The Plan to Save the Iran Deal Needs Private-Sector Buy-In

With the election of Joe Biden to the US presidency dialogue, between Washington and Tehran appears to once again be possible. Both Tehran and the Biden team have expressed a willingness to consider a “clean” return to the terms of the Joint Comprehensive Plan of Action (JCPOA, better known as the Iran nuclear agreement) if the other does the same. Namely – Iran would revert its nuclear activities to within the limits set out in the JCPOA, which it began breaching in May 2019, and the US would once again lift sanctions on Iran as prescribed by the agreement.

Reality, of course, will be more complicated. Securing economic benefits will be a priority for Tehran in any dialogue on the future of the deal, or any agreement that may succeed it. However, as became clear following the initial removal of US and international sanctions on Iran in 2016, the degree to which sanctions-lifting on paper translates to economic relief in practice depends in no small part on the willingness of the private sector to engage with the Iranian market. If the US and E3 hope to present renewed trade and investment as a credible and meaningful incentive for Iranian cooperation, it will be necessary to both address private sector concerns and manage Iranian expectations.

At the moment, many businesses around the world have opted out of engaging with Iran. The scope and complexity of US economic measures against Iran, as well as the high costs of potentially losing access to the US market and financial system in case of an accidental breach, is sufficient to turn even the most well-resourced compliance departments off of engaging with Iran. Iran is also one of only two countries—alongside North Korea—on the “blacklist” put forth by the Financial Action Task Force (FATF), the global standard-setter on countering financial crime. As a result of Iran’s failure to address “strategic deficiencies” in its financial crime regime the FATF currently requires jurisdictions to apply “enhanced due diligence” to their transactions with Iran, leading many banks to opt out of transacting with the country altogether. This means that businesses struggle to access financial infrastructure necessary for doing business with Iran.

There is some indication that, even if US sanctions on Iran were lifted, the uptake for private sector engagement with Iran would remain slow and limited. A few weeks ago, Iranian president Hassan Rouhani reportedly requested that Iran’s Expediency Council reprise its review of legislation that would address the deficiencies in Iran’s financial crime legislation called out by the FATF, which may help address some private sector concerns. However, persistent challenges in relations between Iran and the US and E3 will continue to create uncertainty for businesses. On December 17, the European Parliament passed a resolution condemning Iran’s detention and execution of human rights defenders and prisoners of conscience and called for the application of targeted financial sanctions on the Iranian individuals responsible. A few days earlier, a European Union-funded virtual business conference was postponed following the execution in Iran of journalist Rouhollah Zam.

Furthermore, some key US economic measures against Iran—for instance, sanctions on the Central Bank of Iran and on the Iranian Revolutionary Guard Corps (IRGC), as well as the designation of Iran as a jurisdiction of primary money laundering concern—are not related to Iran’s nuclear activities and may not be lifted as part of a return to the nuclear deal. These sanctions will continue to create complexity for banks and other businesses and will factor into private sector risk calculus. The possibility of another snap-back of US nuclear-related and secondary sanctions on Iran under a future change of administration in Washington will also discourage businesses investment. Persistent concerns over exposure to US sanctions within the financial sector in particular will complicate renewed economic engagement with Iran, as businesses will have trouble finding banks willing to support financial transactions with Iranian counterparts. Efforts by the incoming Biden administration to figure out the legal and regulatory logistics of sanctions-lifting, while ensuring that sanctions remain an effective tool of US foreign policy, will therefore also have to address challenges in the practical  implementation of sanctions-relief.

Reversing the economic impacts of private sector reticence to engage with Iran will be top of mind for the Islamic Republic as it engages with the new Biden administration. Tehran has previously called for compensation for “damages” to the Iranian economy caused by US sanctions – although Iranian leadership appears to have dropped such demands as a pre-condition for an Iranian return to compliance with the JCPOA in recent statements. And while Iran’s Supreme Leader Ali Khamenei expressed support for seeking sanctions-removal in recent marks directed at Iranian officials and the Iranian public, he also stressed the importance of “nullifying” the impact of sanctions on the Iranian economy. He distinguished “neutralizing” sanctions from sanctions-lifting and seemed to express scepticism over US and European ability to deliver on the former.

Assessing business’ levels of interest in re-engaging with the Iranian market and addressing concerns where possible will lend greater weight to US and European incentives of economic relief, hopefully encouraging greater cooperation from Iran in any future diplomacy—whether on its nuclear programme or more broadly. Relaying to Tehran the results of these private sector consultations may also help manage Iranian expectations on the level of foreign economic interest it can expect following sanctions lifting while also stressing the need for Iran to get its financial regime in order. On the part of Washington, this may include preparing comfort letters, granting sanctions exemptions, updating general licenses and expanding the guidance issued via the Office for Foreign Assets Control “Frequently Asked Questions” on Iran sanctions.

By consulting with their private sectors, the European governments can also better-understand business concerns and uncertainties around engagement with the Iranian market and how these may shift—or fail to do so—with the lifting of US sanctions. In October 2020, the European Commission launched a “Due Diligence Help Desk” aimed at supporting European companies in navigating European sanctions on Iran. While the platforms are well-intentioned and may provide businesses with helpful guidance, it is unclear how effective they will be in practice. The platforms do not address some of the key challenges raised earlier, including the lack of financial infrastructure to support transactions with Iran and concerns over exposure to US sanctions. The UK and European governments may wish to identify and reach out to specific sectors that are likely to be of greatest importance to renewed trade with Iran—for instance, the banking sector or those engaged in energy trade—to ensure they have the assurances, guidance, and infrastructure they need to proceed with confidence. Coordinated efforts across capitals—for instance, through the issuing of joint guidance by American, British, and European financial regulators, as well as dialogue with the US on the concerns of UK and European businesses—will also be valuable.

As renewed diplomacy on the Iranian nuclear question gets underway, it will have to be supplemented by consultations with businesses to assess whether the private sector will be able to make good on economic promises made at the negotiating table, as well as to manage Iranian expectations. At the same time, understanding and, where possible, addressing private sector concerns will help businesses do what they do best—moving goods, people, and capital to ensure that the lifting of sanctions on paper translates into real economic uplift for Iran.

Photo: IRNA

Iran Starved of Investor Capital Needed to Fuel Extensive Privatizations

Iran’s long but troubled drive for privatization received a boost earlier this month. Morteza Lotfi, the recently appointed head of Iran’s Social Securities Investment Company (SHASTA), the country’s largest pension provider, announced that SHASTA would list the remaining 25% of its subsidiary companies not currently on the Tehran Stock Exchange. The move was intended to make the companies “more competitive and their financial status more transparent.”

A few weeks later, Lofti made a further announcement that SHASTA plans to sell its stake in 130 companies in a two stage process. An initial tranche of 40 companies has reportedly been prepared for this divestment. Taken together, the two announcements suggest a renewed push for privatization, taking enterprises out of the limbo of SHASTA’s quasi-state ownership in which they have largely languished.

While the market value of the proposed privatization was not given, SHASTA is known to have around 200 subsidiary companies and its holdings are cumulatively valued at USD 9 billion. On this basis, the 130 companies poised for sale could therefore have an estimated value of around USD 5.5 billion, with the caveat that the companies to be offloaded are likely the underperforming firms, with lower valuations than the portfolio average. Nonetheless, in terms of the number of companies and their likely market value, SHASTA’s move would be another historic step in Iran’s economic liberalization.

But there are reasons to doubt that SHASTA’s push for privatization will proceed as planned. SHASTA’s own holdings are a legacy of previous failures in Iran’s faltering drive to reduce state control of the economy. SHASTA’s portfolio of assets expanded most rapidly beginning 10 years ago, when privatization efforts overseen by the Ahmadinejad administration fell short in the face of political pressure, economic unpreparedness, and general mismanagement.

In the course of privatizations in this period, a staggeringly small percentage of the formerly state-owned assets actually passed into the true private sector. As Kevan Harris writes, citing a 2010 parliamentary commission report, “Out of seventy billion USD worth of assets of SOEs divested since 2006 only 13.5 percent of the shares had gone to the private sector.” The vast majority of assets were transferred to the control of "parastatals" and cooperatives such as SHASTA. Critics saw this privatization as merely a “relocation” of state-ownership.

Today, the political barriers to the proposed asset sale remain strong. SHASTA is the investment arm of the Social Securities Organization, which provides healthcare entitlements and pensions benefits for a large proportion of Iran’s middle and working-class members of the labor force. SHASTA’s financial returns are intended to cover the costs of these welfare benefits, and are therefore highly politicized. As Harris explains, “Pensioners  would  hardly  accept  a  selloff  of  SHASTA’s  investment  portfolio  to  the private  sector  without  major  guarantees  of  future  entitlements  by  the  state.” The Rouhani administration has committed to reducing entitlements, but given that SHASTA provides a pension to nearly 40% of the Iranian population, any major change to its portfolio could be a flash-point for opposition.

Aside from the political barriers, SHASTA’s bold plan faces another major obstacle. Iran’s equities markets are insufficiently capitalized to facilitate the sale of the 130 companies at sufficiently high prices.The current market capitalization of the Tehran Stock Exchange is about USD 100 billion. Relative to the overall size of the market, a USD 5 billion divestment by SHASTA, already the market’s single largest shareholder, would be difficult to absorb by other investors, particularly investors outside the circle of bonyads and other quasi-state holding companies.

Some within Iran’s financial sector see Lotfi’s announcements as an empty gesture. As relayed by one financial executive in Tehran, who preferred to remain anonymous, “We are used to these kind of gestures from high new management of SHASTA. They need the money and everyone knows it. But they don’t have the guts to push the button when it’s time.”

The Rouhani administration is well aware of this structural barrier to privatization, and has hoped that in the course of the post-sanctions economic rebound, new injections of capital by foreign investors would boost privatization prospects by alleviating the liquidity problem. Recent developments such as the partnership between Italy’s Azimut and Iran’s Mofid Entekhab bode well for the role of foreign institutional asset managers in the TSE, but there remains a long way to go before Iran can witness the foreign capital fueled privatizations that helped rapidly liberalize the BRIC economies. While the overall number of foreign investors trading on the TSE rose following the lifting of international sanctions and although foreigner trading value has doubled in the last year, this progress is measured from a very low base. 

By comparison, around 60% of shares on the Borsa Istanbul are owned by foreign investors. Acknowledging the important role foreign investors will need to play to see through the off-selling, Lotfi disclosed, “Talks are underway with the Turkish government for dual listing of some of [SHASTA’s] subsidiaries on Borsa Istanbul, which would be a positive step toward attracting foreign investment.”

SHASTA's intended move reflects the precise kind of privatization efforts that Western economic policymakers have long advocated in liberalizing markets. But unlike in other liberalization scenarios, Iran's economic actors find themselves hamstrung by structural challenges that few in the international community seem keen to address. As SHASTA looks to right the wrongs of past privatization efforts, a more concerted effort should be made to support inflows of foreign investment. If success in privatization is to be achieved this time around, Iran's equity market investors will need foreign investors to help carry the burden and unlock the opportunity. 

New Survey Examines Iranian Attitudes Towards Foreign Investment, Multinational Companies

A first-of-its-kind survey on attitudes towards trade and investment in Iran conducted by public opinion firm IranPoll in partnership with Bourse & Bazaar, a business media company, points to strong public support in Iran for greater trade with other countries and related economic reforms. A resounding 85% of respondents feel that “growing trade and business ties between Iran and other countries” was leading to good or very good outcomes for the country.

The results of the landmark survey will be presented by IranPoll CEO Dr. Amir Farmanesh to an audience of over 400 European and Iranian business leaders and policymakers at the 4th Europe-Iran Forum, which takes place on October 3-4 in Zurich, Switzerland.

The survey, which was conducted in August 2017 among a representative urban sample of 700 Iranians has been published at a crucial time when debate over the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran Deal, reaches a fever-pitch. While President Trump has expressed his disapproval with the deal, it remains popular among a majority of Iranians, with 62% of respondents approving. But doubts and frustrations have emerged since the agreement was concluded in 2015. Acutely aware of President Trump’s rhetoric, 77% of Iranians have little or no confidence that the United States “will live up to its obligations under the agreement.” By contrast, public confidence in the European commitment to the JCPOA remains strong, with 57% of respondents believing the Europeans will stick with the agreement.

“Contrary to the reputation and image of the US, Europe’s image in Iran has improved significantly since the signing of the JCPOA and Iranians welcome greater trade and economic engagement with European companies” commented Dr. Farmanesh, the CEO and President of IranPoll. “Yet, only a minority of Iranians believe European producers have a good understanding of the needs and the taste of the Iranian people, which means European companies need to take extra steps not only to familiarize themselves with Iran's business environment but also to demonstrate their appreciation for the tastes, lifestyles, and culture of the Iranian society.”

Against the backdrop of political uncertainty, economic dividends of the agreement remain unclear. While 43% of Iranians report that the “availability of goods made by multinational companies” has increased in Iran since the nuclear deal, majorities say foreign investment and job creation by multinational companies have not increased since the signing of the JCPOA. . However, Iranians do see improvements in the way businesses are operating, with both Iranian and multinational firms making greater efforts towards supporting employee training and technological innovation in Iran when compared to five years ago.

“These findings send an emphatic message to policymakers and business leaders worldwide. Iran may prove to have one of the most receptive populations for a robust agenda of economic engagement,” said Esfandyar Batmanghelidj, founder of Bourse & Bazaar. “The nuclear deal has clearly opened a window of opportunity and encouraged Iranians to think globally and ambitiously. The question remains whether the trade and investment that Iranian have been anticipating will be forthcoming.”

Robust Support for Global Economic Engagement

While public sentiment towards globalization has soured in many countries around the world, Iranians believe that Iran should increase its role in the globalized economy. A majority of Iranians (62%) believe that globalization is having a positive effect worldwide, with just a third (33%)believing the effect is “negative.” Specifically in the case of Iran, a dominant 85% of respondents felt that “growing trade and business ties between Iran and other countries” is leading to good or very good outcomes for the country. Iranians also see positive effects on job creation and wages with 51% of respondents believing that “trade with other countries” creates jobs, and 40% of respondents believing there is an attendant increase in wages (36% see no impact).

As the country reaches out to foreign partners, members of the Iranian public have a strong opinions as to which countries have the most to offer. European countries and Japan are the most desired trading partners among Iranians. The greatest confidence was expressed for German and Japanese investments, with 66% and 67% respondents stating that there is “a lot” of benefit for Iran when these countries invest. French, Swiss, and Italian investments were also seen as highly beneficial. Importantly, European firms have made significant inroads in the Iranian market in the last few months, with notably deals signed by European multinationals such as Total, Renault, Alstom, and Siemens.  

"Now I will read you the names of some countries. As I read the name of each, please tell me the degree to which you think it would be in Iran’s interest for more companies from that country to invest and trade with Iran:"

During the period of economic sanctions, China became Iran’s largest trading partner, surpassing the European Union. However, while 65% of Iranians believe that Chinese investment in Iran is in Iran’s interest, only 19% strongly believe that to be the case. That Iranians exhibit significantly less confidence in the benefits of Chinese investment may help explain why the Europeans have been able to conclude the lion’s share of new commercial agreements following the lifting of international sanctions.

Despite the negative view of Iran in the United States, half of Iranians believe that American investment would benefit Iran (19% strongly).

The level of confidence in a foreign nation’s role as investor generally correlates with the perception of the quality of that country’s products. German and Japanese products were seen as having the highest quality, with 69% and 62% of respondents reporting products from those countries as being of “very good” quality. Chinese products were seen as having the lowest quality, with 61% of respondents reporting the quality as “somewhat bad” or “very bad.”

As Iran begins to modify its laws and policies to help facilitate foreign investment, the domestic debate on economic policy in Iran has become more important. While 56% of respondents believe that Iran should keep tariffs on imports in place, there is clear public support for economic reforms that will help spur foreign investment by major multinationals. An overwhelming majority (86%) of respondents would approve of policies that make it easier for multinational banks to operate in Iran and 87% support policies that encourage foreign investment. The same proportion of respondents would approve of policies to make it easier for “heads of multinational companies” to travel to Iran.

Confidence in the Business Community

Beyond the clear public support for the macroeconomic benefits of globalization, Iranians also have strong opinions about the role of the business community in the process of economic development.

At a time when the Trump administration is threatening to de-certify Iran’s compliance with the JCPOA and re-impose broad sanctions on the country, the pace of multinational investment in Iran has frustrated Iranians, with 70% of those surveyed suggesting that multinational companies are “moving slower than they could” to invest in Iran.  When asked what is causing multinational companies to move slowly, 77% of respondents identified “fear of the United States” as the primary reason.

"Are multinational companies moving as rapidly as they can to trade and invest with Iran now that some sanctions have been lifted, or are they moving slower than they could?"

Moreover, Iranians are ambivalent as to whether Iranian and multinational companies will contribute to job creation in the next year, with just 7% of respondents believing that Iranian companies will create “a lot of jobs.” In comparison, 7% believe that multinationals will create “a lot of jobs.”

While it remains ambiguous whether jobs will be created in the near-term, Iranians do have a clear sense of who they consider to be the primary drivers of economic progress in Iran. Despite the historical dominance of Iran’s state-owned enterprises, when asked to evaluate whether state, private, or multinational companies will be the main contributors to economic improvement, just 31% chose state companies. Iran’s private sector companies enjoy the greatest degree of the public’s confidence, with 41% of respondents believe these firms “can best help to improve economic conditions” in Iran and 21% of respondents see multinational companies having the most positive effect. The confidence in private enterprise demonstrates further public support for Iran’s accelerating efforts of privatization in the post-sanctions period. That support for private firms and multinationals combined outweighs that for the economic leadership of state firms lends support to government efforts to support foreign investment and privatization in tandem.

"Which one of the following kinds of companies do you think can best help to improve economic conditions in Iran?"

Yet, Iranians still do not feel their economy is accountable to the public. A majority of those surveyed, 57%, believe that Iran’s economy is “run by a few big interests” while just 38% believe it is “run for all the people.” One measure of success in the coming years of economic reform will be whether this proportion shifts.

Iranians Leveraging Their Influence

Not merely passive observers of Iran’s economic transformation, Iranians intend to drive economic reforms from the ground-up. Most notably, those seeking jobs have clear expectations that companies to which they are applying for employment respect corporate social responsibility. While 86% of respondents gave job security the highest score for importance when seeking employment at an Iranian company, salary was deemed less important than the reputation of the company, how the company treats its customers, and the company’s commitment to the public health and safety. Similar sentiments were expressed about environmental protections as well, with 58% of Iranians declaring that the environment should be protected, “even if the economy suffers to some extent.”

Importantly, the vast majority of Iranians believe they have “freedom of choice and control” over their direction in life, with 93.4% agreeing with the notion that “people shape their own fate.” Tellingly, 49% agreed with this statement in the strongest terms. These findings suggest that Iranians have a strong individual impulse and a confidence that if afforded the right opportunities they will be motivated to pursue them. The question remains whether policymakers and business leaders both in Iran and abroad will take heed.

Full survey results can be seen here. 

Just $10 Billion Could Fundamentally Change Iran's Economy

As we approach the end of 2016, the most important deal concluded for post-sanctions Iran this year was not among the headline-grabbing agreements signed by Boeing, Airbus, Renault, Siemens, Shell, or Total. Rather, it was a much smaller deal that received absolutely no coverage in the international business media.

In May of this year, German FMCG manufacturer Henkel purchased the remaining shares in its local joint-venture, Henkel Pakvash, taking its ownership to 97.7%. The company was able to deploy EUR 62 million to make the acquisition by purchasing shares on Iran’s Fara Bourse. In August, Henkel subsequently purchased the detergent business of Behdad Chemical for approximately EUR 158 million.

Henkel’s two transactions should be considered the most important of 2016, not only because they were successfully completed (in contrast to many of the larger deals that remain at contract stage), but also because these transactions are reflective of the most important kind of capital deployment for Iran’s near-term economic growth.

Both supporters and opponents of the Iran Deal have been focused on the billion-dollar contracts being made between major multinationals and Iranian state-owned enterprises. The logic is simple. Iran is a large economy and the true economic value of the Iran deal will only be reached when the country receives billions of dollars of foreign direct investment.

Iranian officials have boasted of a USD 50 billion target for FDI in 2016, a massive leap from the USD 2 billion registered the previous year. Reports suggest that Iran will more likely achieve around USD 8 billion. It took the Russian economy eight years (from 1999 to 2007) to see FDI inflows rise from levels commensurate with the current levels in Iran to the USD 50 billion milestone. While the process may take less time in Iran, business leaders and policymakers need to focus on what can be achieved in the next year.

By necessity, larger deals operate on longer timeframes. It will take years for Airbus and Boeing to complete their deliveries, or for Shell and Total to start pumping oil, and for Renault and Daimler to ramp up production. In effect, the contracts signed today will only manifest their full economic value in the next five to ten years.

In the private sector, timeframes for investment are much shorter. As the Henkel deals show, investment in private sector firms can happen quite quickly, even just months after Implementation Day. These transactions are the potential spark for Iran’s economic engine and they represent the overlooked landscape of Iran’s economy. The bulk of untapped economic value lies in the private sector.

Privately-owned companies maintain dominant positions in consumer-facing sectors such as FMCG, food and beverage, pharmaceuticals, consumer technologies, and hospitality and tourism. These companies, some of which are family-owned and some of which are publicly-held, are led by a globalized class of managers, many of whom have studied and lived abroad. Therefore, these companies operate much closer to international best practices for key functions such as accounting, supply chain management, human resource management, and marketing and communications. While many of these firms are under financial duress due to the lasting effects of sanctions, they nonetheless possess strong market share and significant cash flow, making them ripe for turnarounds. Some are in superb financial shape.

Most importantly, these companies are identifiable, if not widely known. While the firms and their owners have remained out of the limelight of Bloomberg, Reuters, or the Wall Street Journal, the grapevine in Tehran has a way of determining which companies deserve to be counted among the top 100, and which are the true standouts. The much talked about “positive list” of clean and compliant companies already exists—one just has to be on the ground in Tehran long enough to catalogue it. This is a small group of companies, at most numbering around one hundred . The very largest of these companies generate around USD 1 billion in revenue. As such, most of these enterprises would require relatively little capital for a strategic or financial investor to take a meaningful, if not a majority, ownership position. This is particularly true if one considers that leveraged buyouts—with debt financing coming from Iran—could be part of the capital solution. Realistically, the value of the purchased stakes, whether majority or minority, would rarely exceed USD 200 million and would probably average between USD 20 to 50 million.

Such transactions are small enough that they would enable the investing company or fund to mitigate the banking sector challenges that are currently throttling Iran trade and investment. The smaller banks that have begun to work with Iran are equipped to handle transactions of this size without breaking their balance sheets. By the same token, it is far easier to convince a large bank to facilitate a smaller transaction on the back of significant investor-led due diligence. Strong evidence for this can be seen in the success of Pomegranate, a Swedish investment fund, in deploying approximately EUR 60 million into Iran's tech sector. 

Looking for one hundred companies with a high average acquisition transaction value of USD 100 million dollars means that a total of just USD 10 billion is needed to trigger a fundamental change in Iran's economy across numerous levels, from company operation to macroeconomic conditions. 

Foreign investment is a protracted process. It will make an impact on the acquisition target at numerous stages, as new strategic shareholders take positions across Iran’s private sector. In the vetting stage, private sector firms will need to prepare themselves for due diligence, taking further steps towards better accounting and corporate governance practices. These firms will also have to embrace internationalization, becoming more knowledgeable of the global commercial landscape, and improving their capacity to engage with foreign investors or partners. When executed, the investment itself will fund knowledge and technology transfers, with the new foreign owner proving their “value-add” by helping the Iranian company make improvements in management and operations.

While the above benefits take place at the microeconomic level, there is a strong body of economic research from Iran that outlines the macroeconomic impact of private sector investment. In 2005, economists Pirasteh Hossein and Farzad Karimi examined how investment priorities in Iran could be aligned to “priorities in production and employment” in order to reduce unemployment and better address “[Iran’s] process of development.” One key finding was that “from an investment point of view, "the service sector and FMCG manufacturing are the two areas that can be considered the “‘great winners’ in generating aggregate employment due to investment.” The authors further note that private firms dominate these sectors. Therefore, “more private sector activity is warranted, since this will spread employment opportunities all over the economy with a faster pace.”

While the paper and its data are over a decade old, the fundamental findings may be even more valid today. Given the date of publication, the authors did not account for the additional impact of post-sanctions investment. They could not have predicted the great strides the private sector has made over the last decade. Certainly, there is ample research that establishes the “positive correlation between growth of national incomes and private investment ratios.” Research also shows that foreign direct investment drives greater private domestic investment in what is called a “crowding in” effect.

Finally, in today's world, trade flows are fickle. An anti-globalist turn in politics makes trade a weaker link for constructive international relations. For Iran to achieve true integration into the global economy, shareholder equity will be the tie that binds. By bringing more foreign shareholders into it's economy, Iran will rise in importance in the economic agendas of its European partners.

A direct investment of USD 10 billion is smaller than the total value of the Boeing/Iran Air deal. Growth capital, triggering value-creation, is what is needed at this crucial moment. Deploying a mere USD 10 billion of such resources into Iran's private sector in the next few years will create more economic value than pouring even larger amounts of capital into mature, state-owned enterprises. Investors and policymakers should take note. 

Photo Credit: Henkel

The Politics of Sanctions Relief in Iran: Three Roles for the Private Sector

As politicians and analysts consider the wisdom of offering Iran sanctions relief in exchange for restrictions on the country’s nuclear program, a key stakeholder group remains unaccounted for in the debate – the private sector.

Iran’s private sector stands to gain the most from sanctions relief, and they are uniquely positioned to advance the agenda of normalization through their interactions with both domestic and international business people. Corporate leaders are poised to play three vital roles— interlocutors, stewards, and creators—without which the long awaited nuclear deal will not successfully improve the economic situation in Iran in the way many Iranians anticipate. Policymakers must take account of the relationship between sanctions relief and private sector leadership for the deal to have its much-awaited impact.

In the aftermath of a deal, Iran’s private sector business leaders will be the ideal actors to pick up where the diplomats leave off. These individuals, with global outlooks and ambitions, have already begun reaching out to their peers in the West. And while this outreach is primarily about securing new investment and business opportunities for themselves, it also offers an opportunity to present Iran in a new light, and undo the effects of political vilification and cultural misconception. 

The notion of “business diplomacy” has emerged in the last decade as a serious topic of strategic thought, suggesting that the business executive can serve as a special kind of “ambassador.” And in the transition from high-stakes diplomacy to the “business as usual” mentality expected from a détente between Iran and the West, business diplomacy is the essential intermediate step. 

But in order to take on this role, Iran’s private sector business leaders will need a place at the table.  They must be welcome to visit Western countries much the same way American and European trade delegations have begun visiting Iran. Sanctions, stigma, and arcane visa policies should not prevent an Iranian CEO from coming to London, Paris, or New York to discuss his country and his company in the hope of finding an investor or partner. On the contrary, this should be welcomed as a necessary and productive kind of engagement.  

If Iran’s private sector business leaders can consolidate their economic position on the back of foreign investment and trade, they will be able to take on a vital role as stewards of a nuclear deal.  

For the average Iranian, the nuclear deal has one fundamental promise: greater prosperity. The mechanism embraced by the United States and its allies of using sanctions as a coercive policy tool has had the effect of conditioning Iranians in an almost Pavlovian way— geopolitical strife begets economic pain. Consequently, the signal of political accord and the “relief” of sanctions seems to be triggering the expectation of the relief of this economic pain, and even that of economic reward. Indeed, as opinion polls suggest, President Rouhani’s legitimacy in the eyes of the Iranian public hinges on his rebuilding of the economy.  

But the rollback of sanctions will not bring about relief unless it translates directly into an increased flow of goods, services, and capital into Iran. Following the change in the Iran regulatory environment, only private sector companies will be able to establish the flows necessary for economic growth— whether to introduce vital pharmaceuticals, the latest fashions, or investment funds into the country.

Iran’s private sector is uniquely positioned to create value for Iran’s long-term development. Value creation, as a concept of management, entails the proper treatment of shareholders, employees, and customers as part of corporate social responsibility. When value creation is more than the policy of a single business, and instead reflects the ethos of a whole industry or economic sector, private enterprise can take on a true social significance.

In this sense, Iran’s private sector firms, if properly empowered, can serve as the anchor for Iranian civil society. Through a commitment to corporate citizenship, companies can become advocates for the citizenry within the context of Iranian political economy.

In the current situation, the Iranian state and private enterprise compete for access to limited resources and capital. Livelihoods are either tied to a state affiliate or to a private concern Knowing this, class and cultural divisions are exacerbated by economic antagonism. Issues of public health, environmental degradation, educational policy, and legal protection will not be effectively addressed.

The Islamic Republic’s support for privatization has been surprisingly persistent, if unfulfilled. The technocrats are well aware that state owned enterprises struggle to generate economic gains of real value.

The Rouhani administration is committed to privatization and to the success of the non-governmental sector in Iran. The aim is to give new actors a voice in the wider arena of public affairs.  

This commitment has been signaled since the early days of the administration's tenure, and in Rouhani's cabinet’s engagement of the current crop of Iran’s private sector business leaders. The logic is clear. The Iranian state ought to focus on security and governance, and rent seeking should be formalized through taxation. 

But in the history of modern Iran, and especially in the age of globalization, economic policy has never been a national prerogative.

The imposition of sanctions and their aftermath are testament to this fact. As key actors in Iran try to turn over a new leaf, it is up to the P5+1 to empower Iran’s private sector as interlocutors, stewards, and creators, and thereby ensure that policy treats such empowerment not as an afterthought, but as an intended effect of a nuclear deal. Sanctions relief ought not to be seen as merely the quid-pro-quo of any final nuclear agreement. It is truly the sine-qua-non of everything promised by the ongoing détente. 

Photo Credit: AP Photo/Michael Euler

Iran’s Capital Markets: Securitizing the Future

The future of the Iranian financial sector might be vastly different to what we—those who work in the industry– can imagine today. With this in mind, the potential for making the financial sector a driving force for Iran’s economic reboot must considered as supremely important. 

For Iran to overhaul various aspects of the domestic economy, it must attract at least $1,000 billion dollars in investment during the next decade. If for any reason our economy fails to absorb the required level of investment, not only will we not achieve the goals of Iran’s 2025 Vision Plan, but we will also miss a historic opportunity to enhance our rightful position in the global economy.

Therefore, it is our obligation to obtain the much-needed investment for Iran. 

The unusual hurdles imposed on our economy have culminated in an unfortunate economic stagnation. This situation has adversely impacted a country with an enormous potential, which would otherwise be most appealing to the international investor. 

In order to ensure sustainable economic growth, Iran will need to divert considerable financial resources into infrastructure and large-scale projects. These projects may be unprecedented in size and complexity for Iran. 

The key point is that conventional methods for promoting investment in Iran, particularly foreign direct investment, have become less appealing and are insufficient to effectively address international investors’ concerns, especially after exposure to the world economic crisis. 

In the case of Iran, this is further aggravated by the harsh conditions imposed on investment due to sanctions. Knowing this, two factors have a crucial role in leading potential investors: transparency and the ease of exit from ventures, i.e. favorable exit strategies. 

Iran’s finance sector leaders will need to be flexible and innovative in financial engineering and offer a range of financial instruments to investors, either domestic or foreign. This leads to the conclusion that for those of us in the sector there is no strategy more important or effective than securitization. 

Securitization is the financial practice of pooling various types of debt, illiquid assets, and/or groups of assets into more liquid financial instruments in order to sell them to third party investors. Securitization promotes liquidity in capital markets by making it easier for investors to buy and sell (enter and exit) investments across sectors. 

During the last decade, various new types of project financing methods have been devised for infrastructure investments in Iran. Compensation Arrangements, ranges of Build-Operate-Transfers (BOTs), and, recently, Public-Private Partnership agreements (PPPs) alongside the issuance of participating notes, corporate bonds and Sukuks are examples of our endeavors for financing projects. 

Despite our achievements, we do not fully realize the imperative of giving potential investors even greater confidence through intelligent securitization.  I have to stress that investors are clever people, they know how to assess projects and how to control their business risks, but they need the right vehicles. 

By confidence I mean providing investors with transparent and reliable information as well as reliable platforms for transacting securitized projects and investments. Investors must be confident that whenever they decide, they are able to sell their investment at a fair price.

Therefore, I believe that securitization, though not the only way the only imperative to improve the investment climate, is nonetheless critical. Securitization offers the best and most efficient methods of financing the country’s projects in the post-sanctions era in the shortest period of time.

Now the question is what are the required grounds for new best-practices? 

Certainly, we need to review our legislative environment and implement the required amendments, remove the unnecessary barriers and in general, improve our “doing-business” indices. In addition to the above, Iran’s finance marketplaces remain a vital part of this development plan. Specifically, securitization needs markets where assets can be effectively valued and traded. 

A notable point is that Iran has the oldest capital market in the region, established in 1968. With almost 50 years of experience, Iran has a robust background in this area and thanks to the new Securities Market Act, ratified by the Parliament in 2004, the country has had the opportunity to modernize its financial market and establish almost all the frameworks required by global best-practice. 

I will not elaborate on the structure of Iran’s capital market here, but it is worth mentioning that during the past decade, we have observed tremendous developments in the fields of financing, financial markets administration, and related technologies. 

These changes include a notable portion of the privatization program within the framework of economic reforms, which was carried out through the Tehran Stock Exchange (TSE) and the Iran FaraBourse (over-the-counter market). 

The Iran Mercantile Exchange and Iran Energy Exchange, too, have had an important and constructive role in improving commodity markets’ efficiency and transparency in our economy, which deserves its own detailed discussion. However, it is noteworthy that the share of the contribution of the capital markets to Iran’s GDP is still unsatisfactory. 

Where the main impetus behind long-term sustainable economic growth is national and foreign capital investment, it becomes imperative that new methods based on securitization be devised, which at the same time make further development of the financial markets a necessity. We, therefore, need to introduce new players in our financial markets including new companies and entities, which can develop new and innovative methods, products, and instruments of finance based on securitization, educate a new generation of specialized experts, enter joint ventures with reputable international firms, obtain and develop new systems in the area of financial technology, and more.

International investors continue to recognize that the Iranian financial sector, with its great potential, will be one of the most active, (and hence profitable) industries in the region. But these investors will only act with confidence once sanctions are lifted and Iran’s new phase of securitization and transparent sector development begins. 

Photo Credit: The Iran Project