February 29, 2008 / 12:21 AM / in 10 years

European firm thrives in Iran despite sanctions

TEHRAN (Reuters) - British executive Robert Mills says his express delivery firm is enjoying explosive growth in Iran, despite tightening international sanctions on the Islamic Republic over its disputed nuclear plans.

<p>Robert Mills, country manager of German-owned delivery and logistics group DHL Express, stands in front of a company car in Tehran February 13, 2008. Mills says his express delivery firm is enjoying explosive growth in Iran, despite tightening international sanctions on the Islamic Republic over its disputed nuclear plans. REUTERS/Raheb Homavandi</p>

With a longstanding U.S. embargo barring two key rivals from entering the world’s fourth-largest crude producer, DHL Express claims a share of at least 60 percent of what Mills called one of the region’s fastest-growing markets for the sector.

“Business is good, business is improving year-on-year,” enthused the 40-year-old country manager of DHL, a unit of mail and logistics group Deutsche Post.

“After China and Russia in the 80s and 90s it is one of the biggest untapped markets left in terms of consumers.”

A service provider which has no major dealings with Iranian banks, which are increasingly shunned by their Western counterparts, DHL’s experience is not representative of the environment facing foreign companies in Iran.

But its position in transport does illustrate how Iran’s windfall gains from high oil prices are, to some extent, cushioning the sanctions’ impact on the country.

For Mills, financial and other punitive measures imposed by the United Nations and the United States since late 2006 over Tehran’s nuclear programme have not slowed business: “I can’t feel them, I can’t see them,” he said.

A country of 70 million, Iran is the second-largest producer in the 13-member Organization of the Petroleum Exporting Countries (OPEC). Imports have soared this decade, rising by 14 percent to nearly $50 billion in the 2006-07 Iranian year.

Mills said the tonnage handled by DHL jumped by 50 percent in two years and the company has doubled its turnover in Iran since 2005 on the back of rising imports of everything from telecommunications equipment to car spare parts.

“We have had quite an explosion of growth ... Iran is a big importing country.”

Iran, whose economy grew 6.7 percent year-on-year in the six months to September according to central bank figures, expects to earn $63 billion from oil sales in the 2007-08 fiscal year.

“Because of the high oil price it is easier to get around the direct financial sanctions,” said senior director Richard Fox of international credit ratings institute Fitch in London.

EUROPEANS ACTIVE

Unlike the United States, the European Union still lets its firms operate in Iran, even though leading EU states are backing Washington in stepping up pressure to halt Tehran’s nuclear activities, which Iran says are peaceful but the West fears have military aims.

European firms in Iran include oil groups such as France’s Total, Anglo-Dutch Royal Dutch Shell, Nordic telecoms groups Ericsson and Nokia, and French car makers Renault and Peugeot.

For DHL’s Mills, the absence of U.S. competitors United Parcel Service Inc and FedEx Corp “takes a lot of pressure off for the obvious reason.”

DHL’s strength in Iran is in contrast with the United States market, where the company is struggling to take on UPS and FedEx on their home turf and is losing money.

Another European manager in Iran, who said his engineering firm trebled its sales in a decade, said it “is a great market,” although he like several others spoke on condition of anonymity, concerned about the sensitivities of working in the country.

The local head of an EU-based firm selling machinery and other equipment to Iranian customers, also declining to be named, said it too had seen double-digit growth last year and continued to expand.

“Seventy million people ... give a lot of opportunities for the right producers,” he said.

Russia clearly also sees opportunities. Gazprom, the world’s top gas producer, this month said it will take on big new energy projects in Iran, a move that was likely to anger the United States which wants the Islamic state isolated.

“FINANCIAL TERRORISM”

But the situation is potentially volatile, which some say discourages longer-term planning: “Things happen from day to day,” said the executive selling machinery. “What you think on Monday might be possible, you find on Friday is impossible.”

Washington’s pressure is having more of an impact on trade than separate measures imposed by the United Nations, which is expected to vote soon on a third round of relatively mild sanctions, some analysts and business managers say.

The United States started cutting business and other ties with Iran after its 1979 Islamic revolution but is now also encouraging especially banks from other countries to stay away.

In what Iran’s central bank governor has denounced as “financial terrorism,” U.S. sanctions have targeted four of Iran’s major banks -- Bank Mellat, Bank Melli, Bank Sepah and Bank Saderat. Bank Sepah has also been hit by U.N. sanctions.

Western banks including Deutsche Bank, HSBC and Credit Suisse have stopped U.S. dollar transactions with Iran or severed ties altogether.

European executives say this makes it difficult to open letters of credit, a payment guarantee vital for trade.

“All international banks more or less stopped accepting letter of credits from Iran,” one executive said. “We had to start doing transactions through regional banks, mainly in Dubai.”

Analysts say Western multinationals are becoming more wary of investing due to perceived political risk and escalating problems in securing trade finance. Germany, for example, last year halved the volume of new export credit guarantees for trade with Iran.

Iran’s trade with the EU has declined since 2005, when the Europeans exported goods worth 13 billion euros to the country, and both Total and Shell have indicated political tension could influence investment plans.

Mills said he did not yet know whether a measure in the draft new U.N. resolution designed to limit exports of “dual use” items -- those with potential in military or civilian fields -- would affect his company’s operations.

Even energy-hungry China, which has been cultivating ties with Iran with trade forecast by some analysts to reach around $20 billion this year, has trimmed bank dealings as Washington pushes for tighter sanctions, Iranian media have said.

“Everything has become more difficult and everything has increased in cost,” the country manager of the EU-based machinery firm said. “You grow old quickly here.”

Additional reporting by James Regan in Frankfurt and Paul Carrel in Berlin; Editing by Sara Ledwith

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