On an Island of Free Enterprise, Iran Lets Down Its Hair (a Little)

The party begins at Tehran's airport, where Iranians buying tickets for the Persian Gulf island of Kish - Iran's premier free-trade zone - laugh lightheartedly in anticipation of their visit. Empty duffel bags pack the plane, to better bring back loot on the return journey.

Head scarves are worn more loosely, and there is an air of ready rebellion and fun that, in this one offshore part of Iran, is legally sanctioned. To attract investors and tourists, the tight Islamic restrictions that apply to Iran's mainland have been modified.

"We come for fun," says Sepideh Sadeghi, an economics student who sits on the beach in her Islamic head scarf with a friend. Their jeans are showing from under their chadors, but the young women are relaxed and laughing, out on a school shopping trip. "It's so different from Tehran, and we get away from all the pollution - all kinds of it."

Here Iran is taking advantage of its strategic position as the "gateway" to huge Central Asian markets and as the crossroads of the ancient Silk Route. Rich in oil and gas resources, Iran also wants to make itself indispensable to its neighbors as an efficient transport hub.

Kish (pronounced keesh) and two other Gulf island free-trade zones are crucial to Iran's hopes, despite high tariffs on the mainland that officials admit are counterproductive and do little to encourage businesses to target Iran's own large market.

But with the big plans has come a deliberate, partial accommodation of the free-wheeling ways of foreigners - a compromise that has attracted Iranian visitors as well. Here, live music is played, and women can ride bicycles, jet skis, and sometimes water-ski and scuba dive - all activities forbidden on the mainland.

"This is the best way to invest in Iran," says Morteza Alviri, head of the High Council of Free Industrial and Trade Zones, in Tehran. Investors are tax-exempt for 15 years, and low energy costs and a cheap, well-educated work force are big selling points.

So, too, is the consumer market of 300 million people. "Iran is the shortest route to Central Asia, and these free-trade zones are a special gateway," he says. "We are optimistic because we are trying to create the right atmosphere, with a minimum of red tape."

Already, Iranian officials say, some $280 million has been invested in Kish alone in the past two years, in import-export and light manufacturing projects. Some $4.8 billion more is said to be under discussion.

Unilateral US sanctions imposed on Iran in 1995 - because the State Department labels Iran a state sponsor of terrorism - have also hit hard. A deal with the Los Angeles-based US oil giant ARCO for a joint petrochemical plant has been on on ice since then, for example.

"The sanctions create a bad atmosphere," says Mr. Alviri, "because they indirectly indicate that there are risks to investing in the Persian Gulf."

Nevertheless, Iran's "executive policy is with the investor, not against him," says Massoud Arbab, the deputy for Social and Cultural Affairs for Kish. "Officials of the government are smart and alert people who know that each area of the country has its own rules. Kish is an international area, and should have its own rules."

Cranking up an economic engine

Several months ago, Iran approved new laws that allow foreign banks and offshore banking in Kish - a move that many potential investors were waiting for. A large British-French deal for the assembly of Renault cars in Kish has recently been signed. The cars will make their way into Iran's market as more Iranian-made parts are used.

Hong Kong is not the right example of what the Iranians say they want to achieve, nor does Dubai's well-established status as an all-comers, free-trade hub suit them. The closest model is China and its Special Economic Zones, where the central economy gives way on the edge to the free market.

Approval seems to come from the highest authority. The official Kish guidebook quotes the late Ayatollah Ruhollah Khomeini, who led the Islamic revolution: "I advise the rich who have made their wealth through legitimate means, to invest in constructive activities.... And be sure that this, by itself, is counted as a rewarding and valuable worship."

Still, the regime's founding cleric might have been surprised at some of the day-to-day activities on Kish. Officials say nothing that happens here is illegal, but note that horseback riding, tennis, and the allure of watersports have helped tripled the number of visitors in the past five years.

Kish has held special sway over its rulers and conquerors, from the moment the first pier helped turn the island into a trade center in the 12th century. The permissive days of the shah of Iran kept that legacy alive into modern times.

But nearly 20 years after the 1979 Islamic revolution ousted the shah's pro-West regime, there is still plenty of evidence that Kish once served as a palace resort for Iran's rich and famous, and for fabulously wealthy Arab sheikhs.

Providing unparalleled luxury appears to have been the order of the day, and the Kish casino is a case in point. Upstairs, a small bar is awash in mirrors and lights, with thick, red-velvet cushions and gold-brocaded curtains. Private tents shield each table from prying, prerevolutionary eyes, though today the strongest offering is a cappuccino.

Though Kish is sold to investors today as an "Eden" rich with "epic grandeur," the first hint that the revolution has dealt a blow to this former fun house is the cafe menu, written in red felt-tip pen on the inside of the elevator door.

But it's on the former gambling floor where the transformation is almost complete, where the blackjack, poker, and roulette tables have been replaced by a noisy video arcade.

The revolution was supposed to blot out all corrupting Western influences. But when would-be video tank commanders and race-car drivers finish their games, they are treated to messages that point to American software: "Winners don't use drugs," reads one full-screen sign, in English, with a large seal of the US Federal Bureau of Investigation.

Iranians also flock here for the duty-free shopping. Several malls are crowded with overloaded shopping carts and fast-filling duffel bags as visitors stock up on everything from the latest American brand-name appliances to wholesale TVs and sophisticated cosmetics.

A prerevolutionary air

And they come for the music. In Tehran, for example, when a band is asked to play at a private function such as a wedding, they first visit to see where they can hide their instruments in case the party is broken up by Iran's morality police.

But here Iranians clap loudly and make requests - sometimes of illegal prerevolutionary songs - and performers do not fear for the safety of their instruments.

Visitors sometimes even videotape a performance, to remember it at home.

"In Tehran, people can only listen to traditional music, so naturally they come here to listen to something different," says Peyman Malekian, a Kish performer. "I don't do traditional music."

The same applies to the beaches, though from time to time restrictions are reimposed. During the summer, women could jet and water-ski, wearing specially approved outfits. But two months ago they were stopped.

"This is a free-trade zone, but it's not that free," says Alireza, a sailing instructor who waits for customers while clad in a pair of shorts, casual attire outlawed elsewhere in Iran. "A couple here can walk in the street, but they must wear the uniform [Islamic dress].

"This is still Iran," he adds, jokingly. "What do you expect?"