By Samia Nakhoul and Richard Mably

TEHRAN (Reuters) – Hopes that Iran would quickly reintegrate with world markets after its nuclear deal, bringing investment and opportunities to a young population, are turning to frustration. An opaque business environment in Iran and political uncertainty in the United States are to blame.

Tehran’s hotels are buzzing with businessmen keen for a slice of a big new emerging market, more industrially developed than most oil and gas-rich nations but isolated since the 1979 Islamic Revolution that turned Iran into a pariah state for most of the West and many of its Middle Eastern neighbors.

Yet potential foreign investors have found that the removal of international sanctions in exchange for monitored curbs on Iran’s nuclear program is only part of the story.

Barriers to entry include resistance from hardliners within Iran who worry an opening to the world will undermine their entrenched interests, and fear among foreign investors of falling foul of residual U.S. sanctions.

Under the nuclear deal, the U.S. and Europe lifted sanctions in January. But other U.S. restrictions remain. These include a ban on Iran-linked transactions in dollars being processed through the U.S. financial system and sanctions on individuals and entities identified as supporting “state-sponsored terrorism”.

The chief target of the anti-terrorism sanctions is the Islamic Revolutionary Guard Corps (IRGC), the theocratic establishment’s enforcer at home and strike-force abroad. The IRGC is also behind a business empire, encompassing construction to banking, and is expert at hiding its involvement.

Investors and top-tier foreign banks fear U.S. action could shut them out of the international banking system if they deal, even by mistake, with sanctioned bodies.

Adding to the uncertainty, Iranian analysts and foreign executives say, is the rise of Donald Trump, the U.S. tycoon set to clinch the Republican nomination in this year’s presidential election, who has threatened to tear up the Iran deal.

Yet even without this uncertainty, prospective dealmakers are finding themselves blocked.

IRGC TIES

Foreign executives scouting for business in Iran say when they examine the tangle of ownership behind companies they approach, they often detect IRGC ties.

Claude Begle, executive chairman of SymbioSwiss, a logistics and infrastructure company, says he found that one exploratory project turned up such links.

“We did a lot of due diligence and we found that the names of institutions appearing on the OFAC (the US Treasury’s Office of Foreign Assets Control) sanction list are sometimes not far away,” he said in apparent reference to the Revolutionary Guard.

“When you look at the shareholders structure at the second or third level, then you see that such names may appear. They are sitting there.”

“Very often when you look at Iran’s successful companies, you can see that. And unless those companies are willing to modify accordingly their board structures, it will be very hard to raise international financing to work with such entities.”

The central problem for potential foreign investors is that even unwitting contact with an Iranian counterparty under sanctions could result in heavy U.S. Treasury penalties, effectively cutting them off from America’s financial markets – a powerful disincentive for any globalized business.

Alexander Gorjinia, part of the second German business delegation to visit Iran since August 2015, says “the biggest problem is the banks”.

While businesses and banks may have German go-ahead to operate in Iran, OFAC “puts the responsibility of establishing whether the (Iranian) company is clean on the foreign company.”

“The foreign company has to investigate the Iranian company, whether it is linked to or is part of the Iranian Revolutionary Guard,” Gorjinia told Reuters.

“It has to investigate their dealings, how they operate behind the scenes. We have to work with companies that have money in their pocket and most of them are part of the Revolutionary Guard. This is what our information tells us.”

European companies feel all these rules are part of a U.S. administration plan to block business between Europe and Iran, he complains.

Part of the problem is that units of the Revolutionary Guard are intervening in several of the wars across the Middle East.

In Iraq, Iran is aligned with the U.S. in the fight against the jihadis of Islamic State. But in Syria it is on the opposite side along with Russia, propping up the government of President Bashar al-Assad, while in Yemen Tehran has backed the Shi’ite Houthi insurgency that last year prompted U.S. ally Saudi Arabia to launch an air war across its southern border.

Few expect the U.S. to loosen sanctions on the IRGC and its business empire against this backdrop.

FEAR AMONG BANKS

While Western businessmen commonly assume that their Chinese or Russian counterparts would be less inhibited by US sanctions, one Chinese executive in Tehran, who asked not to be named, also highlights the issue that international banks, fearful of being locked out of US capital markets, are so far spurning Iran.

Representing an oil and gas machinery company, he has visited Iran several times after the nuclear accord, but has yet to sign a single deal. Most Iranian companies, he says, even when there is clear demand for his drilling equipment, “don’t have money to pay”.

“They ask the sellers to provide financing,” he says “but that is impossible because throughout the world no foreign bank dares to do business with Iranian banks because they are scared…until the big (international) banks start doing business, but European banks are still scared of U.S. banks.”

Iranian leaders are complaining they have been short-changed on the sanctions relief part of the nuclear deal.

“On paper the United States allows foreign banks to deal with Iran, but in practice they create Iranophobia so no one does business with Iran,” Ayatollah Khamenei said last month.

Begle, the Swiss executive, says President Hassan Rouhani earlier this year asked the visiting Swiss president to press leading Swiss banks to start financing foreign operations in Iran.

“But of course the Swiss government cannot tell a private company to do this,” Begle says. “It can indicate that it would see it favorably, it can even consider some guarantees, but after all, it is a decision for the bank itself.”

HOSTILITY

There are other obstacles. The IRGC and other vested interests built up by hardliners grouped around Ayatollah Ali Khamenei, the Supreme Leader, are hostile to foreign entry into Iran’s economy.

Khamenei, whose power far outweighs that of Iran’s elected officials in parliament or the presidency, gave decisive support to the nuclear deal which greatly strengthened the position of Rouhani, the reform-minded centrist president.

Rouhani, in coalition with reformists and independent conservatives, wrested back control of parliament from hardliners in February’s elections. This, some of his allies believe, should make it easier for the government to introduce business-friendly laws.

Yet four years ago, parliament passed a law intended to reduce the state’s role in the economy, put in place credible regulators and investor guarantees, and eventually get entities like those controlled by the IRGC to pay taxes. It has not been implemented.

Rouhani embodies popular expectations that IRGC-linked vested interests seem determined to thwart, some Iranian analysts believe, because sanctions have enabled them to win and keep control of the economy.

Hossein Raghfar, professor of economics at Tehran’s Alzahra University, says “there are many interest groups that have become very rich because of the economic crisis. They don’t want sanctions to be lifted.”

Saeed Laylaz, an economist close to Rouhani, says Iran’s economy was brought to its knees more by mismanagement than by sanctions. Jailed after hardliners cracked down on protests at the allegedly rigged presidential vote that gave Mahmoud Ahmadinejad a second term in 2009, he does not underestimate the hostility of vested interests towards a more open economy.

“I strongly believe some clear part of the regime has and had the project of creating sanctions against Iran to hide their mismanagement and their organized looting of economic wealth.”

To change the general atmosphere for business in the country, the Supreme Leader, the Revolutionary Guard and the judicial system must all be on board, Laylaz says.

“These are very important elements to attract foreign investment, just having the support of parliament doesn’t work at all. Because of this I am not too optimistic about it.”

(Created by Samia Nakhoul, editing by Janet McBride)