catalysts behind the deal have been Iran’s continuing economic isolation as a result of sanctions and the high value placed by the Obama administration on a comprehensive agreement.
In the wake of the agreement, a broad range of Western companies will be looking to invest in Iran to capitalise on the country’s large internal market and vast natural resources. Oil and gas companies, in particular, have already engaged with the Iranian regime with a view to advance negotiations as far as possible in anticipation of a full lifting of sanctions.
Although the deal will present foreign companies with a broad range of opportunities, the operating environment will almost certainly remain challenging. While the Rouhani government has signalled its intention to liberalise the country’s regulatory framework, conservative elements and vested interests will resist attempts to provide a more open business environment.
Efforts to improve operating landscape have centred on a yet-to-be implemented new business environment law and a new model oil contract, which in its draft form will provide far more attractive fiscal terms than the unpopular "buy-back" contracts offered to European oil companies during the 2000s. The finalised new framework is expected to be presented in September, but political wrangling could still lead to delays or less favourable terms than expected. Similarly, the anticipated business environment law will almost certainly face opposition from elements within the Revolutionary Guard who have benefited from a closed and highly politicised economy.
Addressing institutional and regulatory weaknesses will take time. Although Rouhani has prioritised appointing technocrats to central positions within key ministries most government institutions remain cumbersome and inefficient. During the presidency of Mahmoud Ahmadinejad, the petroleum ministry in particular was filled with thousands of loyalists, with most appointments heavily influenced by political considerations.
The Iranian authorities will nonetheless be acutely aware that the road to greater economic stability does not end with the adoption of the nuclear agreement. Realising the country’s economic potential over the next decade will require well over $100bn (£64bn) in investments, underscoring the strong need to prioritise regulatory reform. While progress will undoubtedly be made over the coming years, foreign companies entering a post-sanctions Iran will have to navigate a host of regulatory and political challenges.