News April 22, 2009, 8:11PM EST

Why Iran Is Hungry for Business with the U.S.

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Renault Pars boss Kerebel says getting business done in Iran takes persistence Kaveh Kazemi/Getty Images

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Iran has much to gain. Facing pressure from Washington, major European banks have stopped doing business in the country. So Iranians must pay exorbitant rates for trade financing from second- and third-tier banks in Europe, the Middle East, and Asia. Some Iranians work around the restrictions by setting up subsidiaries in the United Arab Emirates and playing cat-and-mouse with American inspectors. But such solutions are expensive, adding billions of dollars to Iran's soaring import bill—$57 billion for the year that ended in March. "It's a challenge finding banks that we can trust," says Parviz Aghili, CEO of Karafarin Bank in Tehran.

Sanctions also restrict the development of Iran's vital energy reserves. Tehran wants to boost oil production capacity by 25%, to 5 million barrels a day, but with little foreign help and aging fields in rapid decline, it's tough even to maintain current output. That's one reason Iranian oil officials are quick to say they want American help. "We don't have any problems with U.S. investment," says M.A. Khatibi Tabatabaei, Iran's representative on OPEC's board of governors.

Ahmadinejad's erratic policies make things worse. The populist President has spent freely on everything from loans to small businesses of questionable viability to imported food and cash handouts for the poor. And he has pressured banks to shovel out easy credit, leading to a real estate boom. But worried that oil earnings will start to peter out, the central bank has tightened up, starving factories of capital and prompting a sharp fall in property prices.

Oil Squeeze

Last year, when oil prices surged, the Iranian economy could shrug off its problems. With oil's steep decline and the global financial crunch, though, some fear social unrest. Many factories are months behind on salaries, says Ali Reza Mahjoub, a member of Parliament and head of Workers' House, a labor group. He estimates that unemployment, officially 12.5%, is really closer to 17%. As financing dries up, building is grinding to a halt, says developer Amir-Mohamad Mazaheri. "This is a very dangerous situation," he says, puffing on a cigarette in a new tower in North Tehran. "There will be 3-4 million construction workers looking to any activity to support themselves."

Businesses of all sizes are hurting. Mehdi Farahani makes shoes in a small workshop in central Tehran with his brother and cousin. The 32-year-old says business has fallen by two-thirds, spurring him to lay off half of his 20 workers. Over a lunch of deep-fried trout, rice, and Pepsi in a packed hole-in-the-wall restaurant, he blames the government for doing little to protect small businesses from cheap Chinese imports. "Life in Tehran is becoming very difficult," he says.

Even with sanctions in place, savvy foreigners have managed to make a mark in Iran—though it takes persistence. Renault (RENA.PA), for instance, has a $200 million joint venture to build the Logan compact. But late payments from the Iranians and difficulties training enough suppliers to meet a requirement of 60% local content have slowed progress, Renault says. The venture, Renault Pars, has cut its output target for the Logan by 25%, to 150,000 cars per year. "You need a lot of time and energy," says Renault Pars chief Jean-Michel Kerebel. "What takes five hours in Europe could take five days here."

With Babak Pirouz in Tehran. Reed is London bureau chief for BusinessWeek.

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