President George W. Bush's charm offensive is paying off. After a slew of cozy visits in recent weeks with European leaders about the latest round of U.S. economic sanctions against Iran, European governments are taking a harder line in the hopes of quelling the threat of invasion. Already, Deutsche Bank, Commerzbank, Siemens, Dresdner and HSBC have backed out of Iran.
So much the better for their emerging market rivals. Hundreds of Chinese and Russian companies are working in Iran; few are expected to leave soon. In fact, the latest round of U.S. sanctions may have the opposite of their intended effect, driving Iranian business further into the hands of aggressively mercantilist Chinese and Russian firms in search of lucrative contracts once dominated by the West. In sectors like oil production, telecommunications, aerospace and automotives, the absence of Western mainstays is creating new opportunities for these emerging powers in one of the world's fastest-growing (half of Iran's population is under the age of 20) and most strategic markets.
Energy is the most obvious prize. So far, oil production in the Middle East has been closed to China and Russia due to tough Western competition. The big American and European oil majors, as well as service firms like the United States' Halliburton and France's Schlumberger, are far and away the most skilled players in energy. Take Russia's Tatneft, whose recent efforts to win larger oil- and gas-production contracts in Libya have been crushed by tech-savvy Western giants like Shell and Occidental. But in Iran, firms like Shell, Total and BP are now hesitant to move forward on new energy deals as geopolitical tension rises. "The Chinese and Russians are now going to get contracts they never would have gotten in oil exploration and production," says Vali Nasr, a senior fellow at the Council on Foreign Relations.
Already this year, Iran has cut deals worth more than $3 billion with China's national petroleum and petrochemical companies to develop up and downstream oil projects and to upgrade an existing field. China's Sinopec, which blazed ahead of retreating Western firms for oil contracts in Sudan, has a $2.7 billion deal to upgrade Iran's Arak refinery and other deals worth over $70 billion to develop the Yadavaran gas field and Gamsar oil block. "Most of the other Western companies are pretty leery about making those big investments in Iran because the geopolitical risks are so high that it outweighs the lousy terms Iran is offering," says Michael Herberg, a research director at the National Bureau of Asian Research in Seattle, Washington. "The Chinese companies have a reputation for being willing to accept terms that are less generous." China, which can do the infrastructure work at practically zero capital cost, is hoping to use those deals to get first dibs and better terms on future production. While Western majors generally demand 20 to 30 cents on the dollar, the Chinese are willing to settle for less than 5 cents in their desperate search for more oil to fuel their seemingly inexhaustible growth.
Chinese telecom firms are storming ahead, too. Huawei, now China's largest telecommunications-equipment firm, has already tied up deals in Vietnam, Russia, Malaysia and Spain, and is vying for more contracts in the Middle East. Last year the company (which already dominates Africa) struck a deal with Irancell, Iran's main mobile-phone operator, to expand network coverage. Analysts expect Huawei to bid for the $3.2 billion telecom contract recently issued by Iran's Ministry of Telecommunications.
The deals keep coming as sanction pressure increases. Last month Russia negotiated the sale of 30 Tupolev commercial airplanes to Iran for $1.3 billion. Three months earlier, Chinese carmaker Chery joined forces with Iran Khodro, the country's biggest auto company, in a $370 million venture to build cars in northern Iran. With Iran's driving-age population expected to boom over the next few years, Chery is now looking to build plants elsewhere in the country.
Firms like these have more to offer Iran than just their risk appetite. Having grown their businesses in the developing world, Chinese and Russian companies are often ahead of Western firms in knowing how to deal with large, widespread rural populations, red tape and low-income customers who pinch pennies. Thanks to Washington, it looks like their lead will only increase.