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Why IRAN is hungry for business with U.S.

NCE announces new financial benefits for NCE members

The NCE Spotlight

Why IRAN is hungry for business with U.S.

Tehran—Nestled in rocky hills about 40 minutes from Tehran, Pardis Technology Park is supposed to be Iran's answer to Silicon Valley. But these days, Pardis is deserted and forlorn, with many buildings standing unfinished, their exposed girders rusting. Foreign companies are reluctant to invest in the Islamic Republic, and domestic outfits are cash-strapped.

Both foreigners and locals may find a new reason to move in. President Barack Obama has indicated a willingness to ease tensions with Tehran, and many Iranian businesspeople hope their leaders will engage with him. A relaxing of U.S. economic sanctions "would be a seismic shift," says Ramin Rabii, chairman of Turquoise Partners, a fund manager that invests in Iran.

Americans and other Western companies might benefit, too. Iran, after all, has 66 million people, good schools, and a diversified industrial base—with a pent-up appetite for computers, planes, aircraft parts, and knowhow for the crucial oil and gas industry. And many Iranians like the prospect of working with U.S. companies rather than the Europeans that have been the only game in recent years. "Iranian officials believe Americans are more straightforward in business deals," says Narsi Ghorban, managing director of Narkangan Gas to Liquid, a Tehran energy company. "They get what they want and give you your due."

If businesspeople do come to Tehran, a sprawling city built on steep hills that lead up to snow-capped mountains, they will find some conditions improved. Mobile telephones from other countries finally work, and several private hotels have sprung up. Since the 1979 revolution, social life has never been more liberal. Boys and girls hold hands in public, women show some hair outside their scarves, and checkpoints where police once searched cars for alcohol have all but disappeared. But there's still enough fear of the regime that many people decline to be interviewed.

While President Mahmoud Ahmadinejad continues to make belligerent noises about Israel and the West, others in Tehran have hinted that they're ready for a change. In a Mar. 21 speech, Supreme Leader Ali Khamenei trotted out standard anti-American rhetoric but also indicated a willingness to talk. And Ahmadinejad's probable opponent in the June presidential election, former Prime Minister Mir Hossein Moussavi, favors negotiations with the U.S. "Obama has prompted Iranians to have an open debate about the relationship they want to have with the U.S.," says Gary Sick, an Iran specialist at Columbia University in New York. "This is something that hasn't been seen in 30 years."

Most Iranian executives seem to be rooting for Moussavi. Although he is an old-guard leftist, businesspeople hope he would lead a reform-minded administration that could ease Iran's isolation. "Ahmadinejad has done serious damage to Iran's reputation and the reputation of Iranian business," says Mohammad Reza Behzadian, a former head of the Tehran Chamber of Commerce who runs Tondar Middle East, a trading company in Tehran.

There are, of course, countless stumbling blocks to improved ties. Iran continues to pursue a nuclear program opposed by the West. And Tehran is prone to antagonistic actions such as the Apr. 18 sentencing of Iranian-American journalist Roxana Saberi to eight years in prison on what seem to be trumped-up charges of spying for Washington. But there may be openings for cooperation and confidence-building on Afghanistan, where both Tehran and Washington deplore Taliban influence, and on Iraq, where Iran's help could ease a U.S. withdrawal.

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."

By Stanley Reed

Credit Woes Hit Home

A credit-card crunch is squelching the dreams of entrepreneurs.

Jack Diamond of Tampa, Fla., laid off employees after Bank of America cut his credit line. For two years, Jack Diamond used his Bank of America small-business credit card to finance his plants-and-aquatics nursery business in Tampa. He would use the credit card to purchase plants, then pay down his balance after he sold lilies, pond plants and aquatic fertilizer to customers.

Last September, Bank of America Corp. cut the $46,000 credit line on his card to $27,200, just a few hundred dollars above his current balance. He couldn't buy the plants, seeds and equipment he needed for his spring selling season. He laid off six of his eight employees.

"I'm almost living paycheck to paycheck," says Diamond, 55 years old, who is considering filing for business bankruptcy.

Even as wobbly banks tighten up on consumer credit cards, they are also cracking down on small-business owners by slashing their credit lines, closing accounts and raising interest rates. A recent Federal Reserve survey found that about two-thirds of banks' loan officers reported that they tightened terms for business loans in recent months. Meanwhile the National Small Business Association, a trade group, said 69 percnet of 250 surveyed small-business members faced worse terms on their cards, such as higher interest rates, in the second half of last year.

Banks have reason to get tough. In a bad economy, small businesses are usually among the first victims. Credit-card issuers have seen a surge in charge-offs, or debts no longer expected to be paid, over the past year as small businesses fail.

But the credit-card squeeze couldn't come at a worse moment for the estimated 27.2 million small-business owners who have long been one of the growth engines of the economy. Many, especially start-ups, don't have the track record or size to qualify for traditional bank loans. Even many established small-business owners use credit cards to pay salaries or buy inventory.

"People are using their credit cards to keep the businesses going, so when that dries up, the businesses go," says Jeanne Marie Cella, an attorney in Media, Pa., who has seen a significant increase in small-business owners filing for bankruptcy.

Indeed, the crackdown on business credit cards is happening just as the federal government scrambles to free up credit for small businesses by raising federal loan guarantees and reducing fees on certain Small Business Administration loans. In an attempt to get credit flowing again, the Treasury said it would buy up securities backed by SBA loans. Meanwhile, politicians in Congress are asking the Treasury to use more bailout funds to guarantee bank lines of credit for small businesses.

Until recently, credit-card issuers avidly courted small-business owners. Visa Inc., American Express Co., MasterCard Inc. and Discover Financial Services had an estimated 29 million business credit cards in circulation in 2008, up from just five million in 2000, according to the Nilson Report. Spending on the cards rose to $296.3 billion from about $70.4 billion over the same period.

Banks began moving into small-business credit cards in the mid- to late-1990s following the creation of credit-scoring models. One factor was a 1995 study by Fair Isaac Corp. and Robert Morris Associates, a trade group for loan officers and credit-risk managers, analyzing the performance of business loans.

The study surprised bankers. It found that a small business's cash flow and financial statements bore little correlation with how the owner would pay his or her bills. A much stronger predictor was the business owner's personal credit score. The banks concluded they could safely issue business credit cards to proprietors with good credit records even if the underlying business didn't appear to justify a loan.

"The credit-card industry noticed that study and that's when they started marketing business credit cards," says Robert Lahm, a professor of entrepreneurship at Western Carolina University. "Credit cards have become probably the most common small-business loan product."

Peggy Durant of Clearfield, Pa., took advantage of various personal and business cards' promotional offers to finance her and her husband's small businesses over the past decade, which include a bed and breakfast, residential and commercial rental projects and a solo law practice.

After J.P. Morgan Chase & Co.'s Chase Card Services in January raised the minimum payments on one of her cards, Ms. Durant decided to take out a first mortgage on one of her rental properties and open a business line of credit with her local bank to help pay off other credit-card balances and reserve a cash cushion in case more banks followed suit.

"It has created a sense of anxiety and made us do things differently than we would have," says Ms. Durant, 60. "That money is no longer there to use."

Credit-card issuers, naturally, see a different picture. The rate of business bankruptcy filings has outpaced consumer bankruptcy filings over the past 12 to 15 months. Average charge-offs for businesses with at least one charge-off jumped to nearly $11,000 from a little above $7,000 over the same period, according to data from Equifax Inc.'s commercial-business group.

Faced with rising losses, financial-services firms last year began scaling back credit lines, products and marketing to small businesses. In January, American Express discontinued its business line of credit and capital line program. Capital One Financial Corp. stopped offering small-business closed-end loans last year. Citigroup Inc. discontinued one of its business credit cards, the Citi Business Premier Pass card, late last year. Advanta Corp., which mainly offers small-business credit cards, raised rates on many last year.

Financial-services firms say they are trying to control their risk in the current environment. "The line reductions that might be made reflect concern about overall debt load relative to one's financial position in this environment," said Tom Sclafani, a spokesman for American Express. He declined to comment on individual customers.

Steve Brumer of Suwanee, Ga., says he has been squeezing his own customers since American Express cut the credit line on his business credit card to $20,000 from $65,000 and pared another line of credit that it later closed. In the past, Mr. Brumer, who sells wireless equipment to businesses, would typically give customers up to 30 days to pay their bills, since he would be able to rely on the cards' credit lines to fund his working capital in the meantime. Now, "I don't issue any lines of credit to any customers. It is all cash or all wire funds transfers for everything," says the 53-year-old.

Some small-business owners find their business-card problems spilling into their personal lives. Because the business owners usually agree to be guarantors for the cards, any delinquencies or other adverse actions are usually reported to their personal credit files, making it harder to get personal loans.

Kristie Jakeman of Jensen Beach, Fla., saw her credit score fall to 680 from 740 in January after Advanta started reporting her business credit card to credit bureaus as delinquent.

Her troubles began last summer after Advanta moved to raise her 7.99% interest rate to 9.9% in September, then to 21.9 percent in October. She complained to the company and says it promised to lower her rate but didn't. She continues to fight to have the charges reversed.

The higher payments made it harder to keep up, and she says she finally decided not to make her December payments until the company agreed to work with her. Advanta raised her rate to 33%. A spokesman for Advanta declined to comment.

Because of the drop in her credit score, Jakeman, 42, who runs a racehorse-management business and a company that develops nutritional supplements for animals, says she was turned down for a small-business loan. She is now looking for a business line of credit, which has a much lower credit limit. "We're back to a $50,000 line of credit, which severely limits our growth. I'm certainly not going to go out and hire people.