International companies such as Samsung Electronics are currently facing the harsh reality of Iran’s unstable economy, closing down some of their retail stores in Iran. In response to this, Mohammad Jafar Na’nakar, the head of the legal department of the Iranian Ministry of Information and Communications Technology (ICT), announced that Iran could refuse the entry of executives and staffs of the companies. In addition, Na’nakar warned that they could impose a partial ban on the registration of Samsung phones with Iranian mobile operators. As the conflict between Samsung and Iran increases, other global companies face a dilemma in that they can neither withdraw from nor profitably maintain their operations in Iran.
Because Samsung Electronics decided to pull out of Iran, its retail stores were the first to deal with the consequences firsthand. On February 16, Iranian Foreign Ministry spokesman Abbas Mousavi tweeted a picture of a Samsung Electronics sign being removed from one of their stores along with a message in Korean and Iranian saying, “Some companies left Iran following United States (U.S.) harassment, and they have to know that it is hard to return when they leave Iran.” On the same day, Iran’s Deputy Foreign Minister Abbas Arachi announced, “It would be difficult for companies that sympathize with the U.S. and abandon Iran to step back into the Iranian market.”
Foreign Companies Consider Withdrawal
A lot of international companies are aware of the fact that they will eventually have to confront this situation and decide whether to leave or stay in the Iranian market. Iran has been dealing with economic sanctions imposed by the U.S. in 2018. The U.S. has also passed a bill as a warning to countries who continue to trade with Iran that they will also have economic sanctions imposed on them. Therefore, countries looking to maintain a friendly relationship with the U.S. have no choice but to obey these economic sanctions against Iran, which has caused several problems for foreign companies that have a significant number of Iranian customers.
The first problem is that companies cannot export their goods to Iran. Iran was an important customer for companies based in Japan, France, Turkey, Germany, and Korea. Nevertheless, when the U.S. introduced the economic sanctions, the companies were no longer able to export to Iran, leading to a loss of market share in that country. The second problem is that companies are unable to operate facilities in Iran. Companies with factories in Iran can no longer produce goods because they cannot deliver the necessary supplies to these factories. As a result, companies that have invested in Iran by building facilities will not gain any profit, which has become a considerable concern.
The Economic Situation in Iran
Iran is also facing a problem of its own due to the economic sanctions. According to a report by the Korea Trade-Investment Promotion Agency’s (KOTRA) Tehran Trade Center, Iran’s economic growth in 2019 fell 9.5 percent. Iran’s crude oil exports have plunged to nearly zero since May 2019, and if oil exports continue to decline this year, it is expected that there will be an inevitable economic downturn. The inflation rate was 35.7 percent last year and is expected to be 31 percent this year. The fiscal balance as a ratio of the gross domestic product (GDP) fell 4.4 percent in 2019, and it was forecast to decrease a further 5 percent this year. The current account lost 12.2 billion dollars in 2019 and is expected to lose 15.5 billion dollars this year.
Iran’s industrial production index exhibited a sharp decline of 27.6 percent in 2019 and is continuing to fall due to a downturn in factory operations and a rise in unemployment. According to Iran’s customs office, Iran’s exports fell sharply last year by 25.4 percent on a cumulative basis due to the economic sanctions, while imports shrank 27.4 percent. To make matters worse, international companies, which account for a significant number of jobs for Iranian citizens, are considering leaving the country. In the worst-case scenario, Iran will face a severe economic depression due not only to the sanctions on the oil industry but also to the departure of international companies.
The Connection Between International Companies and Iran
According to Professor Rhee Dong-eun (Division of International Studies), the connection between international companies and the Iranian economy is weak. The foreign direct investment rate inside Iran is one percent, which is low compared to other countries. However, Professor Rhee still emphasized that Iran will face a bleak future if foreign companies leave because, nowadays, many industries are closely interrelated. Therefore, if an industry fails in Iran’s market, negative spillover effects can occur domestically, which will inflict greater damage, particularly to the job market.
With Iran’s economy now at its lowest point, the withdrawal of multinational corporations may not immediately be a decisive blow because there are more serious problems occurring in the Iranian economy. However, the departure of these corporations will lead to a reduction in investment, which will subsequently affect the long-term growth of Iran’s economy. Professor Rhee believes that this is a factor that can weaken Iran’s growth potential, even when the political and diplomatic issues between Iran and the U.S. have been resolved.
When foreign companies leave Iran, the high emotions and trust issues between the two countries may be more serious than reflected in the numbers. Iran is known to have a strong affinity for Korea because of the powerful effects of Hallyu. Culture is a valuable asset for Korean companies in terms of making future inroads into the Iranian economy. On the other hand, if the Iranian government is offended by Korean companies leaving the country, it could be difficult to normalize the cultivated market in Iran. Professor Rhee mentioned that there is a possibility that the U.S. will lift the economic sanctions against Iran in a few years, but the negative feelings among Iranian consumers towards companies that decided to leave could last much longer.
The strategies available for our government and companies to solve this problem with Iran are very limited. It is more crucial to search for ways to achieve public exchanges and cooperation rather than an official diplomatic agreement between the two governments. Seeking a compromise between Korean companies and Iran will promote a more stable relationship for the future.