To Break With Austerity, Rouhani Must Deliver on Sovereign Debt Sale

One of the remarkable, and yet little discussed, aspects of the Iranian election is that Hassan Rouhani triumphed despite being an austerity candidate. His first term was notable for its frugal budgets and commitment to both slash government handouts and reduce expenditures in an effort to tackle inflation. On one hand, the focus on a more disciplined fiscal and monetary policy meant that Rouhani could point to a successful reduction of inflation from over 40% to around 10% while on the campaign trail. On the other hand, job creation has been stagnant and the average Iranian has seen little improvement in their economic well-being.

Some economists, including Djavad Salehi-Esfahani, have argued that Rouhani’s austerity economics are misguided, depriving the economy of vital liquidity that could help jumpstart investment and job creation. For example, Iran’s 2017/2018 budget sees tax revenues stay constant at an equivalent of USD 34 billion despite the fact that economic growth is expected to top 6%. Salehi-Esfahani believes that these figures reflect the Rouhani administration's belief “that letting the private sector off easy would encourage it to invest.” The government, meanwhile, will not contribute much more in investment. Development spending is set to decrease from USD 20 billion to USD 19 billion. 

Surely, the Rouhani administration’s pursuit of a small government that leaves the burden of job creation and economic growth to the private sector is admirable. It represents a significant shift in the mentality that has characterized the economic policy of the Islamic Republic, which has long relied on state-owned enterprise and state-backed financing, supported by oil revenues, to drive economic growth.

But the volume of investment needed to revitalize economic sectors and create substantial job opportunity has not yet materialized. This is an undeniable fact, which Rouhani has attributed to failures on the part of Western powers to adequately implement sanctions relief, leaving international banks unable to work with Iran. Rouhani’s opponents meanwhile, attributed low volume of foreign direct investment to his administration's mismanagement. There is truth to both accounts.

In many ways, Rouhani’s lean towards austerity was a response to the spendthrift policies of his predecessor, Mahmoud Ahmadinejad. The Ahmadinejad administration responded to faltering economic growth during a period of historic oil revenues by ploughing oil rents into the banking system and compelling banks to issue loans. These loans were often provided without the adequate due diligence and were used not to finance growth, but increasingly to fuel speculation, or more forgivably, to address cash flow difficulties faced by companies as a result of international sanctions.

As a result, Iran’s banking sector is now weighed down with a high proportion of non-performing loans, accounting for around 11% of total bank debt. When bank balance sheets grew increasingly precarious as non-payment of loans mounted in the sanctions period, competition for deposits grew. Exacerbating this competition, banks needed to provide higher deposits rates in order to stay ahead of inflation. The combination of forces pushed interest rates up to all-time highs.

The debt market in Iran is now broken. The IMF has urged urgent action to “restructure and recapitalize banks.” In the meantime, banks remain disinclined to lend and in the instances where healthier banks are able to provide loans, borrowers must contend with the high cost of debt.

This may help explain why the Rouhani administration so aggressively sought to address inflation—it was a necessary step to reduce the benchmark interest rate, which has so far been reduced from a high of 22% in 2014 to the current rate of 18%.

But even at such time that interest rates normalize, barriers will remain to the use of debt markets. At a structural level, Iranian companies, particularly in the private sector, rely on equity financing rather than debt financing in order to fund growth. This reflects a “bloc” behavior within Iranian enterprise. Partially as a  consequence of the continued dominance of family-owned businesses in Iran’s non-state economy, business leaders tend to approach financiers within their own networks or holding groups, and many of Iran’s largest companies and banks anchor conglomerates that grew out of sequential processes of a kind of inward-looking venture capital. There is limited comfort among Iranian business leaders to seek funding from groups outside of these tight networks and by the same token, equity investors hesitate to provide finance projects outside their own networks. This means that the pool of available investor capital is rarely competing across the whole pool of available capital deployments—a significant inefficiency.

Growth-oriented investing itself can be a difficult strategic proposition. Iranian business leaders have understandably prioritized weathering periods of  uncertainty over the execution of long-term plans. The challenge of dealing with short-term volatility has naturally favored short-term thinking. Major companies are only recently undertaking strategic reviews that might identify needs to invest in capital improvements or new services in order to drive growth in support of long-term goals.

The combination of the bloc effect in equity financing and the broken debt market creates a major brake on economic growth, especially from a supply-side perspective. To restore momentum, a third party is needed to order to reset the incentives and mechanisms around financing in Iran.

From the outset of its tenure, the Rouhani administration has hoped foreign investors would take on this role. An influx of foreign investment would have triggered growth without requiring the Rouhani administration to pursue difficult political gambles, such as expanding government expenditure for growth investments in the same period in which welfare programs are being culled. Moreover, the administration’s budgetary leeway was significantly reduced given the persistently low price of oil, making any such balancing act even more fraught.

Eighteen months after Implementation Day, it is clear that the administration significantly overestimated both the attractiveness of the market and underestimated the hesitation of major banks to resume ties with Iran. Investing in Iran is neither easily justified nor easily executed.

The country lacks two essential qualities that have characterized most emerging and frontier markets in the last decade. First, most emerging economies are not as diversified as Iran’s, and do not have such a large arrange of incumbent players with whom any foreign multinational or investor will need to compete for marketshare. There tend to be more “greenfield” opportunities in which lower capital commitment can generate higher returns. Second, a nearly universal feature among emerging markets is the consistent application of both expansionary monetary and fiscal policy. Such policy makes it possible for each investor dollar to achieve a higher return.

In its commitment to reduce interest rates and return the debt markets to normalcy, the Rouhani administration is pursuing an appropriate monetary policy—eventually lenders will become active again. But what remains perplexing is the insistence on austere government budgets in the face of low commitment from foreign investors.

It is clear that the Rouhani administration cannot easily spend tax and oil revenues on long-term projects. Oil revenues are stagnant and there is limited political will to raise taxes. At current levels of government revenue, the political risks of such expenditure are high; as the presidential election showed, populism remains a potent rallying cry among Iranian voters. But foreign investors can’t be expected to step into the gap. Direct equity investments remain a hard sell when domestic financing, whether in equity or debt form, remains throttled and liquidity challenges abound.

There is however a feasible solution that has seen much discussion, but little action—Iran’s return to international debt markets. A sovereign bond issue would both provide Iran’s government the opportunity to raise expenditures in a way that does not draw from existing sources of state revenue by providing a wide class of investors exposure to Iran’s expected period of economic growth. Such a security, ultimately backed by the country’s oil revenues, would serve to mitigate perceptions of country risk for creditors.

In May of 2016, Iran’s finance minister Ali Tayebnia disclosed that discussions were taking place with Moody’s and Fitch over restoring Iran’s sovereign credit rating. One year later, the debt sale continues to be a point of discussion. Recently, Valliolah Seif, Governor of the Central Bank of Iran, commented that the country will issue debt “when [Iran] becomes certain that there is demand for [its] debt.”

Seif’s comments allude to the essential problem of Iran’s planned debt sale—marketing. In order to get Iranian bonds onto the market in any substantial way, the country would need the support of major international banks to serve as underwriters. But banks remain hesitant due to sanctions and political risks.

Turkey, a country which presents creditors significant political risk without mitigation of oil revenues, was able to raise USD $2 billion in a Eurobond sale in January of this year. The sale was underwritten by Barclays, Citigroup, Goldman Sachs and Qatar National Bank.

Iran, is fundamentally a more attractive investment opportunity than Turkey. But major banks remain hesitant to provide financial services to Iran. The Rouhani administration needs to make the sovereign debt sale a core focus of its dialogue with European and global counterparts, and insist on political and technical support in order to entice 2-3 major banks to come on board. In the same manner that the Joint-Commission oversees implementation of the Iran nuclear deal, a multidisciplinary working group needs to be formed to manage the implementation of the debt sale. With the right stakeholders engaged, one can a combination of early-mover banks from Europe, Russia, and Japan agreeing to underwrite the bond issue.

Encouragingly, the delays may have played to Iran’s favor. Emerging markets are just now beginning to rebound, and investors have driven sovereign debt sales to record highs. The Rouhani administration must seize this opportunity and move beyond the limitations of its present austerity economics.

Photo Credit: Wikicommons

The Stage is Set, But Will Rouhani Deliver in His Next Act?

Last Friday, Hassan Rouhani emerged victorious in Iran’s contentious election, winning nearly 60% of the vote in a contest which saw 72% turnout. The clear victory confirms the incumbent’s popular mandate, and reflects the electorate’s belief that he remains the only politician able to lead on Iran’s wide range of economic, political, and social challenges.

Crucially, his chief opponents Ebrahim Raisi and Mohammad Bagher Ghalibaf were unable to present a cohesive alternative to Rouhani’s economic program, relying instead on unrealistic promises to expand welfare handouts to Iran’s lower classes.

The promises of greater handouts had an undeniable appeal, however, as voters aired their frustrations with the lack of improvement in their standard of living during Rouhani’s first term. While growth has rebounded since the lifting of international sanctions, stubborn unemployment and wage stagnation have left the average Iranian patiently waiting for the much touted windfall of the nuclear deal. Nonetheless, Iranian voters understand that international engagement is a precondition of any eventual improvement in their economic fortunes. In a boon to electoral fortunes, Rouhani and his administration were widely and credibly seen as the most effective advocate for Iran’s international relations. 

Yet, just two days after Rouhani’s victory, American President Donald Trump issued a scathing address from the specially-convened Riyadh Summit, during his first overseas trip. Trump’s speech, issued in concert with the Saudi leadership, cast Iran as a chronic human rights violator and the leading supporter of international terrorism. He called for the international community to isolate Iran.

The juxtaposition of Iran’s energetic and significant popular vote (driven in great numbers by Iranian women voters), with the cynical pageantry of the Riyadh Summit, held in a country where elections do not occur and in which women have limited freedoms, could not have been more stark. 

While the Trump administration has quickly aligned itself with the particular vision of Iran espoused by Saudi Arabia and its Persian Gulf allies, the rest of the international community has watched the weekend’s events with greater pause. In the election, Iran put its best foot forward; demonstrating quite vividly that it cannot be caricatured as the destructive force portrayed by Trump, but should understood as a multifaceted country whose civil society is yearning for international engagement.

Though Trump’s speech risked adding fuel to the regional rivalry between Iran and Saudi Arabia, President Rouhani struck a measured tone in his first press conference since being re-elected, noting on Monday that the Saudi people remain Iran’s friends.

Overall, the weekend’s events may actually prove a blessing for Iran. By putting Iran’s better qualities into such clear relief, and by making so transparent the subservience of US foreign policy in the Middle East to an agenda defined by Saudi Arabia, a much wider political space is opening for ties between Iran and the wider international community, especially in regards to relations with Europe.

Senior leaders from the European Union, such as High Representative Federica Mogherini, were the first to congratulate President Rouhani on his reelection. His electoral success will no doubt give greater confidence to the slew of major multinational corporations that have been pursuing trade and investment deals in Iran. At the same time, the elections serve as a validation for the European policy that expanded economic relations can help encourage Iran’s move to a more open and accommodating political and social posture. 

Consider also that despite the rhetoric, the Trump administration looks unlikely to interfere with the basic sanctions relief afforded through implementation of the JCPOA nuclear deal. As such, the baseline conditions for Iran’s economic engagement with the international business community have improved significantly.

In order to fully deliver on his promise of economic growth and to more effectively attract investment from industrial players and financial investors, the Rouhani administration must commit to a bold agenda of sustained reform. While his first term was largely focused on addressing fiscal and monetary policy (tightening budgets and reducing money supply in order to tackle inflation, for example), his second term must focus on industrial policy.

Iran needs to quickly decide how it will balance the requirement to support domestic industrialization and job creation with the need to welcome leading multinational companies who wish to bring their products to the Iranian market. A lack of clarity on this issue has meant that many long-standing trading partners in Iran are struggling to get the same support from government ministries and agencies that are afforded to outside companies promising new investment in the country.

This unequal treatment belies a lack of coordination among Iran’s government and business stakeholder groups on issues pertaining to the country’s business environment. European governments and trade promotion bodies could do much more to help transfer best-practices to their Iranian counterparts, helping to support the business development efforts of both foreign and Iranian companies. This kind of technical cooperation, which goes beyond delegations and trade events to address the practical challenges facing the business community across-sector, remains the elusive next step in Europe-Iran ties.

Rouhani’s great success has been to set the stage for an economic resurgence. The question now remains whether he can successfully direct the actors to play their parts.

Photo Credit: Wikicommons

Early Delivery of Iran Air’s First Boeing Jetliner in Doubt

On April 10, 2017, news broke that Iran Air was to receive its first new Boeing jetliner nearly one year earlier than expected, with delivery slated for mid-May. This was to be the first aircraft of eighty for which Boeing and Iran Air signed a $16.6 billion in December 2016. Deliveries for the order, which include fifty 737 MAX 8s and thirty 777s in two variants, were slated to begin in December 2018.

The aircraft in question was originally built for Turkish Airlines with the registration TC-LJK. Deemed superfluous to requirements before delivery, the plane was to be sold by Turkish to Iran Air, where it would fly with the registration EP-IQA. Prior to reassignment, the jetliner, a Boeing 777-300ER, would need to be repainted in Iran Air colors. 

This was to take place in Victorville, California, where International Aerospace Coatings (IAC), a Boeing contractor, operates a program painting liveries for 777 aircraft. Initial reports suggested that TC-LJK would fly to Victorville on April 13 for repainting, following a visit by an Iran Air certification team to ensure the Iranians were happy to acquire the jetliner in its current configuration. 

But new reports suggest that the deal has stalled. 

Flight data shows that TC-LJK, operating as BOE549, remains in Everett, and has not moved since a short test flight on April 7.

This suggests that the repainting has not been completed. It might be that Iran Air requested alterations to the configuration of the aircraft, which would be made at Everett and would have delayed repainting. But the more likely explanation is that Iran Air is no longer able to secure the early acquisition. 

An April 22 post on Paine Field News, a blog site which tracks production of aircraft at Boeing’s Everett factory, cites an unnamed source at the manufacturer to claim that the “Turkish-Iran Air deal for TC-LJK is officially dead” and that Turkish airlines has decided to take delivery of the aircraft as originally intended. 

Yet just two days prior, on April 20, the same website cited the same unnamed source to suggest that deal was still alive and that Iran Air inspection teams had visited Everett to view the aircraft. 

Something must have changed in the calculation of Boeing, Turkish Airlines, and Iran Air on or around April 21. 

It is worth noting that an early delivery of the aircraft to Iran Air became much more difficult on April 19, when Secretary of State Rex Tillerson made an extended address to the press in which he highlighted “Iran’s alarming and ongoing provocations that export terror and violence.” The tone of this address, and the reaction it elicited in the media, certainly meant that there would have been a heightened impact on Boeing’s corporate reputation and that of any facilitating banks had the delivery to Iran Air gone ahead in the subsequent weeks. While Boeing has lobbied that its deal with Iran Air supports American jobs, critics of the deal were buoyed by Tillerson’s apparent acknowledge of concerns over the appropriateness of US-trade with Iran, despite confirmed adherence to commitments under JCPOA. 

It may be that Boeing, Iran Air, and Turkish Airlines decided to take a wait-and-see approach on the Trump Administration's rhetoric on Iran. Certainly, even if Iran Air is unable to receive TC-LJK, there remain other "orphaned" jetliners on the market which Boeing can help direct to its Iranian client. An acquisition during the summer remains possible. Given the importance of the Boeing-Iran Air deal as a landmark contract for Iran's post-sanctions trade, the race will be on to make a successful delivery. 

Photo Credit: Wikicommons

Iran, Pakistan, and Afghanistan Should Take a Regional Approach to Start-Ups

Afghanistan, Iran, and Pakistan host some of most interesting and promising start-ups in Southwest Asia. Entrepreneurship and innovation are neither new nor foreign imports to the region. Cities and towns in Afghanistan, Iran, and Pakistan make up parts of the Silk Road, an ancient network of trade routes that once connected the East and West from China to the Mediterranean Sea. Historically, trade, innovation, and cultural exchanges have flourished along these trade routes.

Today, however, the entrepreneurs of this region operate in isolation from one another. Divergent political ideologies, cultural biases, and economic policies have prevented many entrepreneurs from exchanging ideas and collaborating, rendering them unaware of their neighbors’ achievements in areas of social innovation and entrepreneurship. Knowledge sharing and transfer, if sustained, can highlight the achievements of local and regional social and tech entrepreneurs.

While these three countries engage in active trade individually, building a regional start-up ecosystem would provide a space for entrepreneurs to share their experiences and collaborate further. Because of their shared cultures, histories, languages, and similar economies, Afghan, Iranian, and Pakistani entrepreneurs already share many common characteristics that could foster more collaboration and generate more economic growth and innovation. Therefore, we propose the formation of a regional start-up ecosystem to benefit the entrepreneurs and the economies of the above countries.

Entrepreneurs and ecosystems do not operate in a vacuum. Political, social, and economic realities influence entrepreneurs and shape start-ups. Establishing a regional start-up ecosystem would reduce border tensions, improve overall regional security, promote good governance, and allow the steady flow of goods and services across the region. Meanwhile, entrepreneurs and social innovators should focus on studying and understanding their regional markets, finding opportunities for growth and scaling within their own region.

Pakistan: An Established Player

Of the three countries, Pakistan has the most elaborate and developed start-up ecosystem. Urban areas of Karachi, Lahore, Peshawar, and Islamabad are home to some of the most renowned and internationally acclaimed entrepreneurs and social innovators (e.g payload, Healthwire, Dockit, Meezaj).

Since the security climate in the country has improved, the start-up landscape has grown and attracted venture capitalists from Silicon Valley, Malaysia and the Persian Gulf. The 2012 launch of Plan9, Pakistan’s first incubator, laid the groundwork for the start-up ecosystem. Pakistan is now home to more than 20 start-up incubators and accelerators that provide co-working, office space, mentorship, networking opportunities, and access to investors.

Undoubtedly, Pakistan has the potential to become the next emerging hub in Asia. Both high mobile penetration and the well-developed telecommunication infrastructure have given rise to tech start-ups that have disrupted almost every sector—wedding, health, fashion, payments. Success stories include Convo, a social networking platform, and have captured the attention of international investors.          

Shaun Di Gregorio, CEO of Frontier Digital Ventures, a venture capital fund based in Malaysia that has previously invested in Pakistani start-ups, notes that “People who have an appetite for emerging markets will be attracted to Pakistan. It’s considered one of the next big frontier markets.”

Pakistan holds an edge over its regional counterparts primarily because of two reasons. First, Pakistan’s market does not set a limit on foreign equity, enabling investors to hold a 100 percent stake without the help of any local partners. Second, total repatriation of investment capital is allowed. Therefore, every penny earned in profit can be returned to the original investor with ease.

While serving as an example for its neighbors, Pakistan’s start-up scene continues to flourish, there is still work to do. As Khurram Zafar, executive director of Lahore University of Management Sciences’ Center for Entrepreneurship, notes “more bridges are needed between Pakistan and the outside world which are best built by the diaspora looking to stay connected with the country.” This lack of connectivity can be seen in the region. Many Afghan or Iranian start-ups are unaware of the incubators or accelerators that exist in Pakistan and unsurprisingly, there are no Iranian tech entrepreneurs in Pakistan’s accelerator programs such asInvests2Innovate or Peshawar 2.0. Collaboration among these three countries would boost productivity, increase access to investment, and promote their status to emerging markets.

Iran: A Rising Star

Iran’s entrepreneurship ecosystem remains nascent yet promising. In the past decade, Iranian policymakers have shifted their focus to entrepreneurship and innovation and there is plenty of room for progress. Iran’s overall score on the 2016 GEI Index is 28.8%, ranking 80th among the 130 countries surveyed. Among the 15 MENA countries, Iran’s ranking at 14 indicates a weak entrepreneurship ecosystem. Compared to previous years, Iran’s overall score has improved, but it has yet to fully realize its potential.

In 2008, Iranian start-ups such as Digikala emerged in the ecommerce and online retail market, becoming the largest ecommerce platform in Iran. Emulating Amazon, this start-up is considered a poster child for start-up success in Iran. In recent years, fast Internet speeds, high mobile penetration, and official support for entrepreneurship have led to creation of a flourishing start-up scene. 

There are many sectors that remain bursting with potential for disruption. They include ride sharing, people to people hospitality, online furniture, design services, and payment delivery. Certainly, there is high demand for these types of start-ups because of Iran’s sophisticated and young costumers, and underserved markets, a legacy of international sanctions which has now been largely removed.  

Despite its low entrepreneurship and productivity scores, Iran ranks fifth after India, China, Russia, and the U.S. for having a significant number of talented and well-educated engineers. Consequently, Iranian policymakers should divert their attention fully to exploiting Iran’s impressive human resources toward boosting competitiveness, promoting employment, and raising productivity levels.

Iran’s start-up scene is vibrant led by several savvy Western educated mentors and modeled after successful Silicon Valley companies. Start up Grind and Start-up Weekend events are held throughout the country. However, there too few incubators and those which do exist often struggle to provide adequate financing opportunities to promising businesses. Accelerators exist, but few are run professionally and optimally. Unfortunately, Iranian legal codes do not protect innovation and intellectual property rights. These obstacles have created setbacks for Iranian entrepreneurs, preventing them from robust growth and scaling.

Afghanistan: Underappreciated Potential

Although Afghanistan’s ecosystem and start-up scene is only now starting to grow. Particularly in urban areas of Kabul, Jalalabab, Kandahar, Mazar-i-Sharif, and Herat, new programs are being launched teaching youth how to code, teaching entrepreneurship, and many more related programs to increase capacity, knowledge, and skills.

Among such programs are Shetab Afghanistan, the first comprehensive incubation, co-working, and mentor program in Kabul that is helping entrepreneurs and social innovators. There is also Afghanistan Startup, Startup Valley, Startupistan, and many more that are entering the Afghan start-up scene.. A 2015 survey carried out including 27 start-ups in Afghanistan revealed that 70% of Afghan start-ups fail due to ecosystem and market start-up failures, including access to mentors, infrastructure, and more open regulatory environment, and access to finance. Contrary to conventional wisdom, security is not the top concern facing entrepreneurs. Instead, entrepreneurs face the following challenges: limited access to networks and regional markets, faster internet and related infrastructure, trade friendly regulatory environment, an end to corruption, as well as availability of supportive incubation, acceleration and co-working programs. These gaps can be filled within regional frameworks. 

Why Collaboration Matters

It time to put more weight on the effective implementation of new political and economic initiatives, collaborative networks, policies, and programs to regionally link start-up ecosystems across Iran, Pakistan, and Afghanistan.

The potential benefits of collaboration across regional ecosystems outnumber the disadvantages. It would lead to increased visibility and publicity for start-ups, offering an opportunity to scale into new regional markets. It would increase technical knowledge that is localized, and could potentially open up entrepreneurs from the region to sorely needed financial and mentor resources. Beyond these concrete benefits, local governments should offer incentives to attract large corporations in these countries. After all, large corporations remain vitally important for ecosystem building because they help investment in the supply chain, contract start-ups, or even possibly acquire the most promising start-ups in the long-run.

Because of the dominant Western-centric narrative widely accepted among entrepreneurs and start-up lovers, there is an overarching tendency for entrepreneurs to take examples from the West and emulate them. Therefore, there is a gap in knowledge among young entrepreneurs in these countries about exciting and new developments in their own backyard. While it is reasonable to emulate Western models, it is equally important to adopt and adjust them considering local conditions, specifically cultures, languages, and lifestyles.

For example, initiatives could include regional conferences like a TEDx talk held in Herat focusing on regional start-ups that can incorporate Tadjik entrepreneurs. Another way to foster brainstorming and collaboration among entrepreneurs could be to swap co-working spaces, as is done in Europe, so that an entrepreneur from Lahore can learn about the Iranian social technology market to scale his mobile geo-app for car parking. In addition, Iranian, Pakistani, and Afghan member investors could use shared Linked groups as a viable means to bridge cultural biases, connect board members, and enable mentor sharing between various accelerator and incubation programs in the region.

Among the most promising initiatives would be to establish a regional exchange and scholarship program between regional universities. Again looking at the region’s ‘backyard,’ the ASEAN (Association of South Eastern Asian Nations) countries have created several programs that support cross-border innovation and collaboration. For example, the very successful ASEAN University Network has helped hundreds of exchange students to study across borders since 1995. The organizations has built partnerships with other renowned universities around the world to promote knowledge sharing, collaboration, an access to opportunity through joint project-work.

Through the ASEAN Center for Entrepreneurship, regional and global initiatives support various start-ups. Recently, the Malaysian government, through its MaGIC Program, has offered ASEAN start-ups access to a regional accelerator funding and educational support services in Kuala Lumpur. Even "pariah state" North-Korea is sending its young entrepreneurs to Singapore, a powerful start-up hub, to help them in business, law, and economic policy and to learn about Lean Canvas (with the help of Choson Exchange, an NGO).

These initiatives provide compelling models of what could be done to support the achievements of local and regional entrepreneurs and social entrepreneurs among Pakistani, Iranian, and Afghan start-ups.

Unfortunately, the international media has failed to present a full and balanced view of Iran, Afghanistan, and Pakistan. Negative images of violence and terrorism have become ingrained in many entrepreneurs’ minds and rendered them oblivious to the achievements of their neighbors in the areas of social innovation and entrepreneurship. Today’s revival of the ancient trade routes as a successful model for a regional start-up ecosystem highlights not only their historical legacy, but also their contemporary relevance to regional commerce, trade, and advancement of Southwest Asia.

Photo Credit: Bourse & Bazaar

In Letter to Congress, Rex Tillerson Sends Positive Signal on Iran Deal

Update: Several hours after the publishing of this piece, Secretary of State Rex Tillerson gave a press conference in which he outlined a strongly negative outlook on Iran, underscoring that the administration's review of Iran policy will take into account the full breadth of foreign policy concerns including support for terrorism and human rights violations. The statement can be seen here. 

In a letter to House Speaker Paul Ryan sent yesterday, Rex Tillerson, the U.S. Secretary of State, confirmed "that Iran is compliant through April 18th with its commitments under the Joint Comprehensive Plan of Action." The letter represents the clearest confirmation to date that the Trump administration is in agreement with the international community on the fact of Iran's compliance with the JCPOA, also known as the Iran Deal. 

While some outlets misreported that the letter was equivalent to an extension of sanctions relief, it is more accurately a preliminary step, part of the State Department's quarterly reporting to Congress on Iran's compliance with the Iran Deal. The critical date for the extension of sanctions relief arrives in mid-May, just prior to the Iranian presidential elections. At that point, Tillerson will need to formally "waive" the US secondary sanctions on Iran, exercising an authority delegated to him by the President.

The timing of the letter to Ryan, coming just one month before the renewals are required, is a positive signal that the Trump administration will continue to implement the Iran Deal. 

To be clear, the letter was not a total break from the relatively hawkish position taken by the Trump administration towards Iran. Tillerson's missive was titled "Iran Continues to Sponsor Terrorism" and it informs Speaker Ryan that President Trump has "directed a National Security Council-led interagency review" to examine whether sanctions relief afforded to Iran is "is vital to the national security interests of the United States." The invocation of Iran as a "leading state sponsor of terror" and the reference to the pending review have led some to see the letter as consistent with President Trump's negative view of Iran and campaign rhetoric in which he described JCPOA as one of the "worst deals" ever negotiated.  

However, the letter should be seen as a positive signal for three reasons. First, it is a confirmation that the Trump administration trusts established verification procedures, which include the oversight of the International Atomic Energy Agency (IAEA) and American intelligence gathering. Many opponents of the Iran deal have tried to cast-doubt on the trustworthiness of both the IAEA assessments and intelligence estimates dating to the tenure of the Obama administration, which have so far pointed to Iran's compliance with the Iran Deal. Tillerson's letter would seem to confirm that these mechanisms of evaluation hold weight for the new administration. 

Second, the letter demonstrates an increasing willingness for the Trump administration to craft its Iran policy through normal channels.  The interagency review requested by President Trump is a formalized and commonly-used process to determine appropriate national security policy. Given that the composition of Trump's National Security Council has changed considerably since he took office, most notably with the ouster of General Mike Flynn, who had put Iran "on notice" shortly before his demise, there is an improved likelihood that a review conducted at this stage would make a sober assessment of the Iran Deal's consistency with the US national security interest. 

Finally, Tillerson's letter reflects that the Trump administration may now have a grasp on the essential challenge it is facing in crafting its policy towards Iran. On one hand, there is considerable pressure from certain congressional leaders and foreign allies such as Saudi Arabia and Israel for the administration to take a much harder stance towards the Islamic Republic. Indeed, it is worth noting that Tillerson's letter coincided with his participation in a U.S.-Saudi CEO Summit hosted by the U.S. Chamber of Commerce. On the other hand, the administration has seemingly come to understand that JCPOA is an effective foreign policy tool, one that actually addresses much of the complexity in dealing with Iran. To cease its implementation of the Iran Deal in the face of Iranian compliance would both strain relations with European allies and likely cause further destabilization in the Middle East. 

For President Trump, the task will be to remain tough, but reasonable. It remains possible for the Trump administration to be tough on Iran by taking the lead on targeted sanctions designations, such as those levied for Iran's February ballistic missile test. But at the same time, it is also reasonable for the administration to continue the "suspension of sanctions related to Iran pursuant to the JCPOA," as the letter puts it, especially if such suspensions support other Trump administration priorities, such as job creation through limited US-Iran trade.  

At this juncture, key stakeholders, including the leaders of American multinationals which stand to benefit from access to the Iranian market, need step-up their outreach to Trump. Encouragingly, the viability of the Iran Deal is no longer "fake news." 

Photo Credit: Wikicommons

Extention of Key Incentive Scheme Boosts Iran's Renewable Energy Market

Since the lifting of sanctions, Iran’s renewable market has emerged as an exciting destination for international green energy developers and investors. Growth can largely be attributed to a generous Feed-in-Tariffs (FiTs) scheme and the government’s continued effort to promote policies that, in combination, aim to strike the right balance between promoting Iran’s renewable market, removing barriers to project deployment, and building the technical capacities of the domestic industry.  By looking at some of the recent but important developments in Iran’s renewable energy (RE) market, including the nature of government policies, it becomes clear that the Rouhani administration has set a path for growth enabled by international investment.  

Iran’s generous program of green subsidies has been the key determinant of the attractiveness of its renewable market, and with the government’s recent decision to maintain its current FiTs for another 12 months, the market is set to shift into a higher-gear. The extension of the FiTs scheme, which was delivered through a decree signed by the Minister of Energy in mid-March 2017, demonstrated the continued commitment of the government in sustaining the momentum of its favorable renewable energy investment landscape among many of its regional and international competitors. The consistency in the nature of Iran’s renewable policies in the last three years is by extension, a major confidence-building measure for developers and investors, whose interest in a given market is not cultivated by generous FiTs alone, but also by stable and predictable policy environment.

Interestingly, the recent extension Iran’s FiTs scheme comes at a time when in most of other markets across the globe, governments are either reducing, halting or terminating their FiTs schemes all together. This has been a major cause of concern for green developers and investors with huge vested interest in those markets. With a reduction in government incentives and flattened demand in the European market, green developers and investors are now eagerly looking into opportunities in other attractive markets. Iran comes at the top of the list.

Opportunities and Limits of Feed-in-Tariffs

The extension of Iran’s FiTs scheme presents a window of opportunity that will not be around forever, and so the countdown has already begun for developers to take advantage of the existing rates by signing their Power Purchase Agreements (PPAs) with Iran’s Renewable Energy Organization (SUNA) prior to March 2018. In light of this, it is projected that this year SUNA will expand its pipeline of renewable projects to be developed by international developers in partnership with local partners.

Currently, Iran’s FiTs scheme stipulates a 20-year PPA framework that supports a series of 13 renewable plants. The structure of the scheme is deliberately designed to increase the solar and wind capacities of the country, while also encourage procurement of smaller-scale projects by offering higher margin of profit for systems under 10MW and 30MW capacities. The reason behind this policy is twofold. On the one hand, it allows an experimental approach, where the impact of the initial projects that are pending construction and connection in this fledgling market can be assessed, and on other hand, it enables for the competence and commitment of developers to be evaluated in smaller projects prior to issuing further licenses for larger-scale developments. For the most capable developers, Iran’s FiTs system and structure simply means a strategy of portfolio aggregation—that is, building smaller projects that can be aggregated at a later stage. Therefore, many of renewable projects that will mushroom across different regions of the country in the next 24 months will consist of solar photovoltaic plants with 10MW to 30MW of capacity.

Nevertheless, the success and growth of Iran’s RE market cannot not rest on its generous FiTs scheme alone. For example, rival renewable markets, such as UAE, Jordan and Egypt, are currently developing and deploying projects on a much larger-scale than Iran without even considering the need to offer a generous FiTs scheme. For example, the launch of Dubai’s recent large-scale 200MW solar project in March, which was implemented at a record-low bid of 5.6 cents per kilowatt-hour, was product of a competitive RE tendering scheme, which is an alternative means of engaging developers.

The rapid pace of progress in the region’s RE markets, has made Iranian authorities ever more conscious that in parallel to providing FiTs, they need to institute and maintain multiple complementary mechanisms, such as competitive bidding tenders. Taking this in mind, the recent announcement of Yazd Regional Electricity Company for its plans to hold Iran’s first RE tender on the development of a 150MW utility-scale solar project is precisely aligned with this new emerging strategy of Iran—that is, to maintain its current FiTs scheme for broadly incentivizing development projects on smaller-scale, while phase in competitive bidding tenders as a new complementary measure to support larger-scale projects.

Project Deployment Mechanisms

In parallel to government’s effort to incentivize this market in the last two years, SUNA has also been hard at work in addressing deficiencies in regulations, removing barriers-to-entry, and setting a viable and functioning mechanism for project procurement and development. Designing an effective implementation framework, is in many respects the most challenging part of the puzzle for new emerging renewable markets, such as Iran. It requires a significant deal of coordination between various bureaucracies and organizations, followed by a synchronization of relevant policies and regulatory frameworks that enable project procurement and development. The good news is that the Iranian RE market has made great strides in this regard. The successful launch of the 14MW Hamedan solar park in February 2017, followed with the upcoming launch of Esfahan 10MW solar park, would not have been possible without a functioning project development mechanisms.

The achievements of SUNA in responding to many of technical and non-technical impediments of project implementation framework and regulation deficiencies means that the organization can now expand its activities into other important areas, such as more active investment promotion activities.. This includes establishing and developing new synergies and facilitating dialogue with international RE bodies for learning best practises in areas of policy, technology and financial resources, while also engaging with both local and international financial investors to provide the necessary project finance facilities. The recent delegations from the International Renewable Energy Agency (IRENA) and the Norwegian Export Credit Guarantee Agency to Iran to hold meetings with SUNA reflect the increased communication and engagement of this organization with international stakeholders and bodies.

Building Technical Capacity

Support for renewable energy will not only bring numerous environmental benefits, but will also have significant economic yields for the country. The RE sector can important source of job growth should investment support local capabilities and infrastructure. Iran’s renewable market, despite in its infancy, has already inspired countless entrepreneurs to set up localized businesses in the value chain of renewable power generation and development solutions.

This has not gone unnoticed by the government, which has particularly designed its FiTs scheme in order to foster technical capacity within the industry. The program supports local businesses and entrepreneurs active in this field by allocating a premium of up to 30% on base FiTs rates to those projects that utilize locally-produced content. This premium is attractive enough to encourage international developers to maximize integration of domestically produced technologies, or to explore new local manufacturing of key components.

The next generation of Iranian electrical engineers and technicians has already demonstrated resilience, technical expertise and an entrepreneurial-mindset by not only creating and supporting the value chain of electricity generation of the country, but also exporting their services, equipment, and technologies to the regional markets. To demonstrate, Iran’s power industry, exported over USD 3 billion in electric engineering services and goods to the regional market last year. Aside from supportive policies, the long-term potential to use Iran as a launchpad for regional expansion, sets the country's renewable energy market apart from its regional rivals. Investors are beginning to take note. 

Photo Credit: Financial Tribune

Boeing, Iran, and American Jobs

This article was originally published in LobeLog.

New reports suggest that Iran Air’s first new Boeing jetliner could be delivered within the month.

According to Reuters, Boeing is reallocating a 777 originally designated for Turkish Airlines. This would be the first aircraft of eighty for which Boeing and Iran Air signed a $16.6 billion in December 2016. Deliveries for the order, which include fifty 737 MAX 8s and thirty 777s in two variants, were originally slated to begin in December 2018.

The early deliver will be a boost to President Hassan Rouhani’s reelection push, and follows Boeing’s announcement last week of its second agreement to sell passenger airplanes to an Iranian airline—a deal to sell thirty 737 MAX 8 airplanes to Iran Aseman airlines, valued at $3 billion.

The Iran Air and Iran Aseman deals are among Boeing’s largest open orders and come at a time of softening demand for commercial aircraft among the world’s airlines.

Expectations are also high for the deal within the Iranian business community. Many business leaders in Iran, as well as their European peers, see the Iran Air and Iran Aseman contracts as important bellwethers of the willingness of the United States to continue to implement sanctions relief commitments under the Joint Comprehensive Plan of Action (JCPOA) nuclear deal. Specifically, the deals are a test of whether the US Treasury’s Office of Foreign Asset Control will continue to provide licenses to both American and European companies that seek to engage opportunities in Iran. Athough Iran Air and Boeing were able to proceed from a memorandum of agreement to a full contract on the back of an OFAC license issued for the relevant transactions, the license was granted in the final months of the Obama administration. The Iran Aseman deal, which is currently limited to a memorandum of agreement, will only be able to proceed to a full contract when the Trump administration issues an OFAC license.

Trump has called the Iran Deal the “the worst deal ever negotiated.” The question is whether he will see Boeing’s opportunity as a redeeming feature.

When Iran Means Jobs

Boeing’s engagement with Iran pits the Trump administration's skepticism of the value of the Iran nuclear deal directly against an avowed commitment to support American jobs, particularly in the manufacturing sector.

Numerous American companies are engaged in business with Iran, either via their non-US subsidiaries as permitted under General License H or on the basis of humanitarian exemptions for the export of agricultural commodities or pharmaceutical products. However, it is rare for the products eventually exported to Iran to originate in the United States. Generally, the exported goods of American companies are produced in a non-U.S. manufacturing facility as part of a globalized supply chain. As such, for most American multinational corporations, engaging in opportunities in Iran may deliver shareholder value but won’t unlikely support American job creation on a large scale.

Boeing is an exception to this pattern. For political and practical reasons, the production of airplanes was never offshored and therefore a direct link exists between the orders placed in Iran and American labor at Boeing’s primary production facilities in Bellevue, Washington and to a lesser extent, North Charleston, South Carolina.

Although Boeing is a large, successful American company, it remains politically delicate to pursue business in Iran. Cognizant of this fact, the company has sought to speak Trump’s language when discussing its sales to Iran.

Boeing has highlighted American manufacturing jobs as a fundamental consideration of both the 2016 deal with Iran Air and the recent deal with Iran Aseman. According to Boeing’s official statement on December 11, 2016 announcing the deal to deliver airplanes to Iran Air, the sales will “support tens of thousands of U.S. jobs directly associated with production and delivery of the 777-300ERs and nearly 100,000 U.S. jobs in the U.S. aerospace value stream for the full course of deliveries.” Similarly, the April 4, 2017 announcement of the agreement with Iran Aseman noted “an aerospace sale of this magnitude creates or sustains approximately 18,000 jobs in the United States.”

Boeing’s government relations outreach isn’t limited to public statements. Following Trump’s public lambasting of the company for the cost of a proposed replacement for Air Force One, Boeing CEO Dennis A. Muilenburg has made it a priority to build a direct relationship with the Trump, first meeting with then-president-elect at Trump Tower on January 17. One month later, President Trump visited the Boeing facility in North Charleston, South Carolina which manufactures the 787 Dreamliner. That Trump visited the North Charleston facility rather than the larger Bellevue, Washington facility likely reflected the fact that Trump carried South Carolina in the election, but lost Washington state. Perhaps conveniently, North Charleston is the main manufacturing facility for the 787 Dreamliner, which has not been ordered by Iran Air or Iran Aseman.

After touring the facility, Trump presided over a rally attended by Boeing workers and Muilenberg. “My focus has been all about jobs. And jobs is one of the primary reasons I'm standing here today as your president,” he declared. “I will never, ever disappoint you. Believe me, I will not disappoint you.”

Given the clear parallel between Trump’s speech and Boeing’s positioning of its deals with Iran, it is highly unlikely that Muilenburg and Trump did not discuss Boeing’s Iran business, although there has been no public statement to this effect. It is likewise unlikely that Boeing would have proceeded with the deal with Iran Aseman unless it was reasonably confident in the viability of the deal. Certainly, the executives at Iran Aseman, a privately held airline that has not yet announced a similar deal with Airbus, would have insisted on Boeing’s assurances that the aircraft deliveries were politically viable.

Boeing’s Commitment to Iran

Boeing’s commitment to Iran requires not just political resolve, but also long-term thinking. Not only will these deals take many years to come to fruition—the Iran Air deliveries set to begin in earnest in 2018 and the Iran Aseman deliveries only in 2022—but the full extent of the export opportunity represented by Iran will only materialize over the next two decades.

There are three key considerations that Boeing needs to make. First, the company’s ability to supply aircraft to Iran is of great significance given that it has only one other true global competitor in Airbus. If Boeing is unable to fulfill these agreements it will no doubt lose significant orders to the European giant.  

Second, Iran’s current orders are primarily focused on the modernization of existing fleets and the addition of capacity on existing routes. At the moment, Turkish and Emirates Airlines have significant market share in Iran’s international travel market from Iran because of their ability to operate more flights from destinations in Iran to Europe through their respective hubs in Istanbul and Dubai. European airlines have also made significant inroads in the market in the last two years. For example, although Iran Air only operates flights from Tehran to London three times a week, British Airways now operates a daily service. At the same time, an aging fleet makes Iran Air unappealing to travelers and hurts the airline’s ability to compete with international carriers.

In the next decade, during which time existing fleets would have been modernized, Iran’s economic recovery and its favorable geography should combine to further boost tourist and business travel to Iran from a wider range of international markets. Indeed, the IATA has forecasted that Iran’s passenger volume could rise from 12 million passengers today to 44 million passengers in 2034.

Iran Air currently flies to about 50 destinations worldwide. By comparison, Turkish Airlines, leveraging the geography of its Istanbul hub, now flies to 296 destinations worldwide. It’s unlikely that Iran Air or any Iranian airline has the financial resources and market conditions to become a “mega-carrier”—and indeed these airlines are beginning to struggle. Still, Iranian carriers have significant room for growth, particularly in serving “transit” roles, which means that further orders are possible, especially for long-haul aircraft like the 787 Dreamliner.

Finally, Iran’s most commercially successful airline is privately held Mahan Air. Mahan continues to be listed on the OFAC Specially Designated Nationals (SDN) list for the use of its civilian aircraft in airlifting troops and munitions from Iran to Syria. But it’s fleet size of 50 aircraft is significantly greater than Iran Air’s 29 aircraft, and it flies to more destinations with greater regularity and a higher passenger volume. Should Mahan reform its business practices and clarify its ownership, Boeing and Airbus could be competing for another significant set of orders.

Framework for “Business Diplomacy”

For the above reasons, Boeing’s engagement with Iran isn’t about a couple of one-off transactions. It is about a longterm commitment to a market that will generate substantial orders over the next two decades. From a political standpoint, this makes Boeing’s foray into Iran so important.

Whereas US diplomats have no access to Iran and limited direct dialogue with Iranian counterparts, American executives are opening substantial channels of communication. In this sense, leaders like Muilenburg become the unlikely interlocutors between pragmatic commercial and governmental stakeholders in Iran seeking to engage US-Iran relations on a transactional basis, and the American political establishment, most notably President Trump himself.

Boeing’s deals could help build a framework on which to develop US-Iran ties in the coming years. In some respects, Boeing’s situation echoes the aborted Conocophillips oil exploration and production deal from 1995. Likewise heralded as a rekindling of US-Iran ties, the Conoco deal died at the hands of congressional pressure and sanctions legislation. But the Boeing deal may have better prospects for three reasons: it does not require an investment in Iran, the sale of new and safer airplanes principally benefits the Iranian people, and most crucially, it supports American jobs.

The Boeing deals need their own “implementation.” This process will keep critical commercial and political stakeholders engaged in a discussion about what constructive engagement with Iran can achieve. In its first phase, under the auspices of President Trump, the scope of engagement will likely remain limited to protecting aircraft manufacturing jobs. Let’s just hope he doesn’t let the workers down.

Photo Credit: Iran Aseman

Slowly But Surely, Lake Urmia Comes Back to Life

This article was originally published on the United Nations Iran website.

Life has returned to the dying Salt Lake in North-West Iran. The effort to restore what had been broken is succeeding.

Returning to the barren landscape after almost four years, I was able to see water. Not nearly enough, but much more than last time. The lake is reviving. And this revival is the result of an immensely successful collaborative effort involving many players—some Iranian, some foreign.

Lake Urmia was once Iran’s largest lake. In its prime, it was the second largest saltwater lake in the world. But years of man-made disruption—from the frenzy of 60 years of dam-building to the massive over-use of feeder rivers—had diverted the natural flow of sweet water from the surrounding basin into the salty lake. As a result, it simply dried out. It died at the hands of humans.

I also remember thinking that if the lake dried up two main things would happen. One is that salt from the dried lake bed would blow around and get dumped on farming land and crops in what essentially becomes a salt dustbowl in a fairly large radius around the lake. Secondly, we could expect people to get sick. For example, in the vicinity of the dried-out Aral Sea in Central Asia, we already see people afflicted with allergies and respiratory diseases including cancers.

But there would be a third self-destructive phenomenon at play as well. As farmers drilled ever-deeper to pump out the aquifers at the side of the lake for farming, over-exploitation of this groundwater surrounding the lake would cause saltwater seepage into those very same wells. This would hit people’s access to potable drinking water. So we were threatened by a “perfect salt storm” affecting people’s health and livelihoods.

When our plane landed in Urmia two weeks ago, having taken the normal one hour to fly from Tehran, I wondered what I would see. I had heard tell of an improvement. But such stories often vanish in the face of requests to provide evidence. I wanted to see for myself.

It was when we started to approach the vast open expanse of lake bed that I saw the morning sun glimmering off something which had not been there when last I travelled to the lake.

Water. Not deep. But enough to cover the salt dust granules which had caused such havoc before. As we drove across the bridge which bisects the lake, the glimmering started to stretch out towards the rising sun.

I must confess I was so happy that tears were welling up in my eyes. The environmental problems we create can be fixed, I thought. And here is how it happened.

First, some numbers.

When Lake Urmia was full, say 20 years ago, it was estimated to contain around 30 billion cubic meters (bcm) of water. At the worst point, 3 to 4 years ago, it contained a mere 0.5 bcm of salt water. The number now stands at 2.5 bcm. The deadly decline has been reversed. The amount of water now keeps increasing each month. 

Use slider to see before and after.

Three to four years ago, when the water level was at its worst, only 500 of Lake Urmia’s 5,000 square kilometer surface was covered by any water at all. That figure has now risen to 2,300 square kilometers. Admittedly, much of that water is spread extremely thin, and some tends to evaporate easily. But it is there, offering a protective covering for the estimated 6 billion tons of salt and dust, which now no longer finds its way so easily into the air, into our eyes and lungs, and onto the farmers’ crops.

Because the amount of annual precipitation in terms of rain and snow in the basin has not changed appreciably in the last few years, we must look elsewhere for an explanation of why the lake is now filling up.

There are three main reasons. The first is engineering works to help unblock and un-silt the feeder rivers. Second is the deliberate release of water from the dams in the surrounding hills. Third, and most difficult of all to accomplish, has been a change in the way water management in the basin happens—especially among farmers. Other approaches like banning illegal wells have also had an impact.

The third approach—better water management—took considerable time and effort to achieve. But it appears here to stay. While practicing new roles and partnership of local authorities and communities within LU restoration process, it took painstaking effort to get farmers to reconsider how they grow their crops by modifying their agricultural techniques when growing wheat, barley, rapeseed and fruit and vegetables.

The new techniques are astonishingly simple: changing farm dimensions to make for smaller plots which retain water better; not using flooding as a form of irrigation, but rather trickle-irrigation which is targeted at the crops and thus not wasted; avoiding deep tillage which causes unnecessary water loss; introducing drought-resistant crop strains; ploughing plant residue back into the soil rather than burning it.

Across the board, the crop yield—despite using less water—has also increased by 40 per cent.

Use slider to see before and after.

Here is a final reassuring set of numbers. Considering the normal hydrological conditions, the lake has an average of 5.4 meters and the maximum depth in northern part around is around 15 meters. When the lake was at its worst point, the lake’s average level had dropped to almost zero. When we compare the level of the lake taken now with what prevailed at exactly this time last year, we note a 6 centimeter rise. The monthly increases have been incremental, but sustained.

The project which has brought about the improved water management is being implemented by the UN Development Programme (UNDP). Based in West and East Azerbaijan provinces with a focus on Lake Urmia surrounding cities and villages, it works closely with local farmers, provincial and national governments and others to initiate an adaptation process by implementing the “ecosystem approach."

Following a 7 year project to introduce ecosystem approach for saving Lake Urmia, with the generous financial support from the Japanese government in recent years, as well as an inflow from the Iranian government’s own resources at both the national and provincial levels, these techniques have been successfully implemented in 90 villages. But this number represents only about 10% of the irrigated farming area in the Urmia Basin. Nonetheless, in the areas where the sustainable agriculture is being practiced, there is a water saving of about one-third of the water that would otherwise have been wasted under the old inefficient practices. This saved water can flow back into the lake, thereby replenishing it.

UNDP’s interventions to save Iranian wetlands including Lake Urmia—starting 12 years ago, but intensifying significantly with the addition of three phases of Japanese funds—have focused on working with local farmers, cooperatives and government to support a new model of partnership among stakeholders and initiate an adaptation process by implementing sustainable agriculture techniques. It has also advocated alternative livelihoods for women using micro-credit and biodiversity conservation.

At present the project’s interventions cover sites all around the lake, and most affected, part of the lake basin. To boost coverage from 10%, the plan is to move towards significant upscaling of this important initiative in an emblematic effort which is being recognized at an international level.

As I got on the plane to return home to Tehran in the evening, three takeaway lessons occurred to me.

First, we face powerful environmental challenges in Iran.  But we can fix what we have broken.  And this is happening—right now—in Lake Urmia.

Second, the public must educate itself and speak out on the environment. The UN received a petition in 2016, containing 1.7 million signatures, requesting action on Lake Urmia. The pressure has been relentless. Such pressure must be welcomed and acted upon.

Third, in the final analysis, these environmental problems cannot be solved if we act alone. The Lake Urmia response shows that it takes leadership by public authorities, acting in collaboration with the affected communities, and sometimes with support from the international community (technical support from UNDP and financial support from a partner like Japan) to do the trick.

What has happened in Lake Urmia is an example to inspire us all—both within and beyond Iran.

Photo Credit: United Nations Iran, Nasa

In the Future, Iran's Biscuits Will Be Made by Robots

Some of Iran’s most popular biscuits are manufactured in a facility about an hour south of Tehran. In the tea drinking country of Iran, biscuits are a staple, served to guests in living rooms and boardrooms alike. The biscuit company in question has been in business for over 50 years and occupies several buildings which house production lines for butter biscuits, chocolate cookies, and flavored wafers. 

While the scents are those of a bakery, the factory’s sights and sounds are completely industrial. Conveyor belts whir on several parallel production lines, arranged in the long central hall. The oldest equipment in operation was made in 1961 by English equipment maker Simon-Vicars and can bake 500 kilos of biscuits per hour. The majority of the equipment is made by Germany’s Werner & Pfleiderer, with two lines installed in the 1970s and a third line installed in the 1990s. These ovens can bake up to 900 kilos of biscuits per hour. The most modern equipment in the factory are the two Italian Imaforni ovens, purchased second-hand, which can bake up to 600 kilos of biscuits per hour. However, the Imaforni machines are often dormant.

Across the production lines, only the mixing, baking, and cooling processes are mechanized. Packaging of the biscuits is done by hand by teams stationed at the end of each line.

In a building next door to the main factory, the baking of more complex wafer cookies requires even more human input. Not only is packaging completed by hand, but the assembly of the wafers requires the sheets of pastry to be manually fed into the machine that applies the filling.

Altogether the factory employs just under 200 people and boasts a maximum production capacity of 11,000 tonnes per year. With dormant production lines, the output is really about half that figure. By way of comparison, Mondelez International’s factory at La Haye-Foussiere in France produces 45,000 tonnes of biscuits per year with just 450 employees. With greater automation, the La Haye-Foussiere factory employs just twice the number of workers to produce at least four times the biscuits each year.

The owners of the Iranian biscuit factory had one emphatic answer when asked what they would do a new injection of capital: “We would invest in automation.”

Last week, I wrote about the importance of the blue-collar workforce to Iran’s economic recovery, and how post-sanctions growth needs to serve this stakeholder group. While in the short-term, there is clear evidence that foreign direct investment will support the type of economic growth that drives job creation, in the longer-term, the relationship between investment and job creation is less linear. Workers know this and it explains lingering doubts among the working classes about the trajectory of Iran's economic development.

Automation looms large over industrial sectors around the world, and Iran is no different. The arrival of what is being called the “Fourth Industrial Revolution” was the focus of the 2016 World Economic Forum in Davos. The “Future of Jobs” report published during as part of the annual gathering made waves for its prediction of rapid and dramatic shifts in the composition of workforces worldwide. The report predicted over 1.6 million lost jobs in the manufacturing sector by 2020 across a sample of 20 countries that included developed economies such as the United States, Germany, and Japan, as well as rising economies such as China, India, Brazil and South Africa.

While Iran was not one of the country’s sampled in the report, the findings did cover Turkey, which is a strong proxy for Iran given the similar size and composition of its labor force. Employment in the manufacturing sector will actually increase in Turkey through 2020. Similar increases are forecasted for Mexico and South Africa. The report evidences how the pace of economic growth in emerging markets in the next 5-10 years will mean an expansion, rather than contraction in blue-collar jobs. The trend should hold true for Iran.

However, the report’s authors also note that the implementation of automation technologies will only begin to gain momentum globally between 2018 and 2020, when “Advanced robots with enhanced senses, dexterity, and intelligence” which “can be more practical than human labour in manufacturing” begin to account for a greater number of the roles on the production line. Realistically, the adoption of these expensive technologies in less-developed economies such as Iran will take place later, but as adoption increases the next generation of automation technologies will become less expensive in the same period when Iranian labor begins to grow more expensive as wages rise during the post-sanctions economic recovery. This combination of events will make automation even more appealing. Inbound investment will be used to improve efficiency and productivity in the manufacturing sector and capital intensive automation will be justified based on economies of scale made possible as Iran’s exports rebound.

Already, companies like German robotic arm manufacturer Kuka have helped modernize the assembly lines at Iran Khodro and other Iranian automakers. While such improvements to efficiency have helped Iran’s auto-industry become more competitive by international standards, thereby justifying the new wave of potential investment from the likes of Renault, Daimler, and Volkswagen, the long-term profitability of these sectors could depend on reductions to the workforce.

The experience of European automakers in their domestic markets is instructive. On average, a European Union auto worker produces the equivalent of 7 vehicles per year. In Iran, which has approximately 500,000 autoworkers and an annual vehicle production of about 1 million, the worker-to-vehicle productivity ratio is just 2. In the medium-term, an improvement in Iran’s productivity ratio would necessitate both increases in automation and also reductions to the workforce.

For the Rouhani administration, this presents a stark dilemma. How do you usher in an economic agenda to serve the people, if the new agenda will also usher in technologies that could upend employment opportunities for the working classes?

Over the last few years, many of Rouhani's critics have taken to labeling him a neoliberal, the implication being that his pursuit of economic growth will come at the expense of blue-collar workers. Rouhani's ability to address the concern will depend on his ability to ensure that "knowledge transfer" follows investment. 

When asked how they intend to manage impending shifts in labor markets, 65% respondents in “Future of Jobs” report cited “reskilling current employees” as the fundamental strategy for basic industries, including blue-collar work such as manufacturing and construction. But while rich countries like Switzerland and Sweden that face this dilemma can experiment with ideas such as universal income or mass retraining of the workforce, for Iran, these issues are far more delicate. 

As World Economic Forum founder Klaus Schwab and board member Richard Samans write in the preface of the report:

It is critical that businesses take an active role in supporting their current workforces through re-training, that individuals take a proactive approach to their own lifelong learning and that governments create the enabling environment, rapidly and creatively, to assist these efforts.

For the biscuit company, the opportunities to retrain staff for new roles are numerous. Whereas 200 individuals work in the company, just a dozen are involved in the distribution and sales of the company's products. There are essentially no formalized teams in sales and marketing, business services, retail partnerships, human resources, or corporate and legal affairs despite robust annual revenues. So while the overall proportion of manufacturing labor may decline, the growth of companies like the biscuit maker, should also open the door to opportunities in other job roles.

Looking to the breakdown of the Mondelez workforce in the UK, of the 5000 total employees, two-thirds are directly involved in manufacturing. By this standard the Iranian biscuit company should have nearly 10 times the current number of commercial staff given the size of the manufacturing staff. 

Indeed, the "Future of Jobs Report" forecasts job growth in business and financial operations, management, and sales functions across the sampled countries. For Iran, the challenge will be to make sure blue-collar employees are empowered to make the leap into these new roles. 

Photo Credit: Bourse & Bazaar

The Other "Forgotten Man": A Look at Iran's Blue-Collar Workforce

Iran will soon witness a significant boost in its industrial output. Led by a resurgence in the auto sector, the country’s factories are receiving new investment, as major multinationals seek domestic and regional dominance across market sectors. Volkswagen will be building models in partnership with Mammut Khodro, while Mammut Diesel expands its production of Scania trucks. Renault will manufacture trucks in Iran with local partner Arya Diesel. Volvo has signed an agreement to build trucks in partnership with Saipa Diesel. The finalization of Renault’s long-awaited agreement to establish a new manufacturing joint-venture in Iran is expected soon. Peugeot, Daimler, and DAF are also also exploring local production. As the boom in passenger and commercial vehicle production in Iran picks up steam, a rather simple question remains unanswered—Who will build all of these new vehicles?

Iran boasts one of the largest blue-collar workforces in the Middle East. On the back of a population boom that began following the Islamic Revolution of 1979, Iran’s labor force has surged to reach over 27 million, roughly the same size as the labor force of Turkey, and over twice that of Saudi Arabia. The Iranian economy has struggled to absorb the influx of new workers, and the official unemployment rate remains stubborn at between 12%-14%, although some analysts believe the total is even higher. This simple fact explains two fundamental aspects about the dynamism of Iran's political economy. Firstly, the blue collar working class underpins significant consumer buying power. Secondly, the perseverance of Iran’s political diversity cannot be overlooked, especially not in a region where most such diversity has withered away.

Relief for blue-collar workers was fundamental to the early success of the win-win formula that drove the nuclear negotiations between Iran and the P5+1. The initial sanctions relief provided to Iran as part of the Joint Plan of Action (JPOA) focused on sectors which accounted for Iran’s largest employers, including the automotive sector. This was a direct result of advocacy of deal supporters in Washington, who argued that galvanizing Rouhani’s political base required showing tangible benefits to Iran’s blue-collar workers. As a result of targeted sanctions relief, the production of automobiles and commercial vehicles in Iran rebounded from 743,680 units in 2013 to 1,090,846 units in 2014, with year-on-year growth swinging from a 25.6% decrease to a 46.7% increase. This early success may have been the single-most important factor in validating the Rouhani administration’s gamble on diplomacy.

In the subsequent years, however, the importance of Iran’s blue-collar worker has been largely forgotten by business leaders and policymakers working on the implementation of sanctions relief. These stakeholders remain fixated with the Iran Deal’s role in the “Great Game” of the Middle East, and business leaders are focused on the intricacies of compliance and financing challenges as they approach Iran. In both cases, the international media is happy to play into the blind spots of the respective parties.

What has been lost is an appreciation that the “normalization” of relations between Iran and the international community is as much about elevating “normal Iranians” into a global consciousness, as it is about matters of international commercial, financial, and legal integration. While there has been progress in building awareness of Iran’s young and highly educated elite, whose start-ups and entrepreneurial verve play into the inherent coverage biases of the international media, a larger swath of society remains ignored. By a similar token, the rise of the “Iranian consumer” with untapped purchasing power and Western tastes has been much heralded, but the reporting fails to appreciate that Iran’s upper-middle class rests upon a much larger base whose primary economic function is not consumption, but rather production.

The struggle of the blue-collar laborer is one of the few truly universal experiences left in the world. The international fraternity of laborers is bound by a common set of anxieties which exist as much in Iran, as they do in Europe and the United States. These concerns range from access to healthcare to economic fears—all of which culminates in the stressful and all-consuming uncertainty of providing for one’s family.

The health risks faced by Iranian workers are well-documented in Iran’s extensive body of public health research. Issues include exposure to toxins, severe back and neck pain, and the workplace accidents. Most of the completed studies were based on research originally conducted among worker populations in Europe and the United States. The findings consistently suggest that the incidence of health issues adds considerably to the work-related stress of blue-collar workers, diminishing overall satisfaction with quality of life.

Alongside health concerns, Iranian blue-collar workers, both male and female, bear the fundamental burden of providing for their families. In this regard, there remains considerable skepticism of senior management. A 2013 study which looked at the sentiment of workers from at Iran Khodro and Saipa, Iran’s two largest automakers, found that staff report  “top management commitment” to high standards “is not positively related to staff degrees of freedom of choice” for the workers. This means that while the managers at Iranian auto companies may demonstrate their commitment to their staff with training programs and performance-based remuneration opportunities, Iranian auto workers still feel they are at the mercy of their superiors, ultimately hurting overall employee satisfaction. Given that Iran does not permit organized labor, this feeling of vulnerability is especially acute, particularly when companies are late making payroll or fail to improve safety standards.

In the West, the power of working class voters has reasserted itself with the Brexit referendum outcome and the election of President Trump, who boasted of his commitment to America's "forgotten man"—the blue-collar worker—in his inaugural address. Elections in France and Germany also loom large. Behind these electoral shifts is a heightened awareness of the malaise in the working-class heartlands of these countries. Yet while the frustrations of the working class are now better understood by voters across the political spectrum, the mere existence of the working class in economies such as Iran has not been fully acknowledged in these countries, despite the remarkable similarities in the Iranian blue-collar experience.

The only substantive difference between the Iranian and Western working class is that the two groups are demanding opposing solutions from their governments. Whereas voters in the United States and Europe are pushing for a protectionist turn in economic policy in order to protect jobs and wages, working-class voters in Iran have given their mandate to a plan which hinges on the forces of globalization. Having experienced the abject failure of protectionist policies in the Ahmadinejad administration, when Iran’s industrial output cratered under international sanctions and general mismanagement, Iran’s working-class is betting on the success of a different approach.

As the Iranian presidential election looms, a renewed mandate for the Rouhani administration will depend on the ability to demonstrate that sanctions relief has created high-quality employment opportunities, particularly for younger Iranians who face the highest levels of joblessness. Rouhani has succinctly described his vision in stating that “The future path of the Islamic Republic of Iran is the path of economic growth, non-oil exports, attracting domestic and foreign capital, and creating jobs for the educated.” Taking his statement as a “to-do” list, the Rouhani administration has already unlocked economic growth through economic reforms and revitalized non-oil exports through the lifting of sanctions and stimulus programs. Today, domestic and foreign investor capital is slowly being deployed. Job creation, of the kind that supports social mobility, is the remaining objective.

In accordance with Rouhani's vision and the tenor of Western populist politics, major multinationals looking to engage Iran need to consider their own blue-collar stakeholders, both in Iran and at home. Surprisingly few multinationals have touted the job-creation benefits of expanded trade with Iran. One of the few examples can be seen in Boeing’s statement following the finalization of its contract to supply 80 aircraft to Iran Air. In a clear nod to the rhetoric of the Trump administration, Boeing declared that “new orders will support nearly 100,000 U.S. jobs” within the company’s larger supply chain that “currently supports more than 1.5 million U.S. jobs.”

Troublingly, working-class voters in the West are empowering political parties that are either ambivalent or openly antagonistic towards the Iran Deal. In the United States, public sentiment towards Iran remains dire, with American voters considering Iran their second greatest enemy, only after North Korea. Many of these voters fail to recognize that their own job security could be tied to the trade opportunities represented in post-sanctions Iran. They are also unaware that the potential failure of the Iran Deal would principally hurt fellow blue-collar workers who are similarly at the mercy of forces beyond their control.

The great irony is that if there is indeed a breakdown in Iran’s new, improved relations with the international community because of electoral apathy in the West, it is Iran’s blue-collar workers who will be the first to suffer. Should sanctions "snap back", the layoffs in the manufacturing sector would be swift. In the event of possible global political conflict, Iranian conscription would draw indiscriminately from the ranks of its blue-collar labor force. 

In some sense, the full range of stakeholders, including business leaders, policymakers, and the media, continue to look at the Iran Deal through a lens that dates back to 2016 when JCPOA was formally implemented. The ground has shifted since then and new ways are needed to think about the Iran Deal in the current political and economic climate. By connecting the fortunes of blue-collar workers in Iran with those of their Western counterparts, a more powerful model of normalization might be found.

Photo Credit: Atta Kenare

Swedish Prime Minister Visits Scania in Iran, A Case Study in Commitment

On Sunday, Swedish Prime Minister Stefan Löfven visited the Scania truck factory in Qazvin, 25 miles west of Tehran.

The visit, which was a key stop in the itinerary of the largest Swedish business delegation to ever visit Iran, served as an important milestone for Swedish commercial vehicle company Scania, which has demonstrated remarkable perseverance in the Iranian market over the last two decades. Löfven was able to take a tour of the assembly line and meet with workers at the Qazvin facility, who produce nearly 1000 trucks a year emblazoned with Scania’s famous red griffin badge.  

Scania did not mothball its operations in Iran during the sanctions period, choosing instead to continue manufacturing both trucks and buses while competitors such as Volvo, Renault, and Daimler pulled out of the country. Scania's perseverance required extensive coordination with parent company VAG and European regulators. According to Scania CEO Henrik Henriksson, Scania was able to continue its activities in Iran with the necessary approvals only by “maintaining open books with all relevant authorities.”

While Scania’s global competitors are now moving back into the market (Volvo Trucks, another Swedish firm, was also a member of the delegation), the company enjoys a leading position in both the truck and bus market segments in Iran, controlling 64% and 37% of the respective marketshare.

For Henriksson, these figures are a point of pride. “We stood by our customers,” he declared in an interview with Swedish publication TT. Scania’s CEO has visited Iran seven times in the last year—more than any other country—as the company seeks to expand its local production.

The Swedish company works with two local partners. Mammut Diesel, part of the wider Mammut Industrial Group, has been a partner since 2008 and produced 991 Scania trucks at the Qazvin facility last year. Oghab Afshan, which has been a local partner since 2000, produced 863 Scania buses at its facility outside Esfahan last year. The local parts content of Scania vehicles manufactured in Iran is an impressive 20%, but the company is seeking to increase that proportion to 30% by 2018.

Currently, the annual export value for Sweden represented by Scania’s business in Iran is USD 336 million, but Henriksson believes this figure could double if financial channels to Iran were opened. "It is no secret that it is difficult to do business. Channels must be opened if the market is really to take off," he noted.

In coordination with the Prime Minister’s visit, Scania announced a new contract to supply 1350 buses to Esfahan and four other Iranian cities. The first deliveries are expected by the end of this year. The financing for 1000 of these buses will be made available by Shahr-e Atiyeh, an Iranian investment company.

Scania’s success in Iran can be seen as a case study in commitment. Major multinationals that were able to remain active in the Iranian market during sanctions, in part due to the measured support of their governments back home, now find themselves in market-leading positions as competitors try to catch-up.

But beyond the sheer commercial and operational dominance, the Scania success story is also reflective of a strong cultural and ethical approach typical of Swedish industry. Swedish companies have grown accustomed to high public expectations—Swedish media has called attention to salary levels at Scania's Iranian partner firms— but the application of any true corporate ethics in Iran remains a low priority among many multinational firms in Iran. Scania stands out for having generated significant goodwill with its local partners and Iranian policymakers due to its commitment to knowledge and technology transfer. 

Scania has made significant efforts to bring the green technologies available in the European commercial vehicle market to Iran. Mammut recently signed a trilateral cooperation agreement with Iran’s Road Maintenance and Transportation Organization and the Iranian Fuel Conservation Company to support the replacement of 5,000 aging trucks with Scania models that boast better fuel efficiency and lower emissions.

Speaking in advance of the Prime Minister’s visit, Henriksson stated that the firm is seeking to expand its constructive role. "We can contribute with our skills in leadership and education. We want to take part in the effort to improve the environment and road safety in Iran, and hope to receive the support of the Swedish government for this," he said.

As commercial rewards flow from this value-driven business strategy, Scania can serve as a model to other industrial multinationals and their Iranian local partners.

Photo Credit: Urban Andersson

Emerging Privatization in Iran's Energy Sector Deserves a Second Look

The recent news that Austrian oil firm OMV has signed a preliminary agreement with Dana Energy, Iran’s largest and perhaps most capable private oil exploration and production firm, heralds the future of Iran’s energy sector. The agreement between an international oil company (IOC) and a private Iranian energy company is a significant development, given Iran’s long-held promise to privatize its oil and gas industries. The goal of privatization has been a constant feature of the Iran’s five-year economic plans since the 1990s. As economic sanctions were tightened beginning in 2011, investment dwindled and policymakers focused on promoting self-sufficiency in the oil and gas industries. Without access to new equipment, new technology, or best-in-class expertise, Iran’s production collapsed. This decline threatened government budgets as Iran lost global market share. Very quickly, Iranian authorities realized that achieving self-sufficiency actually required foreign investment-- there were too many technologies and management practices yet to be mastered in Iran’s oil and gas industries.

Iran’s reentry into global energy markets has been one of the most heralded aspects of the sanctions relief afforded as part of the JCPOA nuclear deal. Within the larger scope of economic reform, there was a strong expectation that the Rouhani administration would push for a greater role for the private sector in Iran’s oil and gas industry, finally getting the program of privatization back on track. The commitment is evidenced by the several private companies included in the Ministry of Petroleum’s list of approved local E&P partners for new tenders.

However, the first oil production contract under the new Iran Petroleum Contract (IPC) framework was awarded to Persia Oil & Gas Industry Development, a quasi-state company affiliated with Setad (the entity decreed by Supreme Leader Khomeini that encompasses both publicly and privately held assets, including various industries, companies, and real estate holdings.) The awarding of the contract in October, 2016 raised concerns that Rouhani’s support for private enterprise in the energy sector was being blocked by entrenched interests. A recent report by Reuters examined the range of contracts awarded since Implementation Day. The report concluded that state-owned enterprises were winning the lion-share of the new business, including oil and gas sectors. Of the 110 major contracts examined (collectively valued at USD $80 billion), only 17 contracts, worth USD $14.6 billion, were granted to private sector businesses.

The primacy of state enterprise has raised concerns among policy groups in Europe and Washington that the economic benefits of the Iran nuclear deal are not driving economic liberalization. The concern is particularly acute in the energy sector, given the immense importance of oil and gas revenues to government budgets and the significant involvement of state entities such the IRGC in the extractive industries.

There are, however, several reasons why critics should remain optimistic about the prospects for privatization. The Reuters report overlooks important context for the evaluation of post-sanctions contracts, particularly in the energy sector. First, state enterprise was better positioned than the private sector to win the early post-sanctions contracts. The initial wave of economic interest in post-sanctions Iran was marked by delegations led by economic ministers. Naturally, these government-to-government efforts focused on deals in sectors where government-involvement remains high both in Iran and in Europe. While it is widely known that companies like Iran Air, MAPNA, and Iran Khodro are state owned, it is worth remembering that their potential foreign partners like Airbus, Siemens, and Renault count European governments among their major shareholders. In the short term, while political uncertainty remains high, economic activity will naturally favor state-owned or state-backed enterprises in both Europe and Iran.

Second, concerns about awarding contracts to state entities ignore the matter of the actual contractual obligations of the parties. This is particularly important in the oil and gas industry, where the new IPC contracts enshrine clear provisions that support privatization in the long term. While the former “buyback” contracts treated the IOCs as contractors who handed off exploration and production projects to NIOC for operation, the new IPC contracts call for joint-ventures between IOCs and a local exploration and production (E&P) partner at the contracting stage, with a similar joint-venture managing operations when the project is production-ready. Two such examples are the Shell and NIOC oil exploration agreement and Total’s gas deal with Chinese state oil firm CNPC and NIOC subsidiary Petropars. In both cases, the state ownership interests represented by Iran’s NIOC or China’s CNPC will be diluted in the exploration and operation joint-ventures through the participation of Shell and Total, major private sector shareholders. In effect, the next wave of companies that will own Iran’s production capacity will include foreign, private sector ownership, even if domestic private firms are frozen out. This aspect of the agreements represents a significant shift that is missed when merely identifying the signatories to the contract. The obligation of the signatories to own and operate the assets is paramount.

Another provision in the IPC contracts that supports the agenda of privatization hinges on the question of technical and managerial knowledge transfer. In this sense, privatization can be understood as the propensity to behave in a manner consistent with the norms of private enterprise. While Iranian state-owned enterprises may be winning the majority of oil and gas contracts in the near term, the means by which they are defining their cooperation with foreign energy companies has moved to new ground. The new IPC contracts took long to develop, not simply because of the terms that were being offered to foreign companies in Iran’s energy sector, but also because of the new obligations being placed on Iranian energy firms.

The new joint venture companies established as part of IPC contracts will need to operate to the standards of the major shareholders, namely companies like Shell, Total, and Norway’s DNO. When compared to the companies previously operating Iran’s oil and gas fields, these newly-minted JV firms will need to conduct business more transparently, all the while reacting to market forces and adopting the global best-practices on which foreign partners will insist. Indeed, the IOCs working in Iran are required by the IPC framework to “gradually transfer” managerial positions to Iranian nationals in order to “facilitate the process of know-how and managerial skills transfers to the Iranian party.” While it might be unreasonable to expect oil companies to transfer ideas like corporate social responsibility and environmental protection, more fundamental skills like corporate governance, robust accounting, and compliance and risk management will be critical to the successful operation of the new JVs and will therefore have to be transferred to Iranian managerial teams. The significance of this shift cannot be overstated. It would be meaningless to privatize companies that would continue the bad habits and poor management typical of Iranian state-owned enterprises. Moreover, a well-operated and responsible state-owned oil company is compatible with Western business practice. Italy’s Eni and Norway’s Statoil are good examples.

Overall, the privatization of Iran’s oil and gas industry is proceeding at a greater pace than what a cursory look to the active players would suggest. Given that the redevelopment of Iran’s energy sector is only at the nascent stages of a decades-long process, it is far too early to sound the alarm.  

Photo Credit: OMV

A Swedish Training Program May Hold the Answer to Iran’s Banking Challenges

For nearly a year, “banking challenges” have vexed business leaders and investors seeking to work in Iran. While some corresponding banking relationships have been re-established between Iranian and smaller European banks, the scope and type of transactions remain limited. The largest European banks are unwilling to work with Iran. The reasons for these blockages are numerous, but the blame most often falls to the obstinance of the US Department of the Treasury, and in particular, to the Office of Foreign Assets Control, for not providing adequate guidance or licensing provisions to lend confidence to major European banks that transactions with Iran are acceptable.

However, there are additional reasons unrelated to sanctions enforcement, that have reduced the appetite for conducting business in Iran. Across Europe and the United States, new and more stringent rules for banking risk management practices, which include the introduction of personal liability for compliance officers in the event of failures, have changed the risk appetite of financial institutions. On Monday, the Financial Times reported that three of the world’s largest financial institutions—BlackRock, Vanguard, and State Street—“have expanded their corporate governance teams significantly in response to growing pressure from policymakers and clients.” The “stewardship” team at BlackRock now includes 31 specially-trained individuals. Similar expansions are taking place in compliance and risk management departments. In short, international best-practice now requires more people and more specialized training than ever before. For Iran’s banking sector, these changes raise the prospect of being left behind even in the aftermath of sanctions relief.

But history teaches us that banking sectors can catch up quickly, if provided the right support. Following the dissolution of the USSR in 1991, the former Eastern Bloc countries were struggling not merely to establish connections to Western banks, but also to adopt the fundamental structures of market economies. At the same time, financial institutions in the West were rapidly adopting new technologies, as the financial industry met with the digitalization of the economy. Just as countries like Russia, Ukraine, and Poland were reformulating their basic economic priorities, the pace of change was increasing in the world’s dominant economies.

In response to these challenges, Western governments made significant efforts to institute “capacity-building” programs across a wide range of areas including democratic governance, economic liberalization, formation of commercial law, management of industrial sectors, and reform of education systems. Naturally, banking was a crucial area of focus. The provision of financial assistance by organizations such as the International Monetary Fund and World Bank was tied to participation in “training and technical assistance” programs that sought to ensure institutions in post-Communist states were able to make responsible use of the financial support. These programs were largely successful, with banking standards rising within a decade to levels that encouraged global banks to take ownership positions in regional banks—examples include both HSBC Bank Poland and Ukraine’s Raiffeisen Bank Aval.

If capacity-building programs were able to support the establishment of extensive banking relations in countries where an independent financial sector did not even exist prior to 1990, their application in Iran should be able to generate results even faster. Iran boasts a highly sophisticated banking sector which maintained significant relations with major European banks prior to the imposition of financial sanctions in 2011. Many of Iran’s top bankers were educated in the United States and Europe. Majid Ghassemi, Chairman of Pasargad Bank, and former governor of the Central Bank of Iran, holds a PhD from the University of Southampton. Vali Zarrabieh, Chairman of Saman Bank, holds masters degrees from both CASS Business School in London and from Manchester Business School. The CEO of Middle East Bank, Parviz Aghili, holds a PhD from the University of Wisconsin. Yet, while a strong knowledge base exists in the boardrooms of many of Iran’s largest banks, there is a gap in knowledge and technical ability in middle management, particularly as many of Iran’s best and brightest young bankers seek their fortunes abroad.  

Despite this fact, there has been little effort to rekindle education as a basis for the advancement of Iran’s financial sector in the post-sanctions era. In order to gain the confidence of the world's major banks, Iran's first prerogative will be to meet the standards of the Financial Action Task Force (FATF) in the areas of anti-money laundering and counter terrorist finance. While FATF officials have had an ongoing dialogue with senior Iranian bankers and financial regulators, there is little evidence of a comprehensive effort to provide training that would reflect capacity-building within the sector at large. Similarly, while senior IMF officials have visited Iran and assessed economic reform efforts, no major commitments have been made to provide training or assistance. The Governor of the Central Bank of Iran, Valiollah Seif, suggested the creation of an IMF training center in Iran during a meeting with IMF Managing Director Christine Lagarde in April, 2015. Lagarde, herself, raised the prospect of training in a meeting with Iran’s Minister of Finance Ali Tayebnia in October, 2016.

In the absence of training and technical assistance, European banks will remain skeptical that Iranian banks are applying exacting compliance and governance standards. In order to build trust in the Iranian banking sector, a more wide-ranging effort is needed to educate and train the next generation of bankers in Iran, with a specific focus on the new regulatory and governance requirements that are currently coming into force. Encouragingly, such programs already exist. These protocols have long been offered to bankers in developing sectors worldwide. It is simply a matter of getting Iranian bankers involved.

One possible model is the Risk Management in Banking International Training Program (ITP) designed by KPMG Sweden. For over a decade, the program has worked to transfer Swedish and international standard risk management practices to countries with developing financial sectors. ITP was created as part of KPMG Sweden’s commitment to corporate social responsibility, and also as a means to build deeper connections in growth markets worldwide. The program is delivered with the stewardship and funding of the Swedish International Development Cooperation Agency (SIDA).

The program seeks to improve capacity across five key areas: financial markets, lending processes, regulation and supervision, risk management, and project management. Participants hail from a wide range of countries, including African nations such as Kenya, Uganda, and Rwanda, post-Communist states such as Ukraine, Moldova, and Georgia, and countries further afield including Thailand, Indonesia, and even North Korea. Indicatively, there have been no participants from Iran. Of the participants, 82% were between 21-40 years old, reflecting an important focus on junior and mid-career training that can help establish improved practices for the routine function of the bank, while also empowering the next generation of banking leadership. A total of 216 financial institutions, of which 131 were commercial banks, were included in the program. The remaining institutions included central banks, finance ministries, pension authorities, and insurance companies.

An extensive evaluation of the KPMG program, published by SIDA in 2014, looked at the efficacy of the initiative over the previous decade, and made three key observations: the transfer of skills was broadly achieved, new technical skills were adopted in financial institutions, and finally, elements of the training were largely sustained in subsequent years. The SIDA evaluation also found that the effort, though delivered in partnership with a private company, was broadly consistent with the international development commitments of the Swedish government. While the KPMG example is among the largest and most successful in Europe, similar development programs exist in other European countries and could be extended to Iran.

With the big four advisory firms hovering and with European governments keen to support Iran’s re-entry into international markets, it would be relatively easy to coordinate the key stakeholders to make a training program similar to KPMG Sweden’s ITP available to Iranian participants. Moreover, by funding such initiatives, major European corporations and banks could address thorny reputational concerns. These companies could demonstrate their strong commitment to establishing relations with their Iranian counterparts, while simultaneously indicating that it is of the utmost importance for the Iranian financial sector to upgrade its standards. In an ideal world, even American banks and regulatory bodies could play a role in supporting capacity-building, particularly as US sanctions provide clear provisions for education and training initiatives. However, due to President Trump's brash and ill-advised executive order, the prospects of any such training remain limited.

It is clear that full banking relations between Iranian and European banks will take time to re-institute. Rather than simply wishing for change, capacity-building programs are the vital next step. There is plenty that Iran's banking sector can learn while it awaits the rightful opportunity to fully participate in the global financial marketplace. 

Photo Credit: President.ir

How Entrepreneurship Can Help Address Unemployment in Iran

Unemployment is a major concern for both labor force participants and for policymakers, especially during periods of economic downturn. Unemployment has been shown to have long-term negative effects on an individual's happiness, even after he or she finds employment. Furthermore, the resultant decrease in tax revenue from unemployment affects many aspects of an economy. Not only is infrastructure investment reduced, but social welfare payments are increased, producing strains on any government. Iran has a considerable unemployment rate (12.2% in July, 2016) and an even higher rate of youth unemployment (26.1% in July, 2016). For decades, the Iranian government has tried unsuccessfully to reverse this trend.

In a number of countries (e.g. Germany, India), self-employment is considered to be an important labor market option for the unemployed. In such countries, governments have successfully developed policies to support unemployed individuals in establishing their own businesses. In both these countries, financial subsidies  are coupled with non-financial support, such as mentoring and training. In Germany, two programs (Start-up Subsidy and Bridging Allowance) have helped the unemployed to successfully reintegrate into the labor market. Participants who fulfill certain criteria enter one of these programs and are allotted a monthly salary for a specified period of time, all the while receiving mentorship and business advice. In India, several programs such as Rozgar Yojana (introduced in 2001), have incentivized candidates to start new ventures. Rozgar Yojana is exclusively designed for unemployed educated youth. Since its inception, the program has provided employment for over 3.8 million candidates.

The Iranian economy would need to achieve a sustained annual economic growth rate of 8% in order to successfully integrate all job-seekers into the labor market—a virtual impossibility even with the post-sanctions rebound. Thus, innovative solutions for unemployment, such as entrepreneurship training programs, are paramount. To date, Iranian policy-makers have neglected to explore this kind of "bottom-up" job creation, despite the fact that 16% of the labor force is already self-employed. 

From a cultural standpoint, significant research suggests that Iranians hold positive attitudes toward entrepreneurship. More importantly, young Iranians have both the ambition and the confidence needed to launch new ventures. What these youth lack is strong government-supported programs and incentives for them to pursue potential self-employment.

Factors that increase the expected benefits of entrepreneurship or decrease its opportunity costs can positively influence an individuals’ tendency to become an entrepreneur. The provision of subsidies and the creation of apprenticeships for the unemployed can encourage entrepreneurship. The most significant deterrent to setting up a business is the lack of start-up capital. The government can provide subsidies to alleviate this problem, particularly as private sources for so-called venture capital remain limited.

Implementing a successful entrepreneurship program for the unemployed must include three components. Firstly, it is important to define specific eligibility criteria for potential candidates. Secondly, the performance of participants must be evaluated throughout the mentorship process. Thirdly, the government must include successful start-ups and other ventures in the design and implementation of such programs. Iran's vital business ecosystem is rife with the elements needed to greatly improve its serious unemployment problem. The government must play a more vital role in remedying the issue.

Moreover, higher levels of human capital investment have been shown to engender entrepreneurship. It is important to note that for many who have recently lost their jobs, clear access to new opportunities is important to keep confidence high. A well-designed re-integration and training program that compensates participants would allow these individuals to consider shaping their own futures through an entrepreneurial project. My research suggests that education is one of the strongest drivers of entrepreneurial performance so courses and mentorship can help unemployed persons to create successful ventures. 

Even if most of these candidates eventually return to working for others, the skills and confidence they would garner would be instrumental for their future job security in a dynamic economy. As long as participants of such programs successfully re-integrate into the labor market, the entrepreneurship program will have reached its aim.

Photo Credit: Thomas Christofoletti

Nearly Two-Thirds of Americans Oppose Withdrawing from the Iran Deal

As the one-year anniversary of Implementation Day approaches, a new survey has found that nearly two-thirds of Americans oppose withdrawing from the Iran Deal.

The survey, conducted by the University of Maryland Program for Public Consultation, which has conducted extensive public opinion research on both American and Iranian views on the Iran Deal, presented respondents with the main terms of the JCPOA nuclear deal and asked them to evaluate the best course for US policy.

The survey focused in particular on the idea that the United States should withdraw from the Iran Deal, and then seek to renegotiate its terms, a course of action proposed by President-Elect Trump during his campaign.

Across the board, respondents expressed doubt that Iran would agree to renegotiate the deal. A total of 69% of respondents, reflecting 75% of surveyed Democrats and 64% of Republicans, felt Iran’s cooperation was unlikely, even if the rest of the P5+1 came onboard.

Interestingly, while Democrats and Independents felt that the low likelihood of success made renegotiation untenable, with 86% of Democrats and 58% of Independents giving a “final recommendation” to continue with the Iran Deal, just 40% of Republicans came to the same conclusion.

Overall, of the sample of nearly 3,000 respondents contacted in late December of 2016, a significant 64% felt that the US should maintain its commitments to the Iran Deal under the existing terms.   

Steven Kull, director of the center that conducted the study, considered the results to be clear. “Though President-elect Trump campaigned on ripping up the deal and seeking to negotiate a better one, the majority of Americans would rather continue with the deal as long as Iran continues to comply with its terms,” he stated.

Importantly, renegotiating the Iran Deal did not feature in Trump’s promised actions for his first 100-days in office. This may reflect an understanding in the incoming administration renegotiation of the deal is not a priority for the American electorate, and when presented with the facts, most Americans feel that renegotiation is unlikely to lead to a better deal.

For deal supporters, the findings are encouraging and suggest that further public outreach about the deal and its benefits can help protect its political viability as Trump enters the White House.

Photo Credit: Wikicommons

Iran Air's First New Airbus Plane Has Been Spotted in Germany

A plane spotter in Germany named Tobias Gudat has taken the first photo showing what is likely to be the first Airbus aircraft delivered to Iran Air. The grainy photograph captures an Airbus A321 with the registration number EP-IFA sporting Iran Air's updated livery. The plane is currently located at Hamburg's Finkenwerder Airport, which is a private airport used by Airbus for test and delivery flights. 

Gudat posted his image to Flickr on December 15th, the same day that Reuters reported that Airbus had made further progress in its negotiations in Iran. Not only is Airbus expected to finalize its deal with Iran Air "within two weeks." But Iran's Aseman Airlines has separately reached an agreement to lease seven Airbus aircraft from a third party. 

The existence of the plane was first reported by German specialist publication Aero Telegraph on November 18. The plane took its maiden shakedown flight two days earlier, at which point it was unmarked. By December 14, the Iran Air livery was added. 

The photographed A321 is currently the only new Airbus plane assigned to Iran Air. The plane was however originally registered to Colombian airline Avianca and was reassigned to Iran Air prior to its maiden flight. The Aero Telegraph report mentions the possibility that further aircraft currently registered with Avianca and located at Airbus' facility in Spain, could also be assigned to Iran Air. But at the moment no further A321 aircraft, or A330, A350, or A380 aircraft (models originally announced as part of Iran Air's acquisition plan) have been assigned to Iran Air. 

There is significant pressure for Airbus and Iran Air to make the first deliveries as soon as possible. The Airbus deal is seen as a potential watershed for trade and investment in Iran, and will offer the Rouhani administration a powerful symbol that sanctions relief is working. For multinationals and investors the hope is that the successful conclusion of the Airbus deal will raise the comfort level of international banks to transact with Iran. Airbus may also be seeking to ensure the initial delivery is made prior to Donald Trump taking office in the United States. 

Airbus and Iran Air have targeted deliveries in the first quarter of 2017, notably in time for the Iranian presidential election. However, the preparedness of the A321 aircraft currently in Germany raises the prospect that Airbus will make a single early delivery to mark its commitment to its Iranian counterparts. The company will also want to be the first to make a delivery given the simultaneous negotiations between Iran Air and industry rival Boeing. 

The initial contract with Iran Air is likely to cover between 50-60 aircraft out of a total of 118 provisionally stipulated in the agreement signed during President Rouhani's trip to France in January. A successful delivery will make this contract more tangible for all parties, and in particular the Iranian public, who have long demanded newer, safer aircraft. 

Photo Credit: Tobias Gudat

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

How Rex Tillerson's Oil Industry Politics Could Boost the Iran Deal

It has been widely reported that Rex Tillerson is to be named the next Secretary of State, ending speculation about perhaps the consequential cabinet post for the prospects of Iran policy in the Trump administration.

Tillerson’s appointment has shocked many. As the Chairman and CEO of ExxonMobil, he has no formal diplomatic or political experience. Tillerson is also a friend of Vladimir Putin, having built his name as a regional executive for ExxonMobil in the Caspian region in the late 1990s.

Some commentators have suggested that Tillerson’s appointment as Secretary of State will bring the back-room politics of the global oil industry into the heart of American foreign policy. Given the problematic role that oil companies have played in international relations, this may give cause for concern. However, for the prospects of Iran Deal implementation in the Trump administration, Tillerson’s appointment could represent the entry of a pragmatic figure who can look beyond the ideological fixations of people like John Bolton, his reported deputy. Tillerson’s public comments offer clues to his outlook.

Tillerson Does Not Believe in Sanctions

In a May 2014 ExxonMobil shareholder meeting, Tillerson stated, “We do not support sanctions, generally, because we don’t find them to be effective unless they are very well implemented comprehensively and that’s a very hard thing to do.” For a global company like ExxonMobil, which works in politically tumultuous markets, sanctions are an inherent risk to business. For example, Exxon has a pending project with Rosneft worth a reported USD 300 billion that is unable to proceed due to US sanctions. 

Given that there has been a renewed call in Washington for new, non-nuclear sanctions to be levied on Iran, Tillerson’s general disbelief in the efficacy of sanctions is important. This is particularly the case as Europe, China, and Russia have each signaled that they will not cooperate with any US attempt to renegotiate the Iran Deal—making comprehensive implementation of any new sanctions impossible.

Tillerson Wanted To Get Exxon Into Iran

In an interview with CNBC from March of this year, Tillerson made it clear that he saw Iran as an attractive market for ExxonMobil, despite US sanctions. He stated:

U.S. companies like ours are still unable to conduct business in Iran. A lot of our European competitors are in, working actively. I don't know that-- that we're necessarily at a disadvantage. The history of Iranian-- in foreign investment in the past, their terms were always quite challenging, quite difficult. We--never had large investments in Iran for that reason. And I don't know that the Iranians are gonna be any different today. We'll have to wait and see and there hasn't been any contracts put out. But I also learned a long time ago that sometimes being the first in is not necessarily best. We'll wait and see if things open up for U.S. companies. We would certainly take a look because it's a huge resource-owning country.

Since he made these comments, Iran has unveiled its new IPC oil contracts and oil majors Total, Shell and DNO have all signed heads of agreement outlining the terms of new investments in oil and gas production in Iran. Tillerson will see his former peers at the oil majors making huge strides in the market and will likely see this as a perfectly natural development for an economy coming out of an onerous sanctions regime.

Tillerson Sees Multinationals as Private Empires

As described in Steve Coll’s increasingly relevant history of the firm, Private Empire, ExxonMobil developed into the world’s largest company by pursuing interests very different from those of the US foreign policy. Tillerson’s predecessor, Lee “Iron Ass” Raymond once declared, “I am not a U.S. company and I don’t make decisions based on what’s good for the U.S.” For all intents and purposes, Tillerman, who rose through the ranks at Exxon, absorbed this outlook.

Raymond’s statement is particularly noteworthy given the intense focus of the current U.S. sanctions regime on defining U.S. and non-U.S. entities or persons and delineating the scope of Iran business that is accordingly permissible. The dilemma facing many of the world’s largest multinationals and financial institutions is that while they do not necessarily see themselves as “U.S. companies,” they are nonetheless treated as such by U.S. regulators. As a result, business interests in Iran become much more difficult to operate.

Tillerson may be sympathetic to rising calls from major European multinationals across industries for the U.S. to be more proactive in the implementation of the Iran Deal, and in particular, to reduce the extraterritorial nature of its regulatory oversight by changing the extent to which global companies can be reduced to US legal entities.

What About Miles’ Law?

There is an old adage of political science called Miles’ Law that describes how perspectives on policy change depending on one's position within the state bureaucracy: “Where you stand depends on where you sit.”

It may be that in assuming the role of Secretary of State, Tillerson will adopt a more inherently political and therefore oppositional attitude towards Iran. Certainly figures like John Bolton will seek to push Iran policy in a much more hawkish direction.

But Tillerson will ostensibly have the greatest authority in the ongoing treatment of the Iran Deal, inheriting the hands-on role defined by Secretary Kerry. As an oil industry CEO named "Rex," he likely has the advantage over Bolton in getting subordinates to bend to his will. Trump is also more likely to see Tillerson as a peer. 

The present implementation of the deal benefits from the expertise and management of career civil servants like Ambassador Stephen Mull and Chris Backemeyer, who could be encouraged to stay on the Iran file if Tillerson adopts a pragmatic approach. Tillerson could run his State Department as a private empire, allowing the overall tenor of the incoming administration’s foreign policy to be defined by Trump and his more vocal acolytes, but ensuring that the execution of State’s diplomatic aims retains a more businesslike, if not outrightly commercial, logic. This would not be too dissimilar from the operation of the Iranian MFA within the overall context of the political posturing of the Islamic Republic. 

Those who support the deal can find some comfort in the idea that a career of training in the realist politics of the oil industry may make Tillerson a more pragmatic voice in Trump’s cabinet, one which may see the Iran Deal as an appropriate measure that addresses key security concerns, but also provides the world’s private empires desired access to a promising market. 

Photo Credit: Fortune

Smarter Iran Policy Could Give Trump Leverage to Protect American Jobs

Last week, President-Elect Donald Trump and Vice-President Elect Mike Pence traveled to Indianapolis, Indiana to save American jobs. In a speech at a manufacturing facility of Carrier Corporation, a subsidiary of United Technologies Corporation (UTC), Trump announced that the company would preserve approximately 1000 jobs it had planned to outsource to Mexico and would make a new investment to preserve the competitiveness of its Indiana manufacturing facility. In exchange for its compliance, UTC would receive significant tax incentives.

The Wall Street Journal editorial board called the Carrier intervention a “shakedown,” and it was shocking to many that President-Elect Trump would go so far as to interfere in the decision-making of a private enterprise in order to preserve a small number of jobs.

By a similar token, members of the business and policy communities were dismayed to learn that the Trump administration may seek to interfere in the Iran Deal more deliberately and quickly than previously thought. While Trump was making his announcement at Carrier in Indianapolis, the U.S. Senate voted unanimously to renew the Iran Sanctions Act. The following day, it emerged in a report in the Financial Times that the Tump transition team is exploring new non-nuclear sanctions.

But what if Trump is missing out on the chance to win big on both job creation and Iran policy by connecting the two efforts? The potential nexus of Iran policy and jobs policy is clear. Either Iran can be a direct destination for American-made goods, unleashing a new and highly valuable export market, or, Trump can use his powers to permit non-U.S. companies to more freely trade with Iran, offering a growth opportunity that may enable executives to forego cost-saving layoffs in the US. 

Indiana, where Trump and Pence stood up for American jobs, illustrates the salience of Iran to American business interests quite well. Nearly every major multinational corporation with operations in Indiana, counting among them many of the state’s largest employers, have had or currently maintain business dealings with Iran.

When Trump met with Gregory J. Hays, CEO of UTC, at Trump Tower to negotiate the preservation of the jobs at Carrier in Indianapolis, he probably did not realize that instead of offering a tax incentive, he could easily use his future executive powers to enable Carrier and UTC to resume doing business in Iran, a market that was once highly lucrative. 

In 1972, Carrier invested USD $2.4 million (equivalent to nearly USD $15 million today) in order to acquire 50% of Carrier Thermo Frig (CTF), an Iranian manufacturing joint-venture. CTF operated until the Islamic Revolution, growing steadily and paying its shareholders a dividend of just over USD $1 million in 1978 (equivalent to nearly USD $4 million today). While the numbers may seem small, it is worth considering the unrealized growth potential. In neighboring Turkey, Carrier Corporation currently owns 50% of Alarko Carrier, a manufacturing venture similar to that of the former CTF. In 2016, Alarko Carrier generated USD $131 million in revenue.

Today one can still find Carrier air condition units in Iran. Some are old models from the CTF days, others are newer models imported via the grey market. These are serviced by Sarma Afarin Industrial Co. a publicly traded company, which emerged from CTF when Carrier pulled out from Iran in 1979. Sarma Afarin still manufactures climate control units based on Carrier designs.

A couple of days after announcing the Carrier outcome, Trump turned his attention to Rexnord, a diversified industrial company. 

Rexnord of Indiana is moving to Mexico and rather viciously firing all of its 300 workers. This is happening all over our country. No more!

— Donald J. Trump (@realDonaldTrump) December 3, 2016

Just like Carrier, Rexnord had direct business dealings in Iran prior to the Islamic Revolution, and then continued supplying Iran through non-U.S. subsidiaries. The company only began to completely wind down its trade with Iran through in 2009, according to regulatory filings. Iranian companies continue to source and service Rexnord systems through the secondary market.

The incoming administration should realize that the Carrier and Rexnord cases are not exceptions when it comes to Indiana or America's Iran business ties. For example, Indiana is a leader in the American pharmaceutical industry. One of the state’s largest employers is Eli Lilly, which has its global headquarters in Indianapolis. According to regulatory disclosures, the company currently supplies “medicines for patient use in Iran.” The company exports to Iran and conducts related activities “in accordance with our corporate policies and licenses issued by the U.S. Department of the Treasury's Office of Foreign Assets Control.” The encouragement of the Trump administration would certainly help Eli Lilly penetrate the Iranian market, which is becoming a goldmine for European pharmaceutical companies. American firms are being left out. 

Indianapolis is also home to the sprawling North America headquarters of Switzerland's Roche Diagnostics, which researches, develops, and manufactures laboratory equipment for the analysis of medical samples. Under licenses and exemptions for medical equipment, Roche exports diagnostic equipment to Iran through its local agent, Akbarieh. While Roche products manufactured in Indiana are not imported directly to Iran, the research and development performed in Indianapolis informs the rollout of products in the country. Other sections of Roche’s business are operated locally by Roche Pars, a wholly-owned Iranian subsidiary established in August, 2013. Roche Pars is currently the fastest growing pharmaceutical company in Iran, registering 50% annual sales growth as it approaches 5% market share.

Indiana boasts a proud history of transportation manufacturing. The state is home to the world’s sole manufacturing plant for Toyota’s midsize Highlander SUV. While the Highlander is not currently sold in Iran, Toyota’s RAV4 and Corolla models are strong sellers with nearly 4,000 models sold since March of this year. The Highlander would likely do very well, as two of its direct competitors are among the most popular imported models in the country. The Hyundai Santa Fe is Iran’s top selling imported car, followed closely by the Kia Sorento. However, if the Trump-Pence team did decide to unleash Indiana’s mighty Highlander on the Iranian market, they would have to extend an olive branch first, as Iranian legislators have blocked the import of US-manufactured automobiles in retaliation for the US renewal of the Iran Sanctions Act.

According to a 2012 filing to the Securities and Exchange Commission, Cummins, a world-leader in diesel engines and generators, continued exports to Iran via its European subsidiary until 2010, when sales totaled approximately USD $1.3 million. Just two years earlier, sales were USD $5.7 million. As sanctions have tightened, third party importers have stepped in to divert generators produced in Cummins’ factories in places like Chongqing, China and Pune, India to Iran. Neither Cummins, nor the workers at its Seymour, Indiana factory, now benefit from what was once a promising market. 

Rolls Royce’s Indianapolis facility produces “more Rolls-Royce products... than anywhere else in the world” according to its website. While this facility primarily produces small to medium civil aircraft engines and marine and helicopter engines that are not currently exported to Iran, the company has expressed that it welcomes Iran Air’s pending acquisition of Airbus aircraft that will be powered by the larger Rolls-Royce Trent-series engines. In addition, the company is reportedly in talks with Iranian energy authorities to determine whether Rolls-Royce diesel and gas generation systems can be acquired as part of upgrades to Iran’s power infrastructure.

There are almost certainly other companies in Indiana that would benefit from an enabling of trade ties with Iran. In 2014, NIAC, an advocacy group, published a report that examined the total value of US export revenue to Iran forgone between 1995 and 2012 due to the imposition of sanctions. The researchers found the total value of lost exports to be as high as USD $175 billion. In addition, the lost exports translate to an average of 66,000 jobs lost each year. 

Even in the American heartland of Indiana, the economy depends on the success of major multinational corporations, some headquartered locally, others operating foreign outposts. For nearly all of these companies, Iran is a market of significant interest.  If the Trump administration wants to be known for its business acumen, it should think more creatively as to how best to incentivize global corporations to preserve American jobs. Rather than using public pressure and tax incentives to compel global companies, Trump should offer opportunities that encourage growth and ambition.

Given the renewal of the Iran Sanctions Act, it remains the prerogative of the executive branch to green-light Iran trade through the provision of OFAC licenses. Donald Trump has clearly realized that his new role as President-Elect gives him immense influence over some of the world’s largest corporations. He should use that leverage to give big business what it wants—new markets in which to compete. For the workers at Carrier, Rexnord, Eli Lilly, Roche, Toyota, Cummins, and Rolls Royce, anything that reduces the pressure on their executives to slash costs could make all the difference. Currently, European products dominate Iran's marketplace. Products made in Indiana—and indeed in all fifty states—could find a hugely receptive market in Iran. The Trump administration would be wise to take heed. 

Photo Credit: Wikicommons

For Iran's Supermarkets, Bigger May Not Be Better

Supermarkets have long been associated with modernity in Iran. The Shah, who was contemptuous of the “worm-ridden shops” of the traditional Iranian bazaar, writes in his memoirs “I could not stop building supermarkets. I wanted a modern country.” The early leaders of the Islamic Republic also wanted a modern country, and continued to build supermarkets. Most of Iran’s chain retailers are state-owned or state-affiliated enterprises. Etka Chain Stores Company, established in 1955, is controlled by the economic holding company of Iran’s armed forces. The Tehran municipality launched the Shahrvand chain in 1993. Bank Melli, Bank Tejarat, and Bank Saderat jointly launched the Refah chain the following year. Whereas the Shah was apparently building supermarkets for vainglorious reasons, the economic planners of the Islamic Republic found chain stores appealing for the ability to more directly manage supply chains and pricing. 

The introduction of greater efficiency continues to motivate the modernization of Iran’s retail sector, and thereby modernize the economy at large. As part of the push for privatization that began in earnest fifteen years ago, however, the emphasis for retail sector development was moved away from state ownership. Under the Sixth Five-Year Development Plan, Iran aims to increase the share of chain stores in the retail market by 10%, but the onus of that growth is clearly on the private sector. There is plenty of potential.

Market research firm Vistar Business Monitor estimates the total value of Iran’s retail sector at USD $70 billion, of which only 8.5% can be attributed to chain stores, including hypermarkets. Traditional retailers such as neighborhood shops and bazaar vendors account for the remaining 91.5%. In Tehran, the total value of the retail market is estimated at USD 12 billion, of which 15% is attributable to chain stores.

The largest retail chain by number of stores is Etka, with nearly 500 outlets. By way of comparison, Europe’s leading food retailer, Carrefour, boasts over 6000 hypermarkets, supermarkets, and convenience stores in France alone. Given that Iran has a larger population than France, it would be easy to explain the lack of chain stores as related to the country’s lower consumer purchasing power. The average grocery-spend per household in Iran is around IRR 80 million, or roughly USD 2500. Accounting for 3-4 individuals per household, this equates to a per capita spend of roughly USD 650-800. This is on par with spending in Russia and Eastern Europe and far below the USD 3400 spent per capita in France. 

Not surprisingly, purchasing power in Tehran is about three times higher than the national average. Tehran boasts a per capita grocery spend of around USD 2400, which brings this segment of the market closer to the average expenditure seen in countries like Belgium, Netherlands, and Germany. International retail brands have taken note of this spending power. The push for new retail formats coincides with Iran’s post-sanctions growth and development and the entry of international players into the Iranian market. Most notably, French retail giant Carrefour entered the Iranian market in a joint venture with Dubai-based conglomerate Majid Al Futtaim. The two companies launched “Hyperstar,” a clone of Carrefour’s highly successful hypermarket format. The first Hyperstar opened in 2009 in Tehran, and the brand has since expanded its footprint in Tehran and has added branches in Esfahan and Shiraz.

But other hypermarket brands such as France’s Auchan and Germany’s Rewe Group have yet to seriously look at Iran. Part of this reticence may be due to the fact that Iran is a difficult market to navigate from a supply chain and operations perspective, but it also reflects the fact that many of the leading grocery retailers are facing new challenges at home. While hypermarket expansion was the key driver of sector growth for the last twenty years, these massive stores, typically over 5,000 square meters in size, have begun to falter in their profitability. Across Europe, hypermarkets grew by 4.3% annually from 2004-2012. This figure is projected to fall to 2% from 2013-2018, falling below expected growth among neighborhood shops (2.6%), discounters (4.6%), and convenience stores (5.3%). Some of the drivers of the slowdown—market saturation, lack of investment, and real estate development costs—will not pose a barrier to hypermarket expansion in Iran anytime soon. However, three drivers reflect important considerations for the next wave of retail development in Iran.  

First, consumers around the world are tiring of “one-stop shopping” in which a single weekly trip is made to purchase groceries and necessities in large quantities. Part of the reason for this is reduced need. Household sizes across the European Union have been dropping consistently over the last few decades and have now settled at 2.3 individuals. The most common household is a single person household, accounting for one-third of all households in the EU. While Iran’s current average household size is closer to the levels seen in Europe 50 years ago, the size is inflated by the fact that long-term economic instability has led to children continuing to live with their parents well into adulthood at higher levels than might be expected given Iran’s average levels of educational attainment and general economic development. Over the next decade, should Iran’s economic recovery gain momentum, the average household size will likely decrease, particularly as the number of single-person households rises again. Market research has shown that singles see one-stop shopping as less appealing because it requires more time and pre-planning.

Second, the global shift away from one-stop shopping is tied to growing consumer demands for convenience. In developed economies, people are increasingly busy, and two working parents often lead households, a circumstance that will become more common in Iran. This trend has led consumers to rely more on local convenience stores and to purchase groceries online. At the same time, low levels of chain store market penetration means that most Iranians continue to rely on local neighborhood stores for their daily needs. In cities where mobility is limited by traffic and poor transport links, these small shops remain far more convenient than the one-stop shopping outlets. Add to this the rapid uptake of e-commerce among Iranian consumers and the trends suggest hypermarkets may be at their most appealing right now.

Finally, consumers worldwide are insisting on a greater effort by their retailers to engage at a local or community level. The success of retailers such as Costco, Whole Foods Market, and Trader Joe’s—each of which has cultivated a reputation as a friendlier and more ethical retailer—has had a significant impact. The importance of community engagement is particularly acute in Iran, in which retailers are competing with the traditional bazaar, a unique retail space in which market transactions are deeply tied to social exchanges. Iranian consumers remain connected to the idea that purchasing a good is best done via a trusted vendor with whom a personal rapport exists.

To address these issues, Hyperstar has taken numerous steps. It has opened its locations as anchor properties within larger shopping mall developments so that a trip to the grocery store can be part of a larger retail experience. It has also begun to roll out home deliveries to better serve people’s daily needs. Furthermore, it has used in-store activations like food tastings and special events to engage at a community level. Company documents also outline a plan for Hyperstar to eventually roll out smaller “market” stores to serve neighborhoods. 

Nonetheless, the combination of these trends means that while Iran’s retail market is far from saturated, Iranian and international retail companies developing entry or expansion plans for the market need to keep up with the times. Rather than replicate the business models from twenty years ago, retailers in Iran and their international partners should adapt the current best-in-class thinking about how to serve consumers. A “channel convergence” is needed in which retail brands span hypermarkets, convenience stores, discounters, and e-commerce platforms to create a multifaceted consumer offering. This is where Iran’s domestic chain stores could hold immense untapped potential. With new branding and better merchandising, these stores may be ideally positioned to benefit from the coming changes in Iranian consumer preferences.

While conventional wisdom might suggest creating a “modern” Iran will require building the biggest and brightest supermarkets possible, to be truly cutting edge, smaller stores may be the key to success. 

Photo Credit: Thomas Christofoletti