S. Korea Deal With Iran Capital Market Runs Aground

A capital market agreement between Iran and South Korea has been cancelled as a result of “political pressure”, the head of Central Securities Depository of Iran said.

“Progress was made in cooperation with Korea Securities Depository as CSDI’s counterpart, but political concerns caused Koreans to back down from the talks,” Mohammad Reza Mohseni was also quoted as saying by Mehr News Agency.

The official did not elaborate on the exact nature of these political concerns and whether the talks could resume in the future.

He was seemingly referring to the effect of US President Donald Trump’s radical rhetoric of late against Iran and the nuclear deal the country signed with world powers in 2015.

Trump on Oct. 13 refused to certify that Tehran was complying with the accord even though international inspectors said it was, Reuters reported.

The US decision has thrown into doubt the future of the pact negotiated by Iran, the EU and six major powers, namely Britain, China, France, Germany, Russia and the United States. Congress has until mid-December to decide whether to reimpose sanctions lifted under the deal, something few diplomats expect.

Affected by this atmosphere, some conservative businesses have been holding back from engaging with the Iranian market, fearing US punitive measures. Many others are seizing the opportunity of tapping into Iran’s emerging market with all its intrinsic attractions.

“The Iranian capital market has yet to finalize a deal with a foreign country following the lifting of nuclear sanctions,” said Mohseni, noting that only preliminary agreements have so far been signed with exchanges of Japan, Taiwan, Greece and South Korea, among others.

The CSDI-KSD agreement, reached in November 2016, stipulated listing Iranian fixed-interest securities such as Islamic Treasury Bills on Korean exchanges.

“With yields to maturity reaching up to 18% on certain securities, the Iranian debt market can be a highly attractive investment opportunity for foreign investors,” Mohseni said.

According to Managing Director of Iran Fara Bourse Amir Hamouni, foreign investors have invested about $8 billion in Iran’s debt market.

Noting that government-issued bonds dominate the sector in Iran, Hamouni said Iran has never defaulted on its debt, adding that the over-the-counter market Iran Fara Bourse accounts for 82% of all the bonds issued in the country.   

Chairman of Securities and Exchange Organization Shapour Mohammadi said about $5 billion worth of Islamic bonds are slated to be issued in the current fiscal year (2017-18).

There are currently more than 80 types of bonds issued in the Iranian debt market, the yields of which are paid on a monthly or quarterly basis.

Iran’s Treasury sold its first batch of government bills, called Islamic Treasury Bills (a type of short-term sovereign debt), to domestic investors in September 2015. The government redeemed holders of its first batch of the bonds in March 2016, paying holders 5.58 trillion rials ($164 million at market exchange rate) in the process. The bills were given to government contractors in lieu of overdue payments.

The Iranian debt market has been on a fast path to growth, as it expanded from $3.5 billion at the beginning of the previous fiscal year (March 2016-17) to about $12.5 billion at March 2017. Most of the growth occurred in the second half of the year.

Founded in 2005 as a public joint stock company, Central Securities Depository of Iran is the sole registry entity and custodian in the Iranian capital market using the hybrid registry system with a fully dematerialized book entry system.

Korea Securities Depository is the central securities depository of Korea, providing central custody of securities, book-entry transfer and settlement of securities transactions.

KSD was established in December 6, 1974, under the Securities and Exchange Act (later consolidated into the Financial Investment Services and Capital Markets Act). It is a non-classified public institution under South Korea’s Financial Services Commission.

As of 2014, KSD held in custody securities valued at KRW 3,149 trillion and processes a daily average of KRW 70 trillion in securities-related cash.

The perceived political pressures Mohseni was talking about come as the European Union’s top diplomat issued yet another stern warning on Tuesday that the Iran nuclear agreement could not be reopened for negotiation or changed, as Trump has vowed to do.

“Renegotiating part of the agreement or the entire agreement is not an option,” said the diplomat, Federica Mogherini, who serves as the bloc’s high representative for foreign affairs and security policy.

Mogherini said that key legislators on Capitol Hill and White House officials had assured her that the United States would not violate the deal, The New York Times reported.

“I got clear indications that the intention is to keep the United States compliant with the agreement,” she said.