Hotels in central Tehran have been booked out over the past few months by a steady influx of international business executives visiting Iran’s capital, despite negotiators constantly extending a key deadline that would lift economic sanctions on the oil-rich country.
Holding the world’s fourth largest oil reserves and the largest stocks of natural gas, Iran is often thought of as simply another Middle Eastern “petrodollar” economy.
However, in reality, Iran is perhaps the region’s most diverse economy with an established capital market, a well-developed industrial base and a large population that generates a significant demand for services such as telecommunications and banking, wrote the Telegraph.
According to emerging market investment house Renaissance Capital, its gross domestic product last year was around $437 billion, ranking it as the world’s 27th largest economy, ahead of nations such as Austria.
Despite strict economic sanctions, which prohibited most international companies from doing business with the Islamic Republic and prevented Iranian firms from financial transactions overseas, the economy has survived because of the depth of Iran’s industrial base and high levels of education. These characteristics, coupled with its population of over 80 million, prompted Sir Martin Sorrell, chief executive of advertising giant WPP, last year to describe Iran as one of the last major untapped frontiers for business.
International business has already begun to take seriously the opportunities that could soon open up and gearing up to return to Iran.
“For the past several months there has been a lot of excitement about sanctions lifting,” said Reza Soltanzadeh, managing director of the Iran Industries Investment Company. “Companies from Europe, America and Asia have all been here recently to take a look.”
Iran Industries Investment Company is the country’s largest privately-owned fund manager operating on Tehran Stock Exchange, where it manages a portfolio of around $350 million through its securities subsidiary. Soltanzadeh expects about $1 billion will flood on to Iran’s capital market, which is valued at around $120 billion, within the first 18 months of sanctions being lifted.
He believes that most of this money will be directed towards high-value petrochemicals and metals industries in which Iran has a competitive advantage. Unlike its neighbors such as Saudi Arabia and the United Arab Emirates, Iran has a much larger domestic population, which can sustain larger-scale industrial development.
Unlike its neighbors in the Persian Gulf, which remain heavily dependent on the hydrocarbons sector, Iran has managed to develop a broad industrial base. Its car industry produces over 1 million vehicles per year, despite the limitations to accessing new technologies and finance.
“Global investors are never going to see a country of this size and sophistication open up again,” said Renaissance’s chief economist, Charles Robertson.
He says Iran’s economy is comparable to Turkey in its potential but with the added benefit of vast oil reserves and lower average wages. His top tips for investment are retail, telecommunications and the Internet, with the country far behind its neighbors in terms of access.
“The country just needs investment and foreign capital,” said Robertson.
Oil and gas will, of course, attract most interest. Oil majors such as Royal Dutch Shell have already sent delegations to Tehran. At its peak before the Islamic Revolution in the 1970s, Iran was producing between 5 and 6 million barrels per day, and has the potential to return to that level once sanctions are dropped.
But for that to happen, the government will have to reform its contract terms to give international investors a greater share of the profits from any additional oil and gas they produce. Details of the new terms are expected to be released within weeks.
However, the most important area of the economy outside oil to be revitalized once sanctions are eventually lifted will be banking. US embargoes have focused on restricting Iran’s financial sector and specifically the capacity of Iranian and international lenders to act as intermediaries for trade with the outside world.
Allowing Iranian banks to conduct foreign currency transfers in addition to unlocking billions of dollars of Iranian funds trapped overseas would help the country back on to its feet. Lifting sanctions would also allow western banks to reopen branches in Tehran closed for years.
“Banking measures will be near the front of the queue of sanctions that are eventually lifted,” said Henry Smith, Middle East and North Africa analyst at Control Risks.
