Iran is a promising market ? so long as energy majors can do business there. In contrast to other countries in the region, US players are not merely late to the market, but unable to invest there. They may be best off waiting, since those projects to launch so far have been mired in protracted contractual negotiations. Difficulties in retaining financial advisors and a cool US attitude to the country are also contributing factors.

The nearest deal to close is the Par-e Sar IPP. It signed a concession on 19 February 2001 for Iran's first BOT project (valued at just over $550 million). Sponsors are Italy's Sondel, Germany's DSD and the Iranian company MAPNA and the agreement is for the construction and 20-year operation of a 900MW combined-cycle power plant. According to sources close to the deal, discussions have now moved on from acceptance of project finance structures to putting these down in concrete legal form. But omens in other financial markets are good.

In the last few months, Iran has successfully accessed the international bond markets for the first time in more than two decades, and attracted its first investment from the International Finance Corporation (IFC). In addition the government approved a $1.6 billion investment by LG of Korea in September after a year-long hiatus, and bankers have been given the go-ahead to look at stand-alone direct financing for the first time.

In May the Expediency Council ratified Iran's first major new foreign investment law since 1957, closing the door on months of bickering between the Iranian Parliament and the Guardian Council. The law, which will allow expatriate Iranian investment, was expected to come into force in late September. Also this summer, Iran and the European Union (EU) agreed to negotiate a trade pact, while Germany, its leading trade partner, signed a major new trade treaty with Iran.

But the US government has since 1995 threatened sanctions against companies involved in commercial dealing with Iran through two measures ? a presidential decree that has to be repealed and the Congress-controlled Iran-Libya Sanctions Act (ILSA). However a number of European and Asian corporations have gone ahead with direct investment projects regardless, and many US companies fear they are being left behind in the potentially lucrative race to carve up (sorry, develop) Iran's natural resources.

The raw figures are impressive. Dr Albrecht Frischenschlager, director of FTZ Services, a Tehran-based consultancy explains: Iran has a domestic market of 65 million people, approximately 9% of the world's proven oil reserves, around 15% of the world's proven gas reserves, and 11 petrochemical complexes producing 13% of the Persian Gulf region's petrochemical output. It also has major deposits of copper (the second largest in the world), iron ore (9th), zinc (1st) and much more.

But the shortage of term finance available to the private sector in Iran is a major economic hurdle, and it is to correct this weakness that the IFC announced in September its first investment in the country since 1974. It plans to take a 20%, $2 million stake in an Iranian leasing company and lend it an additional $3 million. The joint venture Karafin Leasing ? whose other shareholders are France's Natexis Banque Populaire and Iran's Karafin Bank ? will extend medium-term equipment leases to companies.

The World Bank has said it will lend Iran $755 million over the next two years. But it may have to contend with the elements of isolationist ire in US Congress. The US is the World Bank's biggest shareholder and Congress controls the purse strings of the Treasury when it comes to deciding how much to give to the global organisations.

Private sector commercial banks are keen not to get left behind in Iran. The Europeans in particular are fighting to cement relationships with the country, as can be seen by their involvement in recent high-profile financings. Perhaps the most stunning advance made by the country from its international isolation came in July when the Islamic Republic of Iran re-entered the international capital markets with its first bond issue since the 1979 Islamic revolution.

Just forging ahead with the offering after a couple of years in discussion suggested an important step forward for the Iranian regime. Critics had previously argued that payment of interest on the borrowing would conflict with the Islamic prohibition of usury. In the end the central bank, with the backing of senior religious figures, overrode these concerns.

The five-year bond initially raised Eu500 million and was later increased to Eu625 million, with orders totalling up to Eu800 million. BNP Paribas and Commerzbank lead managed the transaction ? winning the mandate ahead of fierce competition from eight other European banks at a beauty contest.

?Iran made it very clear during the roadshow that they didn't need the money but wanted to open themselves up to the international capital markets,? says Alexis Plan, head of emerging market syndicate at Commerzbank in Frankfurt. ?They were willing to pay a certain price to place the bonds with new investors in Europe, when they could all have gone to the Middle East; they saw the bond issue as an opportunity to issue more bonds later for other corporates.?

Commercial banks took up 41% of the bonds and asset managers 32%, insurance companies 17% and retail investors 10%, Plan says. Geographically speaking, European investors ? mainly UK, German and Swiss ? accounted for 42%, Asia 5% and the rest went to the Gulf and Middle East.

The deal was unusual in the care that the leads had to take to ?respect the US sanctions?. ?It was a hurdle to jump over but we just went ahead and focused on investors elsewhere,? says Plan. ?It was a cautious, well-planned deal that was marketed very selectively.?

The lead managers made sure no US employee worked on the transaction or that no US citizen received a research report.

US banks were not allowed to participate, nor investors. Nor ? to the embarrassment of Moody's Investors Service ? were the rating agencies.

Moody's had rated Iran at B2 in 1999 and a year later upgraded it from stable to positive outlook. Unfortunately shortly before the bond was due to be launched, the US rating agency had to make a humiliating withdrawal of its own rating ? citing fears that it was inconsistent with US government regulations (even though the rating was, as with all sovereign ratings, unsolicited and unpaid for.)

?Moody's has responded to the US Government's concerns and, if those concerns can be satisfied, would anticipate issuing updated ratings,? it said apologetically in a statement. Moody's ? like many US banks and oil companies and a sizable dissenting opinion in the US ? was probably annoyed at being leant on and having to compromise its independence.

Most Europeans believe that isolating Iran will encourage the hardliners. ?Although US views on Iran are not necessarily shared by other members of the international community, we believe they are a significant element of Iran's international risk profile,? says James McCormack, senior director at Fitch in London. Fitch ? the only rating agency involved with Iran at present ? rated Iran's bond issue at B+.

?Domestic political risks centre on active debates between reformers and conservatives on the degree of political, social and economic liberalisation that should be fostered within the Islamic Republic,? McCormack continues. ?Given the turbulent regional environment and the current US stance toward Iran, we believe the reform debates could be affected by international developments, possibly prompting conservative elements to take an even less conciliatory approach, and there is a risk that this could be extended towards external credits.?

Existing international debt payments have not been affected by domestic politics but political risk will loom large in investors' minds. One investor ascribes the shock of the 1979 fall of the Shah and the establishment of the Islamic republic as the main reason for the boom in political risk assessment in the 1980s. Foreign investors in Iran suffered both from the expropriations that occurred and from the imposition of Islamic economic concepts.

The Islamic Republic is expected to issue again by the end of its financial year next March, possibly up to $1 billion. The bond may also open the door for Iranian corporates. ?The intention was to introduce Iran as a credit on the international capital markets, and set a new benchmark for Iranian corporates,? says Mohammad Mojarrad, vice governor of the central bank.

Iran Air in particular requires urgent funding to buy ten new Airbus aircraft over the next two years, say bankers, while the Telecommunications Company of Iran needs financing to install up to three million new telephone lines over the same timeframe.

Project bonds ? similar to bonds already issued by Qatar's Ras Laffan liquefied natural gas (LNG) project ? could be next in line for both private and state-owned companies like the National Iranian Oil Company (NIOC). It would enable them to raise funds without entering into the buy-back schemes that have dominated the oil and gas sector. The more direct financing schemes would allow Iran to strip out the pure cost of capital from the calculations that are done under the buy-back schemes, where international firms charge for equipment and expertise in addition to the cash they raise.

In the last few years European banks have structured a series of massive trade financings backed by export credits. Now a few European banks are looking at alternative ways of financing Iranian projects. Deutsche Bank is believed to be working on a $300 million polyethylene project/corporate financing for Elenac/National Petroleum Company. If it goes ahead, it will be a clear signal that Iran is opening up to foreign debt.

Ironically it was Conoco of the US that first opened the door to foreign direct investment in the oil and gas sector. In 1995 it signed a deal to invest in the huge South Pars gas fields offshore in the Persian Gulf. But the contract was torn up after President Clinton's imposition of sanctions and awarded instead to a consortium led by French rival TotalFinaElf and including Malaysia's Petronas and Gazprom of Russia. The US government investigated the Total transaction but in the end waived any sanctions.

Since then Iran has signed contracts ? and the US government has all but ignored them ? with companies such as the Franco-British company Alstom, Eni/Agip of Italy, Norway's Statoil, as well as Royal Dutch/Shell and BP.

The most recent deal for South Korea's LG Engineering Construction Corp and two domestic players to develop phases nine and ten of South Pars was inked in September. The long-delayed $1.6 billion deal, which is being financed directly, is a visible boost for Iran's drive to attract foreign investment. One observer suggests it represents a victory for Bijan Namdar Zangeneh, Iran's Minister of Petroleum, over long-term critics of his negotiations with foreign firms.

In November, for example, Royal Dutch/Shell produced the first oil from an $800 million 190,000 bpd development deal with NIOC, which had provoked this earlier response by Conoco: ?Reports of the participation by Shell once again illustrate that the US unilateral sanctions policy only serves to eliminate US companies from global competition and do not achieve the effect desired by Washington,'' it said in a statement.

The agreement to redevelop the Soroosh and Norusz offshore oil fields is in contrast to the Anglo-Dutch conglomerate's uncertainty over a 20% share in a South Pars project that it has inherited via its April acquisition of Enterprise Oil. It was widely rumoured that Shell would sell the holding due to fears about its position vis a vis the US government. But a Shell spokesman has said that management will decide later in year what it will do with the project and the decision will be based on purely commercial reasons,

?The ILSA issue is a matter for the US to take up with the EU and the Dutch and British governments,? he says.

BP ? which began life as Anglo-Persian ? is also in something of a bind. BP had to sit back and watch its European rivals sign major Iranian deals as it focused its efforts on North America in buying Amoco in 1998 and Arco in 1999. It was reluctant to deal with Iran until these mergers were wrapped up.

BP, now in some ways a half-American company, bid late last year for a project in the on-shore Bangestan reservoir. It is also engaged with Reliance Industries of India and Philippines National Oil Company in a LNG export project in South Pars.

?We know the US position on investment in Iran via ILSA but our position equally is that we keep the US administration fully aware of what we're doing,? says a BP spokesman in London. ?We are a UK company and expect to be treated the same as any European company.?

So is BP inhibited by its US presence from investing in Iran, as some companies are said to be? It seems not: ?We are the biggest oil producer in the US and we are negotiating with Iran,? he replies.