TEHRAN (Reuters) - Sebastian Straten is going against the flow. As some Western corporations pack up and mothball projects in Iran under pressure of sanctions, the entrepreneurial Dutchman is preparing for the day when tourists flock to the Islamic state.
His guest house business -- a joint venture with an Iranian partner which was dreamed up during a backpacking holiday three years ago -- may be an unlikely embryo for a fortune.
But it serves to highlight the potential opportunities companies in the West are passing up to Asian rivals happy to do business with a country that outgoing U.S. President George W. Bush included in his world view of an "axis of evil."
Straten is developing a small-scale hotels venture in the central city of Yazd, renowned for its labyrinth of lanes between old mudbrick buildings and 'windcatcher' towers designed to cool houses in the desert heat.
He aims to expand to the cities of Isfahan, Shiraz and Qazvin, opening more hotels on the Silk Road, an ancient trade route that linked China with the Middle East and Europe.
Famous tourist sights in Iran include 2,500-year-old ruins at Persepolis near Shiraz and 16th-century Islamic architectural gems in Isfahan. Visitors to the Middle Eastern country can also enjoy skiing, diving and nature.
Straten himself first came to the Islamic Republic as a tourist in 2005: he is not blind to the risks but is nonetheless confident his business will eventually pay off.
"Maybe I'm crazy," said Straten, who quit as product manager at a privately owned pharmaceutical firm to go backpacking, and is now obsessed by the potential of the two small hotels he and his Iranian partner Ali Montazer Ghaem currently own.
"I wouldn't do this if I did not have a very different thinking from other people," the 35-year-old said. "Everything I have, everything I am, everything I believe in, is in this country. It is 100 percent commitment."
While Straten is moving in, there are plenty of examples of large European companies going the other way, even though their governments have not followed the United States in formally banning them from investing in Iran.
Washington is spearheading a drive to isolate Tehran over nuclear work it suspects is aimed at making bombs, a charge Iran rejects, and is putting pressure on businesses to stay away.
France's Total and Royal Dutch Shell are two energy giants which are freezing or scrapping plans for investments worth billions of dollars. Banks such as London-based HSBC and Germany's Deutsche Bank have halted Iran-linked transactions.
The Economist Intelligence Unit (EIU) says tension over Iran's nuclear program, which has drawn three rounds of U.N. sanctions since 2006, is a barrier to foreign investment flows into both its hydrocarbon and non-oil industries.
Those who do take the plunge also find themselves hampered by Iranian red tape, a long-standing grumble of those companies that have invested in the past.
Foreign firms remain "vulnerable to the vagaries of the judicial system which has proven to be slow moving, opaque and suggestible," the EIU said in its July report.
Phil Priestley, a senior risk analyst at Merchant International Group, a strategic risk consultancy based in London, said Iran would remain a high-risk investment destination for the foreseeable future.
President Mahmoud Ahmadinejad's nationalist economic policies "favor 'self-reliance' over foreign capital and expertise, providing little incentive for foreign investors to tackle the byzantine regulatory environment," he said.
But as Europeans have pulled out, companies from Asia are readily stepping into the breach. Chinese oil refiner Sinopec signed a deal last December to invest $2 billion in Iran's Yadavaran oil field and Malaysian firm SKS Development has a multi-billion-dollar gas development contract.
Whatever the political and bureaucratic obstacles, a market of 70 million and a wealth of natural resources make Iran difficult to ignore.
It is still the world's fourth-largest oil exporter and boasts the second-biggest reserves of natural gas after Russia.
"It is almost impossibly difficult ... and it is impossible to walk away," said one senior official at a Western firm that has invested in Iran, speaking on condition of anonymity because of the high sensitivity of appearing to criticize the country.
According to Straten, Iranians don't take too kindly to investors who walk away but hope to return when the climate improves.
"Iranians are very proud people. Once you cut the relationship with an Iranian, he will not easily forget this," he said. "We Europeans are losing ... the battle for investment in Iran, if we are not careful."
His guiding principle is simple: it is better to be among the first foreigners investing in Iran's nascent tourism industry than a latecomer in nearby Dubai, the Gulf's commercial hub -- especially during a financial crisis.
And unlike Western multinationals which occasionally have to sacrifice promising markets to the prevailing political agenda, Straten is able to focus closely on his goal.
Even so, it took him six months to obtain the necessary investment license allowing him to plow up to 500,000 euros ($661,000) into his business over five years. But he has praise for Iranian law that protects foreign investments and says the authorities were supportive of his plans.
The obstacles facing his hotels business had more to do with Western financial institutions cutting ties with Iran as a result of U.S. pressure, forcing him to switch banks.
"I'm limited in my business by my own bank, which is not something you would expect," Straten said. "It is more the outside difficulties I encounter than any difficulties in Iran."
Investors in Iran need to find reliable local partners to operate successfully in the country, Straten said.
"Even if you have a lot of money and a lot of contacts ... it is crazy to think that you can succeed in Iran without a good local partnership."
Straten's own chances of developing a successful hotels business are enhanced by the fact that Iran sees tourism as a priority and wants to invest more than $30 billion in the sector over the next two decades, according to Iranian media.
The eventual success of such plans, however, may depend not just on an end to sanctions but also to a longer-term change in attitudes toward Iran. Observers say growth will otherwise continue to be hampered by a black-and-white image of Iran as a hardline Islamic state hostile to the West.
Editing by Guy Dresser and Sara Ledwith