Iran's Deal With South Korea Ushers New FDI Era

Iran is in dire need of foreign finance after years of hard-hitting sanctions and more than glad to wrap up deals worth $40 billion negotiated or agreed upon in the post-sanctions era.

Major negotiations have been held with Italy, Japan and Norway among many others, but the most recent example to grab national headlines–and score a win for President Hassan Rouahni’s diplomatic engagement with the world–was the €8 billion South Korean finance for Iranian projects finalized late last week.   

However, the fear of US penalties–exacerbated by the uncertainty surrounding Donald Trump’s election–is still hindering the bulk of these finance deals from going through.

This is on top of the challenges facing Iranian lenders in submitting their balance sheets as per international standards after the removal of multilateral sanctions.

“Among these, the possibility of sanctions snap-back remains an issue,” Arash Shahr-Aeini, the deputy head of Export Guarantee Fund of Iran, told Financial Tribune.

“In many cases, the other country would include snap-back scenarios in their finance offers that stipulate Iran reimburses all the funds at once [if the nuclear deal is endangered],” he added.

But rightly so, adds the official, Iran has refused to cave in to such demands and now the issue is largely resolved because the country has remained faithful to its commitments under the Joint Comprehensive Plan of Action, as the nuclear deal is formally known.

As the EGFI deputy notes, the Office of Foreign Assets Control of the US Department of Treasury amended its official document on JCPOA in December 2016 to include prospective guidance on the wind-down of authorized businesses or payment transactions involving Iran in the event there is a re-imposition of sanctions.

The move, which allows for a 180-day period for payment settlements in case of a snap-back, “further clarified the stance of the US” and worked in line with removing ambiguities and doubts, Shahr-Aeini added.

  Korean Deal

The two-part agreement with South Korea, which involves the Korea Export–Import Bank (Kexim) and the Korea Trade Insurance Corporation (K-Sure), defies the harshening US stance toward the Iran deal and hopes to usher in a new era for the country. The deal, the full details of which have yet to be disclosed, has breathed new life in Iran’s uphill march to attract foreign investment.

Kexim is to provide €8 billion for Iranian projects and K-Sure is to guarantee up to €5 billion of potential losses. The agreement is unique in that it does not specify any project for funding but keeps it open-ended to negotiate a range of ventures deemed viable by both sides.

Last Thursday, Ali Salehabadi, the head of Export Development Bank of Iran, was in Seoul to sign the final framework agreement related to the Kexim finance.

The deal went through because “Kexim, a major government-backed lender, was ready to work with Iranian banks to show its willingness to allocate finance”, Shahr-Aeini said.

As part of the agreement, which has been touted as the single biggest foreign finance deal after JCPOA, 12 Iranian lenders led by EDBI have been chosen as agent banks to handle the credits.

According to Hamid Qanbari, the deputy heading the Central Bank of Iran’s Department for Foreign Exchange Credits, four major parties, namely CBI, Economy Ministry, Organization for Investment, Economic and Technical Assistance of Iran and the related ministries, will evaluate the projects that will be eligible to receive finance after their approval.

The Economy Ministry will be the main guarantor of the projects.  

“The first round of funds will enter the country by the time the current fiscal year comes to a close in March,” Qanbari told Financial Tribune.

   Lesson to Be Learned

The EGFI official believes there is a lesson to be learned from the South Korean finance.

“By financing projects in Iran through South Korean businessmen and contractors, Kexim and K-Sure are actually supporting and boosting their own exports,” he said.

According to Shahr-Aeini, K-Sure guaranteed $122 billion of the total of $500 billion worth of South Korean exports last year while Kexim pitched in $65 billion.

That is while in total, “EGFI and EDBI provided services covering only 10% of all Iranian exports in the previous fiscal”.