Pariah to player: investing in the new Iran

February 2015  |  FEATURE  |  FINANCE & INVESTMENT

Financier Worldwide Magazine

Once a country has been labelled a pariah state, rightly or wrongly, the tag can be difficult to shed.

With little scope for contradiction, most people would readily assign this description to Iran – a nation that has been demonstrably lacking friends within the international community for a considerable period of time.

Eighteen months ago things began to change for the Islamic Republic.

In June 2013, Hassan Rouhani was elected president – replacing Mahmoud Ahmadinejad, a toxic figure in the eyes of many. Rouhani, almost immediately, set out a reformist agenda and a new wave of optimism began to pervade the country as the new president’s more accessible style of government ushered in a new era which promises so much more than the naked aggression which characterised his predecessor’s regime.

The first sign of a potential turning of the tide came on 24 November 2013 when discussions centring on Iran’s nuclear program began and a Joint-Action Plan interim agreement was reached between Iran and the P5+1 (a group comprising the five permanent members of the UN Security Council – the United States, the United Kingdom, France, Russia and China – plus Germany). This agreement involved Iran agreeing to roll back its nuclear program in exchange for a relaxation of a number of Western sanctions.

The implementation of the interim deal began in January 2014 and continued throughout much of the year until it was announced, in July, that negotiations would be extended until 24 November 2014, when the parties would meet in Vienna. However, despite the presence of Iranian Foreign Minister Mohammad Zarif and US secretary of state John Kerry, no deal was struck – due in the main to Iran’s unwillingness to discuss its “engagement in weaponization activities” – and the Vienna talks stalled.

Iran’s intransigence pitted against the refusal of the P5+1 to compromise resulted in a second extension being agreed and a new deadline for agreement: 1 July 2015. “The decision taken on 24 November to extend negotiations means that advice will probably not change significantly for the next six months,” said a spokesperson for the Middle East Association (MEA). “The MEA will be taking a watching brief on the business environment in Iran.”

Despite the current status of the talks, the attractions of Iran as an emerging market remains strong. It has a population of 78 million and its economy is worth about $437bn – the 27th largest in the world.

These attractions were accentuated about a month or so prior to the Joint-Action Plan impasse at the 1st EU-Iran conference, held in London, which painted a positive picture of the investment opportunities that could flow from opening up the Iranian market.

“Iran is the last, large, untapped emerging market in the world,” said Ramin Rabii, group chief executive of Turquoise Partners, a company which manages 90 percent of the foreign funds invested on the Tehran Stock exchange. “If you compare Turkey and Iran, they both have populations of around 80 million people. Sixty percent of the Istanbul Stock Exchange is owned by foreigners. In Iran, it is less than half of 1 percent.”

And yet, for all the optimism displayed at the conference, most concede that significant problems remain.

In recent years, attempts to circumnavigate such problems has seen Iran increasingly turn to China, Russia and Turkey to finance major projects. One rich source of ongoing investment is Iran’s relationship with China, itself operating under an economic cloud. However, China has already raised its quota for Iranian projects to $52bn in the coming years, meaning attractive opportunities for firms willing to take the plunge in the Iranian market.

“China has agreed to changes proposed by Iran’s central bank, raising its share in Iranian projects to more than $US52 billion,” said Iran’s deputy energy minister Esmail Mahsouli. “Government projects in the energy sector – including water, electricity, oil, gas and petrochemical and others in the construction and industrial sectors – will receive Chinese financing.”

Although Iranian attempts to outmanoeuvre Western sanctions appear to be bearing some fruit, many indigenous Iranian businesses point the finger at the incompetence of officialdom, not Western interference, as the reason for continuing economic hardship. “No sanctions are better than sanctions but it’s not going to change much because most of the country’s economic problems have nothing to do with sanctions,” claims Teheran bazaar merchant, Mohammad Arjmand. “The economy, the country, everything has been getting worse every year. The main problem is bad management and incompetence by the government.”

Despite the failure of the Vienna talks and subsequent extension agreement, Iran remains a major global investment opportunity. “Iran is potentially a large and interesting market. However, the current political and security situation mean that we are a long way from being able to consider the practicalities of conducting business in-market,” said a spokesperson from the Middle East Association. “There are still sanctions in place, and we suggest that any company looking at Iran should fully comply with the legal framework.”

In a region that has experienced so much turmoil, it is surely in everyone’s interests for Iran to stabilise, although it is evident that major political, regional, financial, legal and economic factors will have to align before Iran can fully realise its great economic potential.

© Financier Worldwide

BY

Fraser Tennant