Last month the biggest investment forum between Iran and Europe in years was held at the fanciful Grosvenor Square Hotel in Central London. Post-sanction business opportunities and networking was the main dish served at the conference.
This latest event received a blessing from Iranian President Hassan Rouhani’s chief of staff, Mohammad Nahavandian, indicating that the Rouhani administration is serious about attracting foreign investment to Iran. On the other side, enterprises are lining up to enter potentially high-growth and lucrative Iranian markets.
The main obstacle remains the sanction regime but there is so much at stake that it would be unwise for businesses not to plan ahead.
With the coming to power of President Hassan Rouhani last year, a new phase of outward political expansion began in which the president, backed up by Foreign Minister Mohammad Javad Zarif, actively tried to renegotiate Iran’s foreign relations.
Rouhani had already made 9 presidential trips in 2014, almost on par with Turkish Recep Tayyip Erdogan’s 11 trips – prime minister of a country much more politically embedded than Iran. Last winter, President Rouhani attended the World Economic Forum in Davos personally, saying that “I want to integrate Iran as an active and peaceful player in the global community.”
Iran’s professional approach to politics came to full fruition with the signing of the Joint Plan of Action – an unprecedented interim nuclear deal – in November 2013, in which sanctions on gold trading, petrochemical exports, the automobile industry and the purchasing of civilian aircraft parts were lifted. Soon enough, companies active in these industries were lining up to invest in Iran.
In February, a delegation representing more than 100 French companies flew to Tehran; Boeing applied for an export license to Iran in the same month, and many other delegations from the West, like Canada, Europe and the US as well as the East, including South Korea, China, Japan and others have visited Iran since.
The reason why all these firms are setting up plans to invest in Iran seems obvious: Iran is the largest “closed market” left on earth, according to an investment note left by Charles Robertson, chief economist at Renaissance Capital Ltd, who visited the country in February.
Robertson compares Iran to Turkey in 2004, when it started its track of continuous high digit growth. Iran’s population is about the same as Turkey’s, but Iran also has clear advantages over Turkey or for that sake most other frontier economies. “It’s like Turkey but with 9 percent of the world’s oil reserves,” Robertson stated.
The country has low national debt—10.63 percent of GDP in the last January reading. Low debt has plagued many South American and African economies over the past decades and is a crucial factor for funds and businesses in contemplating investment.
In the words of Matthew Lynn, who keeps a blog on MarketWatch.com, Iran’s “energy resources are rich enough to fuel the economy, without being quite so large relative to its population that it turns into a petro state such as Saudi Arabia. There are not many other frontier markets with that kind of profile.”
During Rouhani’s tenure, attempts have been made at opening up the Tehran Stock Exchange (TSE) to foreigners. Although sanctions still inhibit foreign investors and funds to directly buy shares and thus currently only own 0.5 percent of the TSE’s stock, the Rouhani administration has put in efforts to change that.
Recently, a new online trading system with the aim of internationalizing the TSE has opened, and the TSE has linked up to the Central Securities Depository of China, the third-largest stock market globally. The TSE has rallied over the last year in anticipation of an opening-up to the wider world, although it has calmed down in more recent months.
Inflow of FDI
But is there any actual growth in investment behind all this fanfare of plans, talks and agreements? Foreign direct investment (FDI) into Iran amounted to $4,662 billion in 2012. In 2013, the last six months of which Rouhani was president, FDI to Iran fell by 35 percent to $3,05 billion, according to the United Nations Conference on Trade and Development’s annual World Investment Report.
However, any conclusion based solely on data would be premature. In July, Deputy Economy Minister Behrouz Alishiri told Fars news agency that foreign investment in the industrial sector had doubled year-on-year in the last Persian calendar year, which ended on March 2014.
Concurrently, the growth or fall of FDI seems to hinge on the nuclear talks and the sanctions. But the Rouhani administration wants to keep its options open and not be tied to what foreign powers eventually decide on the Iran case.
While promoting Iran’s image as an attractive investment destination abroad, Rouhani has also been building up the “resistance economy” at home, which is a plan to diversify domestic production of goods and be less reliable on oil revenue as the main contributor to the budget. The plan has also seriously urged foreign investors to transfer technology into the country.
Rouhani also encourages investors to invest directly in the country, rather than simply focus on trade. At the WEC he stated aptly that “no business can achieve sustainable growth without adhering to social responsibilities and no power can regard its domination as permanent.”
At the same time, some industries cannot be covered by the Resistance Economy alone. A good example is tourism, which given Iran’s many heritage sites has huge potential, but remains barred by lacking infrastructural investment.
Although a deal was signed with an unnamed Japanese hotel chain last February, there are only a few luxury hotels operating in Iran, most of which are located in big cities like Tehran and Mashhad. The much-publicized luxury train coming from Budapest, which was touring Iran last week, shows that high demand is now being channeled via other creative solutions, but contributing little to the employment and income of Iranians.
Years of western sanctions have led to a huge need of investment to catch up. Amir-Ali Amiri who is a founding partner of ACL, an investment firm, argued that the car market has been undersupplied in recent years. With a potential annual market of 1.5 million cars, 20,000 trucks and 3,000 to 4,000 buses, the market is the size of the rest of the Middle East put together, excluding Egypt. A conference held in Tehran on the first of December is already expected to attract many major European car-makers.
In October, Reuters cited Majid Zamani, chief executive of Iran’s Kardan Investment Bank, as saying that Iran needs about $100 billion in foreign capital. Zamani predicts the country will attract $20-$30 billion over the next three to five years. “We need foreign capital for these projects. There is no other way.”
