Economy, Domestic Economy

Investing in Iran: Risks and Rewards

Investing in Iran: Risks and RewardsInvesting in Iran: Risks and Rewards

A great deal has been written about the opportunities waiting for both strategic and portfolio investors in post-sanctions Iran.

There is no denying that the country of almost 80 million people, holder of the world’s third largest reserves of oil and the largest reserves of mostly untapped gas, has enormous potential.

GDP is expected to be $430 billion for the current fiscal year (to March 2016) and is certainly capable of more than doubling over the next seven years when sanctions are taken down as per the agreement with the UN.

However, investors in any developing economy need to be mindful of local conditions and be ready to adapt. The patient and the prepared will make a great deal of money, while those who rush in with ill-prepared due diligence will quickly falter, wrote an article in the Financial Times.

The first point to understand is that despite the years of sanctions, the economy and business have developed, albeit less efficiently and more slowly than would otherwise have been the case. This means that structures are in place that foreign investors will have to either compete against or, in most instances, work with.

Many sectors of the economy and many important industries are underdeveloped when compared with western counterparts because years of sanctions starved them of modern technology and best practice management.

As has been seen in China and other developing economies, such as in Russia’s automotive sector, the government is expected to encourage joint ventures with international companies rather than hinder them. Initially, operating out of one of the country’s several economic zones, which offer zero tax and visa-free entry for foreign investors and a light bureaucratic touch, may offer an interim solution.

Consumer sectors also rank high on the list of economic activities with greatest potential for growth. The retail and consumer service sectors are expected to turn over $150 billion in this fiscal year and that figure will expand greatly in the post-sanctions economy.

Supermarkets and hypermarkets, for example, have only a 4.5% market share in the food retail sector. E-commerce is also well established in Iran but with the local equivalents of PayPal, eBay and others ready to defend their positions and repel new entrants.

For foreign investors, Iran also has the usual list of problems associated with developing, or frontier economies. The country’s low ranking in the World Bank’s Ease of Doing Business Survey, at 118th, illustrates the difficult administrative and legal backdrop.

The country is hydrocarbon dependent and this, plus the accumulation of sanctions, has led to a loss of two-thirds in the exchange rate of the rial against the US dollar since early 2012. The central bank has adopted a very hawkish response and its benchmark interest rate is currently 21%. There is little useful clarity as to what the monetary policy stance will be once sanctions are removed.

The one encouraging factor for investors is that the balance within government has shifted to a pro-business and pro-foreign investment position.

If their actions to get the nuclear deal agreed are relatively quickly rewarded with inward investment and progress toward the 4.5% GDP growth targeted for 2016/17, then foreign investor optimism may start to be validated and the headline risk of a return to sanctions start to recede, provided investors pick the right sectors and align with the right partners.