As new U.S. sanctions on Iran start to bite this month, Western companies still doing business in the country face fresh hurdles in a market that has been both enticing and tough to crack.
Over the past two decades, many Western firms have quietly sunk roots in the Islamic Republic thanks to food, medical and other exemptions from U.S. Treasury Department sanctions on the country. As a result, Coke and Pepsi are available everywhere in a market of roughly 82 million people. Iranian hospitals use ultrasound and MRI equipment made by General Electric Co. And Iranians are able to turn to medicines made by Pfizer Inc. and AstraZeneca PLC to treat their illnesses.
One executive who focuses on Iran for a large multinational consumer-goods company said the market had shown promise before President Trump withdrew the U.S. from the Iran nuclear deal in May.
“I considered [Iran] to be the next big thing because of the huge population and the huge size of the country,” the executive said. “Everything was needed, and a lot of big things were expected and huge plans were put in place. People built teams and offices to cater for the business.”
The Trump administration has made clear that it still doesn’t intend to target food and medical trade. But doing business in Iran, even for those Western companies that continue to operate there legally, has become much more difficult as fresh sanctions have closed off critical finance channels.
Entities hit with U.S. sanctions Monday included 50 Iranian financial institutions that are now prohibited from providing crucial financing for trade. In another blow, the Belgium-based bank-messaging system Swift cut ties with Iran’s lenders, making international transfers all but impossible.
Companies faced the same sorts of hurdles when U.S. sanctions tightened before the 2015 nuclear deal. Many found ways to trade and transact with Iran indirectly, either through middlemen or using a now-closed loophole where non-U.S. subsidiaries of American companies could escape U.S. jurisdiction. Given the wide scope of the new sanctions, it isn’t clear how those companies will adapt this time around.
Novo Nordisk A/S, the Danish pharmaceutical giant, said it was too early to discuss the impact on the company’s new insulin-products plant, one of the first European pharmaceutical investments in Iran after the nuclear deal in 2015.
But a spokeswoman acknowledged limits on the company’s banking options “will make it more difficult to run our business than previously.”
Other pharmaceutical companies that have entered the market could face similar obstacles. U.K.-based AstraZeneca reported $7 million of profits there last year on $18 million of sales. GlaxoSmithKline, the British pharmaceutical giant, reported £4 million ($5.3 million) of profits on £12 million of sales last year. The two companies declined to comment.
Nestlé SA, which employs about 800 people in Iran and operates two factories producing infant cereals and water, doesn’t appear to be backing away from the market despite the new challenges.
“The sanctions are affecting how companies operate in Iran,” a spokesman said. “We are working to mitigate those effects so that we can continue to serve the basic needs of people in Iran.”
A Coca-Cola spokesman said the company had operated legally in Iran for almost two decades, selling beverage concentrate to a bottler and conducting quality monitoring and trademark protection there.
Coca-Cola “and its business partners around the world have a history of focusing on developing our markets over the long term,” he said. “The company remains authorized by [the U.S. Treasury] to maintain these limited activities in Iran,” he added, declining to elaborate on how it was continuing to operate there.
PepsiCo Inc. has a U.S. Treasury license to sell concentrate to an independent bottler and isn’t being affected by sanctions, according to a person familiar with the matter.
Many international sanctions on Iran were lifted in early 2016 following th nuclear deal negotiated between Iran and six world powers the year before. In exchange, Iran agreed to put curbs on its disputed nuclear program—measures Mr. Trump and other opponents saw as inadequate because they didn’t stop Iran’s ballistic-missile program or roll back its military involvement in Syria, Yemen and Lebanon.
When Mr. Trump announced the U.S. withdrawal from the Iran nuclear deal, some Western firms began to reassess their presence.
Under U.S. sanctions, Americans can’t do business with Iran unless they get Treasury waivers or qualify under blanket exemptions for food and medical goods. Non-Americans can be penalized or banished from the U.S. financial system if they deal with any of hundreds of designated entities.
In Europe, where Mr. Trump’s exit from the nuclear deal was broadly opposed, politicians have sought to protect their companies. The European Union has been trying to hash out a special payment channel for trade with Iran that skirts around U.S. sanctions and allows European countries to continue doing business with Iranians.
For some Western companies whose dealings with Iran are primarily limited to export, the trade had already subsided so much as a result of Iran’s economic woes that the new U.S. restrictions are unlikely to have a major impact.
The Iranian rial’s sharp loss in value caused California-based Del Monte to stop exporting packaged food to Iran several months ago because its products were suddenly much more expensive.
“They are very cautious to not buy food from outside,” Muhammad Adil Imtiaz, a Dubai-based sales manager for Del Monte, said of Iranian buyers. “For consumers buying any product, not just food but garments and electronics, the prices have changed completely on the shelves.”
Write to Asa Fitch at asa.fitch@wsj.com and Denise Roland at Denise.Roland@wsj.com
