Dysfunction at the Border Jeopardizes Growth of Iran-Iraq Trade

When the United States re-imposed secondary sanctions on Iran in November 2018, the Rouhani administration belatedly decided that increasing the country’s non-oil exports, particularly to Iran’s regional neighbors, would become a central aim of economic policy.

In 2019, Hossein Modarres Khiyabani, currently the acting industry minister, stated that Iran’s neighboring countries currently import USD 1.2 trillion worth of goods each year, of which Iran accounts for USD 24 billion, equivalent to a 2 percent share. The government aims to grow regional exports to USD 48 billion by the Iranian calendar year ending in March 2022.

Among these countries, Iraq has emerged as Iran’s leading regional trade partner. Iran and Iraq share religious and cultural connections and a border nearly 1,500 kilometers long. But it is Iraq’s large consumer market that makes it ideally suited to play a role in Iran’s non-oil trade agenda. The quality of products produced in Iran is compatible with standards in the Iraqi market, which means a wider range of Iranian producers can target exports to Iraq. This also makes Iraq an arguably more important export destination than China.

While exports to China totaled USD 9.5 billion in the Iranian calendar year ending in March 2020, exports to Iraq were a close second at USD 8.9 billion. Yahya Ale-Es’haq, Chairman of the Iran-Iraq Joint Chamber of Commerce, notes that the composition of trade with China is dominated by raw materials, whereas trade with Iraq includes value-added goods that generate employment in Iran.

“Iran and Iraq set a 5-year target to increase bilateral trade to $20 billion per year in 2018. This has been hampered this year to some extent, partly due to the trade restrictions caused by the COVID-19 outbreak and partly because of Iraq’s reduced purchasing power, a consequence of depleting global oil prices,” Ale-Es’haq told Bourse & Bazaar.

In response to economic pressure at home, Ale-Es’haq explained, Iraq is trying to be more frugal and to address public demands to deal with rampant corruption.

“In reopening Mandali border crossing earlier this month, Iraqi Prime Minister Mustafa Al-Kadhimi said he aims to launch a full-throttle battle against corruption in the borders and customs offices. This is because the central government is not being given its share of customs revenues.”

Officials at the Islamic Republic of Iran Customs Administration (IRICA) describe the Iraqi prime minister’s vow to fight corruption as an internal matter.

“Our customs offices and checkpoints are disciplined and every step and procedure is documented in our electronic system. The Iraqi PM was addressing a matter of national governance as Iraq is a nation made up of different ethnic, religious, tribal and political groups. Each of these have their own regulations and practices which, of course, extend to economic activities of which all groups claim a share,” a spokesperson for IRICA stated.

But Iranian exporters feel that their own government should be doing more to support trade.

Ali Hosseini Sakha is the owner of Nasl-e-Jonoub-e-Karoun Trading Company, based in the southern province of Khuzestan. The company maintains an office in the Iraqi city of Basra. Sakha has been trading in Iraq for over 25 years and last year exported nearly USD 22 million worth of foodstuff, construction material, and minerals across the border.

Sakha also runs a research center under the auspices of the Trade Promotion Organization of Iran, an agency of the Ministry of Industry. He conducts market research and organizes trade forums to try to facilitate greater cooperation and trade on both sides of the border.

“Based on our latest research, the share of Iranian commodities in the Iraqi market amounts to no more than 3 percent. You can hardly find Iranian goods when walking through supermarket aisles in Iraq and that’s a shame,” he said.

Sakha points to a lack of coordination among government agencies. While the government provides a budget to wide range of agencies and to each Iranian province for export promotion activities, the funds are largely squandered on forums and meetings or allocated to those with “special interests.”

Moreover, Sakha explained that Iranian exporters are increasingly reliant on unreliable middlemen in the hopes of getting their products into the Iraq market without having to do the hard work of distribution themselves.

“Iranian exporters take their goods to the border for sale and usually end up making deals with middlemen because that’s how they think they can ‘get ahead in the game.’”

The unregulated middlemen then sell goods on to “the real Iraqi merchants.” Sakha noted that it is not uncommon for middlemen to disappear without having made payment for the goods they have just taken across the border.

He believes that customs officials and the joint Iran-Iraq chamber of commerce could do more to ensure exporters are engaging reliable Iraqi merchants and trading companies. “None of this takes place. The joint chamber is there and has no other business than to serve the interests of certain groups and individuals.”

Sakha’s sentiments were echoed by Hemmat Shahbaz-Beigi, owner of Arshia Gostar Trading Company in Kermanshah province’s Qasr-e-Shirin County. The company exports everything from construction materials, to home appliances, and even vegetables.

Shahbaz-Beigi did not hold back in complaining about the lack of support for Iranian exporters.  

“There are rules and regulations, yet, there is no guarantee that any of them will be executed or applied to your case if you ever come across a problem,” he said.

Shahbaz-Beigi recounted the saga of a USD 200,000 order fulfilled in 2015 than went unpaid. Five years year later, he has spent USD 40,000 in pursuit of payment but “hasn’t gotten a penny back.”  

Shahbaz-Beigi has met with Iran’s consulate general in Iraq but was “not to spend any more on the case and forget about my money altogether.”

He has also been unable to get help from the joint chamber of commerce. “This is just frustrating,” he lamented.

In a recent tweet, Ali Shariati, a board member of the Iran Chamber of Commerce, the nationwide body representing the interests of the country’s private sector, claimed that the Iran-Iraq Joint Chamber of Commerce had been operating without a statute for 16 months and that the chamber no longer comprises of individuals with an interest in developing bilateral trade.

The failure of the joint chamber to support bilateral trade is not unique to the experience of Iranian exporters in Iraq.

“This is how most of our joint chambers are functioning,” explain Farhas Ehteshamzad, former head of Iran Auto Importers Association and a respected figure in business circles. “If these bodies are not made to fulfill their responsibilities towards the private sector, they will not only hamper trade but the members will probably end up monopolizing trade in their areas of interest.”

When asked to comment on the matter, Hamid Hosseini, former general secretary of Iran-Iraq joint chamber and current member, described the complaints of Shariati, Ehteshamzad, and others as “their take on the issue.”

Responding to Shariati’s tweet regarding the join chamber’s statute, Hosseini noted that the statute must be renewed every year during an “assembly with two thirds of the members are present.”

“We have more than 400 members and most of them live in the provinces bordering Iraq. So it’s been hard organizing such an assembly given that we are currently experiencing a pandemic. But we’ve recently been given the permit to hold the assembly online and this will solve the problem,” he explained.

Hosseini added that the joint chamber has an arbitration center with Iraq where disputes are settled, but the problem is that trade between Iranian and Iraqi partners is usually carried out traditionally on the basis of mutual trust rather than robust contracts.

“In such cases, no contracts are signed and there are no documents proving that a commercial interaction has taken place. That’s why these merchants can’t win their cases and the joint chamber should not be made to take the blame for this.”

Despite these challenges, companies committed to export growth can persevere with the right mindset, argued Ali Dorhi, a senior executive at Dina Food Industries, which produces Iran’s beloved “Cheetoz” cheese puffs.

Dorhi believes most Iranian enterprises lack an “export-oriented mindset” and that only “30 percent” of the problems facing Iranian firms eyeing export opportunities can be attributed to bureaucracy and red-tape.

“There is often no market research and trade takes place at the very gates of the borders. Products are not customized or at least adapted a bit to suit the tastes of the destination markets,” Dorhi noted.

“In Iraq, for example, customers demand that product information be written in Arabic on boxes and containers. Many Iranian producers will not meet that request. This is why we end up having an insignificant share of less than 2 percent in Iraq’s lucrative food industry market.”

With oil exports having earned Iran just USD 8.9 billion dollars in the Iranian calendar year that ended in March 2020, the government is finally recognizing the importance of non-oil exports. But what has been neglected, particularly in the case of trade with Iraq, is the need to support exporters with better regulations, better market research, and more responsive trade bodies and chambers of commerce.  

During Al-Khadimi’s recent trip to Iraq, Hassan Rouhani reiterated that Iran and Iraq intend “to expand bilateral trade ties to USD 20 billion”—a figure that reflects the effective doubling of Iranian exports to Iraq. Whether the two countries can reach that lofty goal will depend on whether Iranian authorities and exporters can address the dysfunction at the border.

Photo: IRNA

Country Managers Are Making Post-Sanctions Iran Work

This article was originally published in LobeLog.

On July 3, Patrick Pouyanné, the imposing, former rugby-playing CEO of Total, arrived in Tehran to sign a landmark $5 billion contract to develop Phase 11 of Iran’s South Pars gas field in cooperation with the China National Petroleum Corporation and Petropars, an Iranian firm. The deal was a sign of Pouyanné’s ambition and resolve in the face of the Trump administration’s rhetoric towards Iran.

But the credit for the deal should not go to Pouyanné. Behind every CEO who travels to Iran to sign a deal, there is a “country manager” who paved the way. In the case of Total, it is Eric Festa, whose formal title is managing director for Iran. Erik is one of a small but growing brigade of country managers who are on the front lines of Iran’s post-sanctions economy.

These country managers are tasked to conduct business in a market, which multinationals euphemistically classify as a “growth market” or “development market.” The country managers typically assigned to Iran have experience operating within other similarly complex markets. Most country managers do not have Persian language skills, though some companies have assigned diaspora Iranians to the role. Country managers are chosen for their understanding of the need to balance relationship-based business with strict attention to issues of risk management and compliance. They also tend to have something of a taste for adventure and a willingness to adapt to a new business culture. Some have relocated to Tehran, but most travel in and out of the country every few weeks.

“Country manager” is a grab-bag term. As a rule of thumb, the formal job title of the country manager reflects the stage of the multinational corporation’s investment in Iran. At the earliest exploratory stage, the individual could merely be a head of a project office. As the commitment to the market grows, the job gains more authority, and “country manager” becomes the more common title. As the business moves to a rollout phase, the title is commonly elevated to a corporate vice president role where the individual is also the director of the Iran business unit. For the multinationals with the most advanced investments, such as a dedicated subsidiary or joint venture, a CEO or managing director with significant autonomy and authority often leads the Iran business, overseeing a staff in the hundreds.

The Western policy community has devoted significant time and resources seeking to locate influence within Iran’s political structure, often using its byzantine nature as an excuse to declare, for reasons of expediency rather than clear evidence, that a certain individual or office is the most powerful. Yet, far less attention has been given to the organizational structures that govern the flow and operation of post-sanctions international capital into Iran.

A Useful Bureaucracy

Country managers are the critical actors behind post-sanctions investment in Iran, but they remain essentially invisible in the structure and organization of that trade. It is telling that there exist more flowcharts explaining political decision-making in Iran than commercial decision-making.

The consequence of this blind spot is an inherent distortion in the way power and influence in Iran are understood. This distortion is particularly acute given the status of economic development as the fundamental political priority across Iran’s political spectrum. This economic development hinges on the success of country managers in balancing the commercial directives of their companies with the political and practical needs of Iran’s industries. At the moment, most analyses of Iran’s post-sanctions political economy presuppose that Iranian power brokers such as members of the Revolutionary Guard are unilaterally setting the terms for commercial activity. But in reality, the process of post-sanctions trade and investment is an ongoing negotiation in which country managers have meaningful leverage: the ability to withhold much-needed foreign investment.

On this basis, a full assessment of power and influence in Iran today must account for the role of the country manager. Max Weber, when he long ago posited the concept of the bureaucracy, dispelled the idea that state administration and industrial administration were distinct. Not only are the administrative methods of the state and industry effectively the same—reflected both in the technocratic tendencies of Iran’s political class and in the emergence of multinational corporations as so-called “private empires”—but the execution of large-scale trade and investment also requires the functioning of a single overarching bureaucracy involving governmental and corporate actors from both the domestic and foreign spheres. Country managers, who serve as the administrative link between these two spheres, are the central bureaucrats of post-sanctions trade and investment in Iran.

The bureaucratic nature of trade and investment, which favors rational, technical, governable, and stable decision-making, also makes the attendant processes inherently vulnerable. Although country managers may be quite influential in Iran, none would ever boast about their power or influence. Like most bureaucrats, they feel beholden to systems much greater than themselves. Iran ranks low in ease-of-doing-business, and by no means are its domestic state or industrial bureaucracies efficient. Iran’s post-sanctions reintegration with international systems for enterprise and finance has proven difficult, and country managers experience these myriad challenges firsthand.

Strengthening the Bureaucracy

To improve the expected outcomes associated with the new influx of trade and investment in Iran, the policy community that supports constructive engagement must do more to empower country managers by addressing vulnerabilities in the bureaucratic structure in which they operate. Interventions are needed on a few fronts.

Continuing to borrow from Weber, a bureaucracy depends greatly on its legitimacy. Country managers struggle to position themselves as effective negotiators because they have a difficult time signaling that their leverage within the given commercial negotiations matters. This leverage centers on the notion that country managers can withhold the investment of their multinational companies if terms are not attractive. However, so long as a narrative persists that other political forces may prevent that investment anyway, the country manager has little to no leverage. It is not the case, as some suggest, that political uncertainty is making Iranians desperate to strike deals. Iranians see little reason to engage in reforms and offer more favorable terms when the payoff is not certain. This fact explains why European governments have devoted so much effort to tightening the coordination between government and commercial actors in regards to Iran. The creation of a credible political commitment has been fundamental to the strengthening of the negotiating power of the country managers. Importantly, in this regard, European ambassadors serve as a kind of political partner to the country managers in Iran.

However, the effort to legitimize trade and investment in Iran has its limitations. The permissibility of trade and investment in Iran is no longer primarily a question of legitimacy. Although the legal basis for post-sanctions trade provides a rational, legal authority for those who wish to pursue that business, there remains a “fear factor” associated with Iran that is sometimes inherently irrational. Policymakers have been hesitant to engage concerns around the perceived moral dubiousness or danger of engaging commercially with Iran, perhaps because they see these matters as reflective of a fraught emotional politics. But there needs to be a greater understanding that these emotional issues have a direct bearing on the ability of Iran trade and investment to become more fully bureaucratic, and thereby more fully constructive. Unless steps are taken to provide assurances on the permissibility of trade and investment beyond the basic question of legality, the fuller picture of legitimacy will never be addressed, and therefore bureaucratic actors such as country managers will always remain hamstrung, unable to fully articulate the legitimacy of a proposed engagement to key stakeholders. They will constantly struggle to relay their on-the-ground knowledge of Iran to decision-makers whose impressions are shaped by threatening headlines.

The country manager must also be empowered with a rational commercial framework in which to operate. The rules that govern trade and investment in Iran remain relatively disorganized. Lingering issues around international sanctions and Iranian regulatory frameworks alike mean that companies need to continually evaluate the rules of engagement. As such, country managers who play roughly the same role within the companies across national affiliations and across industrial sectors find themselves spending inordinate amounts of time simply clarifying the rules for their own specific commercial activities.

The most significant example can be seen when multinational corporations seek a specific license for their Iran business activities, principally from the U.S. Office of Foreign Assets Control. With this licensing policy, the U.S. political establishment is using its tools of administration to exercise jurisdiction over the bureaucratic function of European trade and investment. One bureaucracy is undermining another for the ostensible purpose of protecting security interests. But in forcing Iran trade to be less bureaucratic, less regular, and less basically normal, the policy is counterproductive.

Although general licenses are meant to set non-specific, system-wide rules about the administration and operation of business in Iran, persistent ambiguities prevent the creation of a standard practice that establishes such rules. Add to this the reputational issues around engaging with Iran and the rationale for business in Iran remains a very personal decision, dependent on the resolve and risk appetite of the country managers and their superiors. On the Iranian side, a similar personal dynamic exists. The acceptability of a commercial arrangement is based to a large extent on the strictness with which key stakeholders, such as Iranian ministers or commercial partners, apply formal regulations (such as protectionist laws) and uncodified expectations (such as political resistance).

Defining Best Practices

To address both jurisdictional interference and the personal contingency of trade and investment, European governments and industrial companies must develop a more rigorous set of standard practices that establish the rational rules for engaging with Iran. To do so, far greater effort must be spent on policy research to devise and implement best practices for Iran. Just as few studies have been made to locate domestic and foreign commercial actors within Iranian power structures, little research is being conducted to examine issues of industrial policy, economic planning, and management practices within the Iranian context. Relatively few events and forums bring country managers into dialogue with experts who can help define best practices.

The existence of best-practice rules and guidelines will also improve the bureaucratic operation of trade and investment in Iran by making individual country managers more dispensable. At the moment, the entrepreneurial nature of the role means that when country managers leave their post, the learning curve for their successor is especially steep. This “key person risk” prevents the smooth functioning of trade and investment. Iran will struggle to see adequate trade and investment if deals rely too much on the quality of the individual country manager or the administrative wherewithal of the particular company. Although Total may have been the first international oil company to sign a post-sanctions contract precisely because of the company’s unique strengths, the success of post-sanctions investment depends on the emergence of durable, sector-wide competencies.

Over all, the ability for country managers to facilitate economic development in Iran that is both great in magnitude and constructive in impact will depend on the ability for trade and investment in Iran to operate along more regularized and bureaucratic lines. To do so, policymakers must recognize the central role played by country managers in the legitimization and rationalization of commercial engagements with Iran. It is easy to take bureaucracy for granted. But in the delicate effort to improve the political and economic administration of Iran’s post-sanctions trade and investment, success must be systemic.

Photo Credit: Total