Rough Tehran: British companies find themselves in the front line

Iran appears to be heading towards a confrontation with the West over the development of its nuclear programme, which President Mahmoud Ahmad- inejad insists is for civil, rather than military purposes.

The International Atomic Energy Agency, the UN's nuclear watchdog, will meet in a fortnight to decide whether to refer Iran to the UN Security Council. If no settlement with Iran can be reached, economic sanctions could be imposed to try to force it to halt its nuclear programme.

Western diplomats have said they will only impose sanctions that hurt the Tehran government, and its nuclear programme, rather than ordinary Iranians.

But British companies also look like being victims of sanctions, because the UK has a large and growing trade with a nation that, until recently, seemed to have shed its pariah status.

According to the latest official government figures, UK exports to Iran in 2004 totalled £678m, double the figure five years previously. And that's not including an estimated £426m of UK exports that reach Iran via Dubai every year. This makes it one of the UK's largest trading partners in the Middle East.

Much of Iran's potential for future investment lies in its huge oil and gas reserves, respectively the third and second largest in the world. Shell signed an agreement in 2000 to help develop the Soroosh-Nowrooz field, which has estimated reserves of 400 million barrels of oil, but management of the area has been handed back to the National Iranian Oil Company. As with other projects in Iran involving Western oil companies, their involvement is limited, and for a fixed time period, with the NIOC retaining ownership and ultimate management of the fields.

Iran is not the easiest place to work in at the best of times. Business is dominated by the bonyads - officially charitable foundations run by ruling clerics, but which actually control huge monopolies that dominate the economy. Personal contacts are essential to do business, particularly if you're a foreigner, and some Iranians still resent Britain for the days when their country was part of the British Empire and for its support of the Shah, the deeply unpopular former ruler who was overthrown in 1979. Heinrich Matthee, an analyst for the Middle East at security consultancy Control Risks says: "A British company might not have as easy access as a Japanese or Chinese one."

Since the election of President Ahmadinejad in August, the climate for Western, and particularly British firms has been deteriorating - even before the latest stand-off over the nuclear issue.

The change of government meant that the bosses of Iran's most important companies, all state appointees, were replaced, as were officials in government ministries. Les Parfitt, the international trade development manager at the Society for Motor Manufacturers and Traders, says the lengthy and bureaucratic process of obtaining import licences has now become even moe protracted.

More sinisterly, he adds, there has been an unofficial ban on UK imports since October because of Britain's support of the US in Iraq and its criticism of Tehran. Iran has instructed its officials and companies to delay or disrupt the activities of British businesses and exports.

Because the US sanctions on Iran, imposed since the mid 1990s, mean that American companies cannot operate there, Iranian wrath with Western capitalists is more easily aimed at British companies, says Mr Matthee at Control Risks.

A spokesman for the Foreign and Commonwealth Office says the ban was lifted earlier this month, but British businesses operating in Iran have not noticed any improvement so far. It is certain that UK trade figures for 2005, and possibly this year too, will suffer as result.

No British companies are pulling out of Iran yet. But decisions on future investment are being delayed until the current nuclear impasse is resolved, says an adviser to the British Iranian Chamber of Commerce (BICC), which appointed former chancellor Lord Lamont as its chairman two years ago.

"It has affected investment prospects rather than trade," he says. "Companies are taking a wait-and-see approach."

Mr Matthee comments: "Most oil and gas companies involved are taking a low profile. Some Western oil groups in Iran are looking to downscale. New contracts have not been concluded."

If sanctions are imposed on Iran, it is unlikely that the UN will be the organisation responsible, as China and Russia could use their Security Council votes to veto them. That might mean the European Union has to take the decision instead. But, says the adviser to the BICC, the country has lived with US sanctions for so long that it won't fear Europe. "Iran is not as dependent on the West now and has been shifting towards China and India."

As the economic power of the West wanes, so does its political power. That's something to think about before a decision on sanctions is taken.