Iranian-Made Exoskeleton Highlights Potential for Hardware Start-Ups

A new crop of entrepreneurs are making Iran a hub for hardware development, drawing on the country’s deep pool of mechanical and electrical engineering talent.

Iran’s burgeoning startup ecosystem has enjoyed extensive international attention over the last few years, but the focus has remained almost exclusively on app developers and software creators. Behind the scenes, a crop of inventors and engineers have been launching new companies that seek to bring “made in Iran” into the 21st century.

One such company is Pedasys, which was founded in 2013 by a group of researchers from Tehran University, Sharif University of Technology, and Tarbiat Modares University. In 2015, the group was accepted into SATI, Sharif University’s prestigious technology incubator.

The company has designed and manufactured a lower-body exoskeleton called Exoped, which is currently being trialled in clinical settings around Iran. The robotics in Exoped allow paraplegic or elderly individuals who are lower-limb disabled to walk, helping these individuals break free of the limitations of wheelchairs.

There are just a handful of companies worldwide that have developed such technology, but Iran may prove an ideal environment. In addition to engineering expertise, Iran boasts an advanced healthcare system. From the standpoint of social impact, Exoped can make a meaningful difference in the lives of Iranians living with spinal cord injuries, including the elderly, those injured in natural disasters such as earthquakes, war veterans, and those suffering from musculoskeletal degenerative diseases. One 2015 study on the prevalence of spinal cord injuries in Iran estimates the figure at 320 per million individuals. But the researchers note that this is likely an significant underestimation.

A sense of social responsibility is a key motivation for Mostafa Naghipour and his fellow Pedasys co-founders. After nearly a decade of collaboration in robotics research, the team decided to establish a company to bring a new exoskeleton solution to the market. They secured seed capital from Shenasa, the venture capital arm of the Pasargad Financial Group. Shenasa has focused on hardware companies as it builds out its portfolio, which includes a company developing a 3D-printer for industrial applications and a start-up developing new technologies for cochlear implants.

To date, foreign investment in Iran’s start-up ecosystem has focused almost exclusively on software. With lower capital requirements, shorter research and development timeframes, and scale-driven business plans, software can seem a safer bet for foreign investors. But Naghipour believes that while hardware development is more difficult, the business potential with hardware is often greater. He notes, “investing in hardware can create businesses with protected market share and export potential. While it is unlikely that international markets would adopt Iran’s clones of already popular apps, Iran can create hardware technologies that are competitive globally on pricepoint and core capabilities.”

Naghipour believes that Pedasys’ addressable market in the Middle East is six million individuals. For this market, an Iranian product will have an inherent cost advantage. Pedasys’s creators expect their technology to be up to fifty percent less expensive than comparable American, European, or Japanese technologies, without compromising on functionality.

Moreover, as Naghipour explains, the cost of treatment isn’t limited to the cost of the exoskeleton. He notes, “patients require as many as twenty clinical sessions to customize the exoskeleton for their use and to teach them how to operate it effectively. Being able to provide this clinical care is a crucial part of the offering and is almost as important as the technology itself.”

The clinical approach is being refined in Iran to meet local needs. “Four medical centers have purchased their own Exoped unit for research purposes, and we are about to begin the application process for approval by the Iranian Food and Drug Administration,” says Naghipour. The approval process will take about one year. With the FDA approval in hand, Naghipour plans to “begin negotiating with insurance companies to get Exoped covered. We hope to demonstrate to insurance companies that the overall improvements to quality of life are worth their coverage.”

Importantly, applications for Exoped extend beyond rehabilitation. Similar solutions are now being tested by industrial companies worldwide as a means to improve comfort and reduce the risk of injuries for manufacturing workers. Exoped could find a large market in Iran’s automotive manufacturing sector, where chronic lower back pain is a major occupational health issue on assembly lines. Iranian workers who suffer from lower back pain self-report considerably lower overall quality of life scores.

To achieve these ambitions, Pedasys will seek to raise its Series A funding from both domestic and foreign backers. Although the company declined to disclose its fundraising target, Naghipour assures that is it “significantly lower than what Western companies are seeking to raise even before they have a working prototype. In Iran we do much more with much less and we think investors can see that.”

Photo Credit: Bourse & Bazaar

Iranian Protests And The Working Class

This article was originally published in Lobelog. 

In February of 2017, I wrote about Iran’s “forgotten man,” the member of the working class who seemed invisible in the talk of the country’s post-sanctions recovery:

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.

With the new wave of protests sweeping Iran, it seems that the country’s forgotten men and women may be mobilizing to ensure their voices are heard in Iran and around the world. There is a growing consensus that the protests are comprised primarily of members of the working class, who are most vulnerable to chronic unemployment and a rises in the cost of living.

The idea that these are working class protests has explanatory power. First, if the protests are indeed a working-class mobilization, then they are less surprising, and can be seen as akin to the regular “bread riots” that took place during Ahmadinejad’s second term, when Iran’s economy suffered its sharpest contractions.

Second, a working class outlook may explain why the political slogans and imagery of the Green Movement have not been deployed by the protestors. The Green Movement was a predominately middle class movement focused on civil rights, which emerged in response to a chosen candidate being fraudulently denied an election victory. Solidarity with lower class voters was limited and economic grievances were not a central focus.

Third, such a demographic composition may explain the support conservative political groups in Iran have given to the protestors, despite the spectacle and soundtrack of anti-state slogans that have marked many of the gatherings. Conservative politicians are being careful not to alienate members of their base, while trying to cast the protests the predictable outcome of Rouhani’s economic policies. Moreover, a working class composition of the protests can explain how exactly Iran witnessed a successful presidential election with historic turnout and a clear victor just six months before mass mobilizations in cities across the country to protest the government. It may be that those turning to protest now feel their voice was not heard in the May elections.

A simple comparative review of upper-middle income countries such as Iran—including Brazil, Mexico, Thailand, and Russia, among others—demonstrates that while protests end with political expressions, they usually begin with economic motivations. That Iran’s working classes are ready to mobilize, and that the mobilization was so quick, makes sense within the context of Iran’s current economic malaise.

It is generally overlooked when discussing Iran’s post-sanctions economy that Rouhani has operated an austerity budget since his election in 2013. Some even describe his policies as “neoliberal.” While an imperfect descriptor, his administration’s economic approach does broadly correspond to the neoliberal “Washington consensus,” which seeks economic reform through trade liberalization, privatization, tax reform, and limited public spending, focus on foreign direct investment, among other policies.

Such an economic approach is in many ways understandable. Rouhani is seeking to correct the populist excesses of the Ahmadinejad administration while also addressing longstanding structural issues in Iran’s economy such as its overextended welfare system,  a reliance on state-owned enterprise, and cronyism and corruption. But these are, by dint of difficulty, long-term reform projects, which may not fully cohere until after Rouhani’s tenure has ended. In a way, it is laudable that the administration is applying such an outlook for the benefit of what Homa Katouzian has called a “short-term society.” But the near-term political costs are becoming clear.

Rouhani’s budget is ultimately ill-suited to addressing the economic imperative of job creation, which is urgent and at the heart of popular dissatisfaction. As economist Djavad Salehi-Esfahani has written in response to Rouhani’s most recent budget:

One of the main stated goals of this budget is to create jobs, but it is hard to see how it can do that by slashing the development budget at a time that interest rates are very high (they exceed inflation by 5 percentage points or more).  The unemployment rate has been rising in the five years that Rouhani has been in office, mainly because of increased supply pressure, but low demand has been an equal culprit.  With unfavorable news about the future of the nuclear deal and the removal of sanctions, thanks to the 180-degree turn in US policy toward Iran, the prospects for a foreign-investment driven recovery are dim.  With public patience running low, the debates in the parliament over this budget should be more serious than the usual haggling over the needs of special interests.

Most governments in Rouhani’s position pursue expansionary monetary policy and boost public spending to try to drive investment and economic growth. But Iran faces a series of economic challenges that complicate such a response. For example, the principle economic achievement of the Rouhani administration has been to bring inflation under control. The International Monetary Fund expects inflation to sit below 10% this year, down from 40% in 2013. Controlling inflation is critical to bringing stability to prices in Iran’s basket of goods, where other market forces continue to drive up prices. Any attempt to pump money into Iran’s economy to spur investment risks undermining the success on inflation.

Additionally, in the face of low-growth, central banks commonly lower interest rates to make it cheaper to finance new investment. But Iran’s interest rates are being slowly rolled back from a high of 22% to the present level of 18%. Slow adjustments are necessary due to Iran’s banks being overleveraged. Reducing the interest rate too drastically, especially as inflation remains stubborn, would have two effects. First, savers would see their deposits lose value. This would predominately hurt lower-income savers who have a less diversified range of assets. Members of the middle class still benefit from asset appreciation in still robust categories like real estate, stocks, or even gold. Middle class fortunes have improved somewhat following the nuclear deal for this reason. On the contrary, members of the working class rely on interest-bearing deposits accounts to conserve wealth and are therefore very vulnerable to fluctuations in interest rates. The controversy over the unsustainable interest rates offered by unlicensed savings and loan institutions, which spurred protests in cities across Iran in the summer 2017, is indicative of the vulnerability.

Second, a lower interest rate would threaten the financial wellbeing of many of Iran’s banks, which have long skirted reserve ratios and amassed toxic debt. Any attendant drop in deposits would make it even harder for banks to shore up their reserves, making politically fraught recapitalization by the central bank more likely. In the recent assessment of Parviz Aghili, CEO of Iran’s Middle East Bank, it would cost as much as $200 billion to bring Iran’s $700 billion balance sheet in compliance with Basel III standards, which call for a minimum leverage ratio of 6%. By comparison, Rouhani’s total budget for the next Iranian calendar year is $104 billion.

In the face of limited options, the Rouhani administration believed that post-sanctions trade and investment, made possible by the sanctions relief afforded under the Iran nuclear deal, would enable the country to kick-start growth and investment that supports job creation. But the economic dividend of the nuclear deal has not materialized as anticipated. The majority of business leaders believe that this is primarily due to external factors, namely President Trump’s threats to re-impose sanctions on Iran, rather than Iran’s own challenging business environment. The nuclear deal has been so central to Rouhani’s economic plan, with the nuclear deal and investment deals basically conflated in much of the discourse, that the concern around the future of the nuclear deal has also hit confidence in Rouhani’s economic management at large.

Overall, Rouhani is running an austerity budget because he is between a rock and a hard place. The policies he is adopting are economically sensible and necessary—so much so that the budgets have been passed despite pushback from parliament and other corners of the Iranian power structure as to the approach, neoliberal or not. But the policies are politically costly, testing the patience of a people who feel that the hopes for a better livelihood slipping away as the years pass. As Mohammad Ali Shabani writes, the circumstances in Iran can be described by the concept of the J-curve, which posits that mobilizations occur “when a long period of rising expectations and gratifications is followed by a period during which gratifications … suddenly drop off while expectations … continue to rise.”

We cannot fault Iranians for their rising expectations, for they are a people who know their immense potential. This is especially true of the working classes, who have built Iran’s diversified economy with their labor and the country’s rich culture with their values. As Iran has grown richer and more advanced, the burgeoning middle class has come to represent the future. But the recent experiences of wealthier economies offer a cautionary tale about “forgetting” the working classes, and sacrificing their expectations to protect the gratification of others.

Photo Credit: IKCO

Australia's MRC to Spend $2.4 Million on Further Iran Mining Exploration in 2018

Mineral Commodities Limited (MRC), a listed Australian junior mining company, has entered the Iranian market, announcing a series of acquisitions and exploration joint-ventures with an eye to the country’s rich copper, gold, cobalt, and lithium deposits.

In July 2017, MRC established a wholly-owned Iranian subsidiary, Madan Rahjo Kanyab Company. Bahman Rashidi has been appointed country manager and oversees a team based in Tehran.

MRC, which has experience developing projects in Australia and South Africa, is based in Western Australia and is led by brothers Mark and Jospeh Caruso. The company has moved aggressively into the Iranian market with rollout beginning just this year. In a statement, Mark Caruso, the company’s Executive Chairman highlighted Iran’s position as a “a world class  geological and mining jurisdiction” which makes the market attractive “despite global  rhetoric and uncertainty surrounding the lifting of sanctions in Iran.” For MRC, it was important to establish “a first-mover advantage” which has been met with “the willingness of the Iranian Government to support and reinvigorate investment in the mining sector.”

So far, the company has reviewed thirty potential “greenfield” and “brownfield” projects, and has so far executed two deals. The first deal is for Tuzlar, a gold and copper mine near Zanjan, in which MRC will exercise the option to acquire a 73.5% interest via its local subsidiary. Initially, MRC will make a USD 680,000 investment to acquire a 22.8% stake in the mine’s owner, Tuzlar Gold  Mining  and  Industry  Company, with an option to acquire the remaining 50.7% at a price of USD 2.5 million upon further study. Tulzar was one of the deposits first discovered by Anglo American when the global mining giant was exploring the Iranian market nine years ago, prior to the imposition of international sanctions.

MRC’s second deal is for Asbkhan, a copper and gold project located near Tabriz, in which MRC has the right to build a 75% stake in a special purpose vehicle established to develop and operate the mine. The company plans to spend USD 500,000 on further exploration and development work to earn its majority stake in the project pursuant to its recently concluded agreement.

MRC will fund further explorations of the local market from its operational cashflow and has earmarked USD 2.4 million for exploration budget for next year. The company has signed MOUs with the Geological Survey of Iran and Iran Minerals Production & Supply Company (IMPASCO) in order to furnish the data and site-access necessary to conduct further studies.

Iran’s geological resources have been long coveted in the global mining sector, and metallic and mineral deposits rival the country’s oil and gas reserves for overall economic value. Iran boasts 7% of the world’s total proven reserves of metallic and non-metallic deposits, according to BMI Research, a market research firm. World-leading reserves of zinc, copper, and iron ore remain largely unexploited.

Any mining company seeking to develop and operate mines in Iran will need to work with IMIDRO, the state-owned conglomerate that oversees the largely underdeveloped sector. Deputy Minister Mehdi Karbasian, who is Chairman of IMIDRO, has stated that Iran is seeking to attract USD $50 billion in investment in the mining and minerals sector by 2022. A key strategy to achieve this goal is to support privatization in the industry, which many foreign investors consider a precondition.  

The government's ambitious investment target is somewhat mismatched with the fragmented nature of the sector. Most mining in Iran is still conducted at an “artisanal” scale, with local miners extracting from small concessions using limited machinery.

This circumstance, and the absence of the mining giants, offers junior mining companies an opportunity to enter the market and consolidate projects of surprising value. But consolidation at this scale is unlikely to lead to the scale of investment sought in the government's new five-year economic development plan. IMIDRO has been courting the major mining and commodities firms, including Rio Tinto and Glencore, but political risks have largely dissuaded investment thus far. In the meantime, as MRC's market entry demonstrates, it will be the smaller mining firms making the big moves in Iran. 

Photo Credit: Wikicommons

Unilever and Golestan Strike New Joint Venture As Iran’s FMCG Market Accelerates

Unilever, acting through its Iranian subsidiary, has signed a joint venture partnership with Golestan Company, the makers of Golestan tea and one of Iran’s best known consumer goods companies. The agreement was signed on November 29, but was formally announced this week.

The new partnership will see Unilever and Golestan join forces to locally manufacture and sell food products in Iran. The company’s announcement emphasizes that “the new joint venture company will develop, manufacture, market and sell new brands and line of food products in Iran.” This suggests that more than simply an agreement to locally produce brands from the Unilever stable in Iran, the companies will create new offerings that best suit Iranian tastes. 

Özgür Kölükfakı, General Manager for Unilever in Iran, Central Asia, and the Caucuses, noted Golestan’s “local manufacturing and distribution capabilities” as the basis for a partnership that “strengthens [Unilever’s] contribution to Iran.” The announcement did not include details as to the amount of new investment earmarked for the joint venture company.

Though it has diversified into other foods, Golestan Company is best known for its eponymous tea. The ubiquity of Golestan tea in Iran reflects the company's early innovation in distribution and marketing. Golestan was one of the first Iranian FMCG companies to bring distribution in house, allowing greater end-to-end control of the supply chain, with an impact on everything from pricing to brand positioning on store shelves.

Unilever’s commitment to Iran has intensified since 2016, when global CEO Paul Polman made a visit to the country to meet with the expanding local team. Unilever sees Iran as an battleground as it competes in detergents and personal care with the likes of German Henkel and the American Procter & Gamble, and in food and beverage with the likes of Swiss Nestle and French Danone.

That Unilever will now operate not just its local representative office in Unilever Iran, but also a full manufacturing joint venture, reflects a trend among FMCG multinationals working in the country. While Unilever has owned a production facility in Qazvin since 2003, most FMCG companies have typically partnered with Iranian companies within licensing or contract manufacturing models, which saw globally recognized brands produced in Iran but without direct ownership or operation by the international partner, who would instead receive revenues in the form of a fee. This approach exposed multinationals to less risk, but also limited their ability to create value in the Iranian market.

Since the lifting of international sanctions on Iran in 2015, several forces have combined to further push companies towards joint venture partnerships or outright control of their Iran-based manufacturing interests. Not only has the Iranian and regional market matured in the two decades since many international brands began to be locally produced in Iran, offering greater opportunities at scale, but improvements in foreign investment protection and greater political comfort with foreign-owned local enterprise, have made joint ventures more appealing for international firms. This trend has led to new ownership-centered partnerships in the automotive, steel, pharmaceutical, and FMCG sectors, among others.

Consumer preferences have also driven the shift in strategy. Data from market research firm IranPoll indicates that 55% of Iranians believe that European products sold in Iran are “mostly counterfeit.” Iranian consumers still have a strong affinity for local brands, in part because nearly half of Iranians believe that European companies “do not have a good understanding of the needs and the taste of the Iranian people.”

To address these concerns and build local trust, multinational companies need to become more deeply engaged in the Iranian market. A significant 58% of Iranian consumers believe that “opening an official representative office in Iran will increase confidence in the quality of European producers’ products in the Iranian market.” In this context, Unilever’s move to establish a local joint venture with a trusted Iranian partner, and to focus on the development of new product lines tailored to local tastes is a smart response to consumer demands.

Today, in the Iranian FMCG market, the likes of Danone, Groupe Bell, Nestle, and Henkel are either operating with or actively exploring the potential for direct ownership of their local manufacturing interests. The most advanced company in this regard is Henkel, which brought out its Iranian shareholders in 2016 to convert its extensive manufacturing joint venture into a fully-owned subsidiary.

The determination with which FMCG multinationals are investing in the Iranian market is bearing fruits for Iranian consumers. The availability of consumer goods is one of the few areas where Iranians have seen improvements first-hand since the nuclear deal was implemented two years ago. In a recent survey conducted by Bourse & Bazaar in partnership with IranPoll, 43% of Iranian consumers have noted an increase in the “availability of goods made by multinational companies” for sale in Iran.

Said Ahmad Nasiripour, Managing Director of Golestan, relayed his hope that new partnership with Unilever points to a “much brighter future” for the company and its consumers. Expectations will certainly be high.

Photo Credit: Unilever

Autoneum Deal Underscores Huge Potential in Iranian Auto Parts Industry

Switzerland’s Autoneum, a world leader in the acoustic and thermal insulation for automotive applications, has signed a new exclusive license agreement with Ayegh Khodro Toos (AKT), an Iranian auto parts company that specializes in noise and vibration damping materials.

Autoneum and AKT will establish a new production like at AKT’s facility in Mashhad in order to begin producing carpet systems and dashboard parts. The first parts will come off the production line in 2019. According to company materials, AKT employs 95 technicians and controls 75% of the market for automotive insulation.

These parts will support the production of a new "SUV" by IKAP, the joint venture between Iran Khodro and Groupe PSA. The unnamed vehicle is most likely the Peugeot 3008, for which imports to Iran of complete vehicles will begin in early 2018. 

Commenting on the new agreement, Martin Hirzel, CEO of Autoneum, highlighted Iran’s potential as “a central automotive hub for the Middle East, Far East and the Caucasus region.” Hirzel sees “strong sales potential” as the company seeks to meet the needs of customers in this regional market.

The new licensing agreement follows a common model in the Iranian auto parts industry, in which a foreign company brings technology and manufacturing specifications to a local partner, in order to supply the Iranian joint-ventures or CKD contract manufacturing agreements of the likes of PSA Groupe, Renault-Nissan, and Daimler. These parts are the lifeblood of a burgeoning Iranian automotive sector, which produced over 600,000 vehicles in the first half of 2017, registering 18% year-on-year growth.

The Iranian Auto Parts Manufacturers Association (IAPMA) estimates that there are 1200 parts manufacturers in the country generating USD 8 billion in annual sales. IAPMA ambitiously projects that Iranian auto parts market could generates sales of USD 32 billion by 2025. A major contributor of growth will be an expansion in exports, which are currently less than USD 200 million, but are expected to rise to USD 6 billion by 2025, a thirty-fold increase.

Major Iranian auto parts manufacturers such as Ezam and Crouse manufacture under license for global players such as Bosch, Mahle, Mando, and Valeo. The new agreement between AKT and Autoneum shows the potential for smaller, specialist parts manufacturers to strike similar deals that improve the quality and sophistication of the parts available for the local market and for export.

Photo Credit: Autoneum

American Medical Company Second Sight Enters Iranian Market

Second Sight, a publicly-listed American company which develops and manufacturers visual prosthetics, has announced its market entry into Iran with two landmark procedures. Two patients in Shiraz suffering from Retinis Pigmentosa, a category of genetic disorder which leads to the degeneration of cells in the retina, have had their sight partially restored with the implantation of the company’s Argus II device.

The milestone procedures were carried out last month at Shiraz Pars Hospital and the Khalili Hospital of the Shiraz Medical Science University. The devices were successfully implanted by Professor Mohsen Farvardin and his team. The Argus II system uses a small video camera mounted to a patient’s glasses to send images to a small patient-worn video processing unit. This small computer then processes the images and sends corresponding visual instructions to an antenna in the retinal implant. The implant emits small pulses of electricity to the stimulate the remaining photoreceptors in the retina, allowing the patient to perceive visual patterns.

 The procedures were facilitated by Second Sight’s exclusive local distribution partner, Arshia Gostar Darman Company, an established supplier of sound processors and cochlear implants that help remediate hearing loss. Second Sight and Arshia Gostar Darman entered into a partnership in July 2016, at which time Second Sight had received a specific license from the U.S. Office of Foreign Asset Control (OFAC) to permit the sale of the company's medical devices in Iran.  

Second Sight’s market-entry announcement came just one day after the U.S. Department of Treasury levied a USD 1.2 million fine on another American medical company, Dentsply Sirona. US regulators found that between 2009-2012, Dentsply made 37 shipments of dental equipment and supplies to Iran via its international subsidiaries. Company personnel concealed the fact that the goods were destined for Iran. In its public notice, OFAC indicated that products sold by Dentsply “were likely eligible for a specific license.”

The divergent experiences of Second Sight and Dentsply point to persistent challenges for specialist American medical companies that wish to supply the Iranian market. These companies, though smaller than the global behemoths such as Merck or Johnson & Johnson, play a vital role in the healthcare sector as they bring advanced therapies and innovative devices to market. While U.S. licensing policy is generally accommodating of the sales of medicines and medical equipment to Iran on humanitarian grounds, the regulatory burden and legal costs for these companies can be inhibitive. Securing an OFAC license is nearly always necessary in order to operate in a compliant manner. 

At a time when the prospects for renewed American trade with Iran have dimmed, Second Sight's recent success offers a welcome reminder of the opportunities that persist in the pharmaceutial and healthcare sector. 

Photo Credit: Second Sight

Senior American Diplomat To Be Replaced With "Trump Loyalist" in Key Iran Role

As first reported in Foreign Policy, American career diplomat Chris Backemeyer, the Deputy Assistant Secretary for Iranian Affairs, is to be moved to a new role within the State Department’s Bureau of Near Eastern Affairs. Backemeyer will be replaced by Andrew L. Peek, a former intelligence officer in the U.S. Army with no prior diplomatic experience. Peek previously served Republican senators as a foreign policy advisor and has been described as a “Trump loyalist.”

The news comes as the Joint Commission is set to meet in Vienna this week to discuss the implementation of the Joint Comprehensive Plan of Action (JCPOA).

Backemeyer's move marks the year’s fourth and perhaps most significant change to the wider team overseeing Iran policy at the department. In January, Jarrett Blanc, who served as Deputy Lead Negotiator for Iran Nuclear Implementation, left the State Department (as is customary follow for political appointees following a change in administration) taking up a position as a Senior Fellow at the Carnegie Endowment for International Peace. In April Sahar Nowrouzzadeh, a career civil servant, was removed from the State Department's’ Policy Planning Team largely due to attacks from conservative media outlets focusing on her role in helping to craft the Obama administration’s Iran policy. In August, Ambassador Stephen Mull, a career diplomat, left the position of Lead Coordinator for Iran Nuclear Implementation to take up a fellowship at Georgetown University. He remains with the department.

Backemeyer’s reassignment stands out because of his direct involvement in the Joint Commission of the Joint Comprehensive Plan of Action and his decade of experience on Iran. Backemeyer has worked on the Iran file since 2007, rising to the role of Deputy Director of the Office of Sanctions Policy and Implementation before serving as Director for Iran on the National Security Council in the Obama White House.

The American delegation to the Joint Commission meeting next week will still be led by Tom Shannon, the Under Secretary for Political Affairs, who lacks Backemeyer’s specialist knowledge of Iran sanctions or the complex political issues surrounding the implementation of the JCPOA. While, Backemeyer is currently on paternity leave and was not scheduled to attend the upcoming Joint Commission meeting, the loss of his expertise will no doubt raise concerns among his Joint Commission peers, especially as the future of the JCPOA remains in doubt following Trump’s decertification of the deal in October.

The personnel change will also prove troubling to multinational companies pursuing trade and investment opportunities with Iran. Backemeyer spearheaded the Obama administration’s public outreach to companies and financial institutions following the lifting of U.S. secondary sanctions on Iran. This outreach was supported by a small team of “Iran watchers” stationed at several key embassies including London, Paris, and Berlin, as well as the Iran Regional Presence Office in Dubai.

While this outreach ceased following Trump’s inauguration, that Backemeyer and his team had remained in their positions gave business leaders some reassurance that American diplomats were at least aware and understanding of their frustrations with sanctions policy, even if solutions were not always forthcoming. 

It remains to be seen whether new appointee Peek will make any similar effort to listen to the policymakers and business leaders who remain committed to constructive diplomacy and commercial engagement with Iran. Peek described the JCPOA as "America's diplomatic disaster" in a November 2013 column and wrote in March 2015 that the "core problem" with the nuclear deal "is that lifting the sanctions hamstrings US efforts to prevent the largest and strongest power in the Middle East from dominating the Middle East." Clearly, the early signs are less than promising.  

Photo Credit: Politico

Rentierism and Rivalry Between Riyadh and Tehran

This article was originally published in LobeLog. 

In response to the rivalry between Saudi Arabia and Iran, the United States has long pursued a strategy of counterbalancing, extending its security umbrella to cover the kingdom and the GCC states. But as promises of security fade in the face of decreasing belief in the American commitment, infighting in the GCC, and the advent of Saudi military adventurism, security is no longer a sufficient paradigm for policy that seeks to temper an intensifying regional rivalry.

In Saudi Arabia, a young Crown Prince, Mohammad bin Salman (MbS), is poised to rule a country that—on its current trajectory—faces a sustained economic decline as oil revenues shrink and the population grows. By contrast, having demonstrated considerable economic resilience under sanctions and significantly reduced its dependence on oil rents, Iran may finally be poised to achieve sustained growth.

This divergence in fortunes is at the heart of the regional conflict. Should MbS wish to prevent Iranian domination of the region, he will need to secure Saudi Arabia’s economic future and redefine the contribution of economic rents to state power—a puzzle of political economy. In the absence of any robust solution, he will resort, as most rulers do, to externalizing the political instability that will no doubt threaten him within the kingdom’s borders (see Vladimir Putin). The cynical war in Yemen gives an early indication of how such weakness may tragically precipitate further regional conflict.

The power differential between Saudi Arabia and Iran reflects the degree to which the kingdom remains a rentier state and the degree to which the Islamic Republic does not. In the assessment of political scientist Michael Herb, between 1972-1999, the “degree of rentierism” in Saudi Arabia was 80% while in Iran it was just 55%. To the extent that rentierism is understood as a fundamental liability in a country’s long-term political and economic stability, any intervention to temper the rivalry between Saudi Arabia and Iran will need to contend with the fundamental configuration of Saudi political economy, enabling moderation through strength.

Blurry Vision

MbS’s dramatic move to arrest scores of Saudi elites, including Minister of the National Guard Prince Mutaib bin Abdallah and the billionaire chairman of Kingdom Holdings Prince Alwaleed bin Talal, has been widely described as a “purge” or “soft coup.”

But as as executive director of the Arabia Foundation Ali Shihabi has argued, the arrests had little impact on MbS’s political fortunes. He writes, “In actuality, Saudi Arabia completed its political transition last June when King Salman replaced MBN with MBS as heir to the throne.” To this end, it is “wrong to interpret last weekend’s arrests as an action that materially increases the political risk to the monarchy.” Rather, Shihabi suggests that MBS intended to send a message “to political and economic elites that their entitlement to extreme wealth and privilege, and their impunity, is coming to an end.”

The economic consequences of the arrests could be significant. According to a statement on the arrests from the Saudi attorney general, “at least USD $100 billion has been misused through systematic corruption and embezzlement over several decades.”  Shihabi believes that MbS will seek the “recovery of substantial ill-gotten assets from many members of the elite” as part of his effort to correct for perceived abuses.

It is tempting to think, in accordance with MbS’s deliberate self-marketing as an earnest reformer, that the move against corruption is an expression of political strength. This may be true within the internal dynamics of the Saudi Royal family—no doubt his moves against family members were bold. But when viewed within the wider economic context, the need to vilify quasi-state appropriation of wealth in the kingdom speaks to a brewing economic crisis and an acute sense of weakness.

In July, the IMF revised down projections for Saudi GDP growth in 2017 to just 0.1%, with growth for 2018 projected at a paltry 1.1%. In the face of low oil prices and general underperformance, the Saudi economy is teetering on the edge of a recession for the first time since 2010. The overall value of the economy has fallen by over $100 billion in just three years.

Saudi Arabia remains a rich country. But a dwindling cash pile (down nearly $300 billion from the 2014 high) and the first indications of oil’s impending decline as a source of rents have triggered a time-bomb for MbS. The county’s population is ballooning, with the working age population set to grow by 6 million in a country with just 41% workforce participation. MbS is poised to be the first king in Saudi history for whom oil rents will not meet the country’s economic needs or help consolidate his absolute rule.

The much touted Vision 2030 plan is an attempt to defuse this timebomb through an expansive set of economic and social reforms. In the near term, MbS is aiming to introduce an additional $100 billion annually from non-oil revenue by 2020. As described in a fawning profile in Bloomberg Businessweek, MbS “has already reduced massive subsidies for gasoline, electricity, and water. He may impose a value-added tax and levies on luxury goods and sugary drinks.”

But taxing soda is not going to replace declining oil revenues, and the likely impact of the proposed reforms are being oversold. At a more fundamental level, there are no plans to introduce an income tax, and in order to stave unrest from the least fortunate Saudis, cash handouts are still planned. As though to burnish his populist chops, MbS told Bloomberg, “We don’t want to exert any pressure on [the poor]. We want to exert pressure on wealthy people.”

The prince's turn to populism may be a novel chapter in the House of Saud’s playbook for regime survival, but it reflects a confused approach to reformation of a broken political economy. By failing to consider the importance of taxation, MbS seems unwilling to renege on what historian Toby Craig Jones calls the “devil’s bargain” of Saudi political economy, where “no taxation without representation” is perverted to “no representation without taxation.”

To date, the essential challenge of Saudi political economy remains unaddressed. So long as the country’s rulers depend on a dwindling natural resource or the fickle commitment of international investors to drive economic growth, the state will remain weak.

Lessons From Iran

Across the Persian Gulf, Iran’s leaders have made their own Faustian bargains concerning political economy, but the 1979 revolution provided a hard reset that addressed the central liability currently facing their Saudi rivals. The revolution served to give the government more levers by which to grapple with the chief risk that plagues rentier economies—income inequality. Iran’s present level of income inequality, as measured by the GINI coefficient, is just below 0.4. At the time of the Islamic Revolution, the level was 0.5.

According to a growing body of evidence, Iran’s combination of resource rents distribution with a progressive income tax has been fundamental to the country’s ability to mitigate inequality, especially given that Iran’s large population renders resource rents alone an insufficient source of government revenue for this purpose. In 2015, for the first time in over 50 years, tax revenues surpassed oil revenues as the primary source of government income.

A recent study by economists Mohammad Reza Farzanegan and Mohammad Mahdi Habibpour of resource rents distribution in Iran concludes that “any transfer policy that uses oil and gas rents which are publicly-owned and managed in Iran will decrease income inequality and poverty.” However, the authors find that “resource dividend” (RD) policies that combine the distribution of oil rents with income tax have the greatest effect at reducing income inequality. In a sample of 140,000 households, the so-called RD policies saw the GINI coefficient fall from 0.44 to 0.32 in rural areas, and 0.39 to 0.33 in urban areas—reductions in line with the overall improvements in Iranian income inequality since the Islamic Revolution.

President Hassan Rouhani continues to battle stubborn inequality, and the perception of misappropriation of rents through government corruption is a major source of political contention. In this sense, Rouhani’s own campaign of arrests, largely targeting elites connected to Iran’s Revolutionary Guard, mirrors the moves by MbS. But there is a crucial difference. Rouhani is trying to address corruption because he needs to better distribute rents, half of which originate from taxation, in lockstep with economic expansion. MbS is namechecking corruption because he needs to consolidate rents as he faces a economic stagnation—a position of relative weakness.

A Common Aim

In a lengthy interview with the influential Iranian foreign affairs magazine Diplomacy, former Iranian ambassador to Riyadh Hossein Sadeqi makes an emphatic case that MbS will avoid repeating the “Pahlavi scenario,” largely because of a deliberate effort to seek advice from “intellectual centers” including think tanks and consultancies. Sadeqi acknowledged that “Saudi Arabia has a single-product economy in which corruption exists,” but he also puts faith in the country’s capacity for reform, highlighting early progress instituting the Vision 2030 reforms, particularly in a social context.

This measured and hopeful assessment points to an important consideration for American policymakers. Shifting the emphasis in regional balancing away from military parity towards economic parity opens the door for a less confrontational dialogue between Saudi Arabia and Iran. The Iranian government has strong interests in Saudi Arabia’s economic stability. The international community should seek to ensure that a concerted program of training and technical assistance, rather than arms transfers to meet security demands, is made available to support MbS’s reform program.

Moreover, any program that seeks to address the residual challenges of rentierism could be a rare opportunity to bring senior Saudi and Iranian stakeholders around the same table to discuss how best to address destabilizing inequality and preserve standards of living in the post-oil world. The Iranian experience would be hugely instructive if Saudi leaders could be convinced to accept some well-intentioned advice.

Photo Credit: Wikicommons

Oil Giant Total Takes to Twitter to Underscore Iran Commitment

In an unusual move, Total's press office issued a series of tweets on Tuesday in order to correct an apparent mischaracterization of the company's position on its planned USD 4.8 billion gas deal in Iran. 

A piece published by CNN Money on Tuesday, and later echoed by Reuters, suggested that Total was "rethinking" its comittment to Iran in light of the company's large presence in the U.S. and President Trump's opposition to the Iran deal. The piece centered on comments made to CNN Money on the sidelines of an energy conference in Abu Dhabi, with Total CEO Patrick Pouyanné stating that "If there is a sanctions regime [on Iran], we have to look at it carefully... We work in the U.S., we have assets in the U.S., we just acquired more assets in the U.S." 

But a series of tweets from Total's official press office account have since sought to dispel the idea that there has been any change in the company's policy towards Iran. The tweets explain how the comments made by Pouyanné are consistent with those made in several interviews since Trump's de-certification of the JCPOA Iran Deal. 

Hey :) Total's position is & has been consistent on the matter. The CNN piece does not say anything new. Don't mind the tittle of the article...just focus on the quotes: "We are working on the project. We launched the tenders, we should award contracts by January." @yarbatman

— Total Press Office (@TotalPress) November 14, 2017

📢💬 @PPouyanne was very clear in an interview with @energyintel less than a month ago: "We signed the contract, we have launched the tenders, we are supposed to award contracts by year-end, so all that is fitting well in terms of schedule..."

— Total Press Office (@TotalPress) November 14, 2017

💬 "We’ll have clarity on situation before year-end. Congress has 2 months to decide what to do. If Total can do it in a legal way, we’ll do that project as we are committed to Iran. If we cannot do it, we’ll have to stop. It’s not politics, it’s just a matter of legal framework"

— Total Press Office (@TotalPress) November 14, 2017

Total's response clarifies that the company remains committed to its project in Iran's South Pars gas field and draws attention to an earlier interview in which Pouyanné stated he does not see a political barrier to conducting business in Iran. That Total is continuing to push ahead on its Iranian project demonstrates considerable resolve, especially given the company's extensive operations in both the United States and Saudi Arabia, two countries whose governments largely oppose Iran's economic opening. Indeed, the company has recently moved to more directly manage political risks by opening an office in Washington. 

Pouyanné's comments to CNN Money do however raise the possibility that the United States will reimpose secondary sanctions, which would penalize non-U.S. entities for conducting business with Iran. Such a "snapback" scenario would compel nearly all European multinational firms, including Total, to pull back from the market. Total, like many other companies, is simply waiting to see what legal approach Congress is likely to take. Pouyanné told CNN, "We are working on the project. We launched the tenders, we should award contracts by January... I hope by that time, Congress will have an answer for the president and the president will have to renew, or not [renew], the certification."

Encouragingly, it remains unlikely that Congress will opt for snapback, which would constitute withdrawal from the JCPOA. Total's landmark deal still seems poised to open a new era of energy investment in Iran. 

Photo Credit: IRNA

Iran Starved of Investor Capital Needed to Fuel Extensive Privatizations

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

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

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

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

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

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

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

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

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

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

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

Killing Iran’s Economy Won’t Help the U.S.

The Trump administration has announced a set of seemingly aggressive policies against Iran, including decertifying the nuclear agreement known as the Joint Comprehensive Plan of Action (JCPOA). The thrust of the “new” U.S. policy on Iran appears to be the imposition of additional sanctions against organizations such as the Islamic Revolutionary Guards Corps (IRGC). Critics of the JCPOA claim that new sanctions will not only “fix” the JCPOA, but also help roll back Iran’s increasing influence in the Middle East. Both assumptions are wrong.

The JCPOA has been effective in constraining Iran’s nuclear program, a fact confirmed by the International Atomic Energy Agency and the other parties to the JCPOA, namely the United Kingdom, France, Germany, Russia, and China. The Trump administration’s actions not only risk undermining an effective agreement, but are unlikely to change Iran’s regional policies or weaken the Iranian regime at home. Iran’s economy is likely to be damaged by any new U.S. sanctions, with foreign investment having already slowed in response to Trump’s rhetoric. The biggest losers will not be the Iranian regime but the Iranian people,  whose striving the U.S. has long hoped would bring about a less antagonistic Iran.

The IRGC is responsible for Iran’s impressive expansion across the Middle East. Iran is a primary power-broker in Iraq, Syria, and Lebanon; Tehran also wields substantial influence in Afghanistan and even in relatively far off countries such as Yemen. The IRGC is also a major economic player in Iran. So it may seem to make sense that sanctions against the IRGC would help curtail its power in the Middle East. Yet the opposite is true.

Money is not the IRGC’s only motivation in shaping Iran’s regional policies. Rather, a combination of revolutionary zeal, fear of external enemies, Iranian nationalism, and regional instability have also fueled the IRGC’s successes in the region. Yes, it does take substantial funding for Iran to expand its power. Tehran not only funds Hezbollah and the Assad regime in Syria, but a myriad of pro-Iranian groups in Iraq, Afghanistan, and Palestine. But Iran was able to expand its regional power even under the severest of sanctions imposed prior to JCPOA. The rise of the Islamic State and state collapse in places such as Syria have allowed Iran to exploit fear and instability to expand its power. The region’s Shi’a populations, while not always ideologically aligned with Iran, have little choice but to turn to Tehran for protection in the face of extremist Sunnis. Iran does not need billions of dollars to be powerful given the IRGC’s ability to mobilize historically disaffected Shi’a to their cause.

New U.S. sanctions are also likely to undermine President Hassan Rouhani’s attempts to liberalize the economy. Opponents of the JCPOA often claim that “moderates” such as Rouhani are indistinguishable in terms of goals and ideology from the IRGC. No one in Iran’s political establishment can be considered pro-American; yet to ignore or deny political realities in Iran does a disservice to American interests. Rouhani’s government was able to negotiate the JCPOA in spite of Supreme Leader Ayatollah Ali Khamenei’s deep suspicions. The Iranian president hoped that the sanctions relief promised by the JCPOA would help liberalize Iran’s economy and attract substantial foreign investment, decreasing Iran’s dependence on energy exports and potentially weakening the IRGC’s grip in key economic sectors.

To be sure, economic liberalization may enrich Rouhani’s faction and regime insiders largely opposed to American influence in the region; but millions of middle class Iranians who envision better U.S.-Iran relations will also benefit from privatization, foreign investment, and the attendant new job opportunities. U.S. sanctions against the IRGC, which could slow the process of liberalization, will ultimately punish all Iranians, including those who want better ties with Washington. Khamenei’s claims that America can never be trusted will appear increasingly as fact rather than mere political rhetoric. The Trump administration’s efforts to decertify Iran and undermine the JCPOA without justification will reinforce the Iranian public’s suspicions of U.S. intentions. This also would quiet any segment of the Iranian public that might object to Iran’s nuclear pursuits at high cost to the economy.

The IRGC will not stop its expansionism in the Middle East because of sanctions. And sanctions will not weaken the Iranian regime at home. Sanctions may have worked in building American leverage before the JCPOA. But, political conditions in Iran and America’s standing both in the Middle East and across the globe have changed considerably in the last few years. The U.S. is losing its credibility among the Iranian public and U.S. allies who helped negotiate the JCPOA. And Iran is more powerful in the Middle East than before, especially as international powers such as Russia, regional states such as Iraq, and even Turkey turn to Iran as the region’s decisive actor. The biggest losers will be the Iranian people, caught between punitive U.S. policies and a illiberal regime.

Photo Credit: Thomas Cristofoletti

Iran Sanctions Policy Increasingly Throttles Free Trade in Ideas

This article was originally published in LobeLog.

In 1988, as legislators were creating the legal basis for the modern use of economic sanctions as a tool of American foreign policy, an important amendment was added to two laws, the Trading With the Enemy Act (TWEA) and the International Emergency Economic Powers Act (IEEPA). The so-called Berman Amendment was devised to withdraw the president’s authority to use sanctions to prohibit the import or export of informational materials, whether directly or indirectly.

Former Representative Howard L. Berman (D-CA), who put forward the amendment, felt that support for access to information was a cornerstone of American foreign policy and should not be undermined by any program of economic sanctions. He stated: “The fact that we disapprove of the government of a particular country ought not to inhibit our dialog with the people who suffer under those governments…. We are strongest and most influential when we embody the freedoms to which others aspire.” In 1994, the provisions in the Berman Amendment were expanded in the Free Trade in Ideas Act in response to the fast changing media landscape. The definition of “informational materials” came to apply “regardless of format or medium of transmission” to “any information or informational materials.”

Since then, American sanctions policy has generally sought to ensure that the targeting of commercial and financial channels does not inhibit the transmission of information. This is perhaps best exemplified in the case of the sanctions regime levied on Iran, the most extensive ever devised. Even in the case of Iran, exemptions exist in the sanctions regulations for activities such as, publishing, journalism, Internet communications, and even organizing events. In addition, more specific permissions are granted in the form of so-called General Licenses issued by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). These include General License D-1, which permits the use of certain software or hardware for personal communications, and General Licence G, which licenses the export or import of educational services to and from Iran. Companies can also apply for specific licenses, which have been awarded to enable publishing, research, and communications activities that may be more commercial in nature, but are still consistent with the notion of “free trade in ideas.”

However, recent developments suggest that American regulators have lost sight of the absolute importance of protecting informational exchange. On October 13, the U.S. Treasury designated Iran’s Islamic Revolutionary Guard Corps (IRGC) as a “Specially Designated Global Terrorist” (SDGT) As several sanctions designations had already blocked the IRGC, the new action made little difference to the prohibitions around commercial and financial dealings with the Guards. But the push for a terrorism designation did have one new and substantive outcome.

In the FAQ note issued to clarify the new designation, OFAC explains that the new designation draws upon a counterterrorism authority, Executive Order 13224, which was not previously applied to the IRGC. As a result of this new authority, the IRGC “may not avail themselves of the so called ‘Berman exemptions’ under the International Emergency Economic Powers Act (IEEPA) relating to personal communication, humanitarian donations, information or informational materials, and travel.”

This represents one of the first instances in an Iran sanctions designation in which OFAC has specifically clarified that the provisions of the Berman Amendment do not apply. Sanctions experts are quick to point out that, despite the new designation, OFAC will necessarily prioritize enforcing possible illicit financial support for the IRGC above the possible transmission of information, which could be as innocuous as usage of social media platforms or distribution of news media. But if the loss of the exemptions is the only substantive legal consequence of the new designation, then the stakes are actually quite high. As sanctions attorney Clif Burns sharply observed in a blog post, “It is now a federal crime for a U.S. person to give a copy of The Bible to anyone in the IRGC.”

American policymakers may not harbor any sympathies for members of the IRGC, but the manner in which the designation affects informational exchange is emblematic of a general failure in US sanctions policy to adequately consider or protect the free trade in ideas with people and entities, even those on the opposing sides of an adversarial relationship. Beyond the nefarious IRGC, members of Iranian civil society also see their access to information increasingly restricted. In August, Iranian apps were removed from both Apple’s App Store and Google Play, causing an uproar among Iranian users. In September, the online-course platform Coursera began to limit a wider range of content for users based in Iranian, citing sanctions regulations.

For now, the likes of Apple, Google, and Coursera are making voluntary decisions to limit their service provision to Iranian users. But the moves were likely spurred by the marked shift in Iran policy between the Obama and Trump administrations. These companies may have changed their policies in accordance with a stricter interpretation of General License D-1, which had previously been used to justify providing Iranian users access to these online platforms. During the Obama years, the “spirit” of OFAC’s enforcement mandate was clear and informational exchange was in fact encouraged within the scope of exemptions and general licenses.

It may seem tenuous to link the IRGC’s new designation with the recent experiences of Iranian Internet users. But in both cases, the overall disposition of American sanctions policy has clearly moved away from the political and ethical intentions behind the Berman Amendment. Even if the impact on information flows is so far inadvertent and primarily reflective of voluntary actions by the companies operating informational platforms, OFAC could absolutely be doing more to provide comfort around the general permissibility of informational exchange.

The consequences of any reduced “trade in ideas” with Iran will be profound. The United States is limiting its means to influence decisionmaking within the IRGC at precisely the same moment that it is undermining the ability of Iranian civil society to freely access informational services. It is unclear how removing the Berman exemptions for the IRGC weakens the organization. If anything, it may make it harder for Iranian and foreign stakeholders to help influence key reforms that would help mitigate the IRGC’s political and economic might.

For example, with the new designation, a non-governmental organization with a so-called U.S. nexus (such as funding that originates in the United States, or U.S. nationals on the staff) can no longer seek to treat IRGC affiliates as subjects in any research or technical-assistance programs. This is particularly concerning as Iran’s government seeks to push forward with a program of economic liberalization and attempts to induce the IRGC to sell assets and reduce their economic footprint. The Rouhani government needs foreign assistance to cleave the IRGC from its role in the economy, but that assistance may now be prohibited if the informational materials in question are ultimately earmarked for IRGC affiliates.

In March of this year, American University in Beirut agreed to pay a penalty of $700,000 to settle claims in a civil suit brought by the United States. The penalty was tied in part to the provision of “material support” to Jihad al-Binaa, an organization linked to the SDGT-designated Hezbollah, on a university database “for the stated purpose of connecting Non-Governmental Organizations (“NGOs”) with students and others interested in assisting them.” The IRGC has a much wider range of affiliated entities than most organizations designated under counterterrorism authorities, including commercial entities, welfare organizations, and educational institutions. If even listing these entities in a database can be seen as tantamount to material support, warranting an enforcement action, then the SDGT designation could significantly reduce the scope for responsible dialogue with the IRGC, whether direct or indirect.

Considering the fundamental role that both government-backed and independent research and technical assistance programs played in fomenting political and economic liberalization in formerly embargoed countries such as the former Soviet Republics, China, and Vietnam, any policy that blocks informational exchange will deprive the United States of some of its best foreign-policy tools.

There are times when blocking economic relations is necessary. But there is no situation in which the total denial of the free trade of ideas is sensible. The Berman Amendment is much more than a quirk of sanctions policy. It is among the most lucid formulations of liberalism in American foreign policy. In devising its approach to Iran, the Trump administration would do well not to lose sight of how the exchange of ideas has long made American foreign policy great.

Photo Credit: Rouzbeh Fouladi

In Reprieve for Multinational Business, Trump to Stave Snapback of Iran Sanctions

Following a lengthy interagency review, Donald Trump will today unveil his new Iran policy, bringing to an end months of speculation as to his administration's intentions. Despite Trump’s view of the Iran Deal as “the worst deal ever,” early reports make clear that Trump will not be withdrawing from the Joint Comprehensive Plan of Action (JCPOA).

Despite recent political uncertainty, underlying commercial momentum has remained strong in 2017. Trade between Europe and Iran nearly double in the first half of 2017, compared to the same period the year prior. The Iranian government reports that commitments of foreign direct investment have risen 55% in the last Iranian calendar year. The spectre of decertification has been seen as a risk to this steady growth.  

On Thursday, the Trump administration provided background briefings to European diplomats and the members of the press outlining the content of the pending announcement. While specific details of the new strategy remain embargoed until shortly before Trump’s speech, which will be made at 12:45 EST, reporting by the Julian Borger of The Guardian and the Matthew Lee of the Associated Press, outlines a strategy that is less damaging than had been feared.

While President Trump will formally decertify Iran’s compliance with the JCPOA, he will do so not in denial of Iran’s technical compliance with the agreement, which has been subject to eight confirming reports by the International Atomic Energy Association (IAEA), but rather on the basis of America’s national security interest, in accordance with a specific provision for decertification stipulated in the Iran Nuclear Agreement Review Act (INARA).

The move to decertify will push the issue of the Iran Deal to Congress. The Trump administration is seeking new amendments to INARA in an attempt to address perceived “flaws” in the JCPOA. These include new provisions relating to Iran’s ballistic missile program and the activities of Iran’s Islamic Revolutionary Guard Corps (IRGC) that would automatically trigger the snapback of secondary sanctions in the event of a violation. Importantly, the administration is also seeking an amendment to INARA to remove the requirement for Trump to certify Iran’s compliance every 90 days, a move widely seen as a face-saving maneuver for an administration beset by infighting on the issue.

Crucially for multinational businesses active in Iran, the administration will not be recommending Congress reimpose the sanctions removed as part of the implementation of the JCPOA, which would have been tantamount to America’s withdrawal from the deal. The administration has also decided not to designate the IRGC as a terrorist organization, a move which would have risked drawing the Iranian government into an escalation.

As such, Trump’s announcement will have little immediate bearing on the ability of multinational companies to continue to trade and invest in Iran. Business leaders had long expected Trump to eventually decertify Iran’s compliance and had proceeded with commercial contracts accounting for such a move. In a recent survey of business leaders,  68% of Iranian respondents and 63% of non-Iranian respondents considered snapback a likely or very likely outcome of decertification. The fact that the administration is not recommending the reimposition of secondary sanctions will be seen as a reprieve. The question that now remains is the extent to which Congress wishes to redefine the scope of compliant trade and investment through amendments to INARA.

In what some business leaders see as a silver lining of the turmoil caused by the decertification issue, it may be that more definitive action by Congress could actually help safeguard the implementation of the JCPOA and by extension the operations of multinational businesses in Iran. For example, removing the rolling certification requirements would reduce political uncertainty surrounding the deal and its continued implementation. 

Moreover, that Trump is not withdrawing from the agreement demonstrates that coordinated diplomacy can protect the JCPOA in Washington, and by extension, protect market access. In response to rising political uncertainty, and in the lead-up to today's announcement, European governments and the European business community significantly increased their level of direct dialogue on matters related to Iran Deal implementation. This dialogue helped ensure that the missions of the European diplomatic corps and the business community were mutually reinforcing. The progress made by businesses in engaging in Iran, with notable deals signed this summer by many of Europe’s industrial giants, helped underline the strategic value of the JCPOA for Europe beyond the realm of security issues.

The diplomatic efforts will need to continue. Congress is expected to make its determinations regarding the amendments to INARA within the next two months. There is significant risk that Congress could introduce new provisions to INARA that make compliance politically untenable for the Iranian government, which will see possible automatic snapback as a kind of booby trap. However if Congress takes a more sensible approach, the Iran Deal may yet emerge stronger than before. The new Trump strategy is minimal in its prescriptions. European leaders, must step in to define what a workable Iran policy looks like for all parties.  

Photo Credit: Wikicommons

Majority of Business Leaders Blame Trump for Slow Iran Investments

This article was originally published in LobeLog.

As President Donald Trump threatens to de-certify Iran’s compliance with the JCPOA, the political environment around post-sanctions trade and investment has grown more contentious. Yet, at the same time, after extensive negotiations with leading multinational companies, Iran has witnessed landmark agreements signed across industries, with billions of dollars of investment committed and financing agreements inked. For those business leaders continuing to push ahead in Iran, and for the Iranian public to whom they are accountable, the question is what to make of such contradictions.

To examine this and other questions, Bourse & Bazaar partnered with IranPoll to conduct a unique survey focused on economic attitudes and business confidence in Iran. The survey was conducted in August 2017 and covered a representative sample of 700 Iranians.

Several of the questions centered on post-sanctions investment and the political importance of the JCPOA. But perhaps most notably, 70% of Iranians surveyed believe that multinational companies are “moving slower than they could” to trade and invest in Iran following the lifting of international sanctions. Of this group, a significant 76% of Iranians identified “pressure or fear of the United States” as the key reason, compared to just 16% would blamed Iran’s “weak business environment.”

It is certainly sensible for Iranians to blame Trump’s antipathy towards the nuclear deal as a primary reason for the slow pace of Iran’s post-sanctions economic recovery. But this view might unfairly discount the inherent difficulties of investing in Iran, a fact that the Obama administration highlighted when concerns over the slow pace of economic engagement first emerged in early 2016.

It seemed a reasonable assumption that the “experts” who are the business leaders or policymakers actually trying to make trade and investment happen might have a different, more nuanced view than the Iranian public. The barriers to trade and investment in Iran are very real. The country ranks 120 in the World Bank’s “Ease of Doing Business” rankings, having actually fallen three places in the last year.

Results of the “Expert” Survey

To investigate this assumption, IranPoll and Bourse & Bazaar administered an online survey that collected responses from just over 250 “experts,” sampled based on their active involvement in Iran trade and investment matters. Of these respondents, 79% held either a master's degree or PhD, and 70% were professionals from European or Iranian private-sector enterprises. The remainder worked in state-owned enterprises, government agencies, or policy institutes. Importantly, 70% of respondents considered themselves to be either somewhat or well-informed about investing in Iran.

In an amazing example of statistical congruence, 70% of the expert respondents surveyed believe that multinational companies are “moving slower than they could” on trade and invest in Iran. Of this group, 76% blame “pressure or fear of the United States” for the slow movement, with just 17% blaming Iran’s challenging business environment. These proportions directly mirror the results seen in the survey of the Iranian public. How can it be that these experts, who know all too well that Iran is a difficult place to do business, are seemingly discounting those difficulties in the face of Trump’s rhetoric?

The answer may lie in the slow and steady progress that has been made in Iran trade and investment in the last year. Major contracts signed in 2017 include the first major post-sanctions investment in Iran’s oil sector, the first automotive investment majority owned by a foreign multinational, and the first equity stake taken by a global financial institution in an Iranian financial services firm, in addition to several major financing agreements and even more unheralded deals. This overall momentum, hidden to all but those watching Iran most closely, suggests that business leaders, as well as the regulators and policymakers with whom they work, have gained a sharper understanding of how to conduct business in the country. Although Iran’s economy remains rife with obstacles, business leaders are proving more adept navigators. For example, in the same survey, 74% of respondents said that they believe they know the right people to conduct business in Iran. As business leaders gain confidence in their own abilities and greater means to manage challenges within their control, the turmoil in Washington remains the key complication to trade and investment plans.

But if the business leaders are able to recognize American rhetoric as superficial, why exactly is it slowing the pace of trade and investment? This is likely because the rhetoric is impacting decision-making not for those closest to projects in Iran but for those stakeholders on whom they rely.

Commercial Agenda Advances

Reading the headlines on Iran, driven by Trump’s soundbites, it would be easy to believe that Iran is an untenable place to do business in the current political environment. Yet, the “country managers” who run business divisions in Iran for multinational companies have made considerable progress over the last year in pushing forward a commercial agenda. This contradiction may explain why 69% of respondents in the expert survey felt that international media outlets are not an accurate source of information about Iran’s “trade and investment environment.”

The slowdown occurs when the question of Iran crosses the desks of decisionmakers further from the point of contact. By dint of their progress, country managers increasingly need to draw on support from other parts of their multinational organizations and suppliers and partners in order to execute strategy. Most crucially, as a project reaches contract stage, it becomes imperative to find a financing solution. This requires the country manager to both bring his senior executives on board with the project plan and then seek engagement from a financial institution. When critical decisions reach this wider circle of stakeholders, headlines become far more salient. These stakeholders cannot draw on firsthand experience to bolster their confidence in an Iran-related commercial decision and rely instead on the incomplete picture painted in the international media. Understandably, they find it difficult to act decisively in the face of uncertainty, particular when personal or company reputations come into play.

In this way, Trump’s rhetoric is slowing the momentum of trade and investment prior to any snapback of sanctions. No doubt, Trump’s impending decision on decertification of Iran’s compliance with the JCPOA does make snapback a potential outcome. Tellingly, 68% of Iranian respondents and 63% of non-Iranian respondents in the expert survey considered snapback a likely or very likely outcome of decertification.

However, in this intervening period, during which there has been no instrumental change in US policy, the reported slowdown in trade and investment helps demonstrate a deficiency in how deal supporters are counteracting Trump’s message. The critical point is that Trump only has his message. Given the track record of his administration, he is unlikely to have a cohesive Iran policy at any stage, even if he decides to decertify.

Deal supporters in Washington ought to define the economic scope of sensible Iran policy more clearly and thereby support business confidence more actively. The imperative here follows directly from what it means to offer “sanctions relief.” As a policy tool, sanctions impose political ideology on economic structures. The act of sanctions “designations” makes a normative judgement about the objective composition of an economy, defining the acceptable level of commercial relations with certain economic actors. Consequently, crafting an effective post-sanctions policy requires its own congruence between ideology and structure.

In the case of Iran, the objective reality that trade and investment are incentivizing structural liberalization in Iran’s economy needs to be expressed and valued in ideological terms. Encouragingly, European stakeholders have become more assertive in presenting such a vision. Helga Schmid, secretary general of the European External Action Service, stated in a recent speech at the 4th Europe-Iran Forum, “We recognize that it is important that the benefits of the Iranian deal are felt directly by the Iranian people and Iranian businesses. This is necessary for the success of the deal, but it is also in the interest of the EU, its Member States and economic operators.”

Deal supporters in Washington should likewise be more confident in declaring that, where sanctions relief allows, companies ought to be free in engaging in trade and investment in Iran. Commerce not only helps preserve the nuclear deal but it can also help incentivize financial, industrial, and legal reforms, in a manner akin to how enterprise has helped successfully open economies in Eastern Europe, Latin America, and Southeast Asia. Of course, this amelioration will only take place in the medium to long term. But in the near term, a tactical insistence on stronger messaging around economic engagement is necessary to support those stakeholders whose work is so crucial to the quid-pro-quo of the deal and whose activities are fundamental to winning the hearts and minds of an Iranian public already so hopeful that engagement will deliver a brighter future.

Photo Credit: Wikicommons

In First, Global Financial Institution Takes Equity Stake in Iranian Financial Services Firm

Mofid Securities, Iran’s largest independent brokerage and financial advisory company, has entered into a major new agreement with Azimut Group, one of Europe’s leading asset managers. The agreement will see Azimut take a 20% stake in Mofid Entekhab, the asset management business of Mofid Securities, as Azimut and Mofid seek to bring a higher standard of asset management offerings to the Iranian market for both domestic and foreign investors.

The new deal makes Azmiut the first global financial institution to make an equity investment in an Iranian financial services company. It comes at a time when Iran’s financial services sector has made recent headway in reconnecting with global counterparts. New financing deals with Austria’s Oberbank and Denmark’s Danske Bank and an announced commitment from French bank BPI suggest that more foreign capital is set to flow to Iran in 2018, so long as the possible snapback of secondary sanctions does not take place. Similarly, investor appetite has grown with investment companies deploying foreign capital in Iran’s public and private equities in historic volumes. 

With the minority acquisition and joint pro rata capital increase, Azimut will help Mofid Entekhab to develop new investment strategies in local asset classes. Marketing will see a boost with an expanded, locally trained sales force. Most importantly, Azimut and Mofid intend to launch new offshore funds to enable foreign investors to gain exposure to promising Iranian equities.

Mofid Entekhab currently manages USD 89 million in six mutual funds and managed accounts, with 8% market share among Iran’s equity funds. The Mofid Group, founded in 1994, has earned a reputation for its innovation in the Iranian financial sector. The company has invested considerably to raise the standards of its services to international standards. Notably, Mofid owns Pouya Finance, the fintech company behind BourseView, the most extensive financial data platform for Iran’s capital markets. 

The new partnership with Azimut is consistent with Mofid’s effort to provide clients to “a new suite of financial advisory and wealth management services in line with the highest international standards,” said Hamid Azaraksh, Chairman of Mofid Securities. Azaraksh states that the company’s strategic goal is “to capitalize on [its] track record as the leading financial intermediary in Iran and create with Azimut a benchmark for the local asset management industry.”

For Azmut, the deal represents a bold move into a country with immense financial potential. Sergio Albarelli, CEO of Azimut Holding, described the deal as “a historical first step for a global player entering the Iranian financial market.” Albarelli noted the compatibility of Mofid and Azimut, based on “core values of independence and commitment to performance.”

The deal, announced just a week before U.S. President Donald Trump is set to declare whether he intends to “de-certify” Iran’s compliance with the JCPOA, offers another example of the strong European commitment to economic engagement with Iran, which is now in evidence across sectors. 

Photo Credit: Mofid Securities

New Survey Examines Iranian Attitudes Towards Foreign Investment, Multinational Companies

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

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

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

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

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

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

Robust Support for Global Economic Engagement

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

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

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

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

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

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

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

Confidence in the Business Community

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

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

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

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

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

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

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

Iranians Leveraging Their Influence

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

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

Full survey results can be seen here. 

MTN Group Offers a Glimpse of the Future for Iran Investor Relations

On August 3rd, the same day that President Rouhani officially launched his second term, South Africa’s MTN Group, a major telecommunications company, presented its 2017 interim results.

As a publicly traded multinational company, MTN’s presentation had all the trappings of a modern investor relations conference: a live-stream on Periscope, a dedicated hashtag (#MTNResults), a web portal, and significant media attention.

But the presentation also included something that perhaps no other company could boast—a direct and wide-ranging discussion of Iran business operations.

The MTN Irancell joint-venture makes Iran one of MTN Group’s most important markets, covering nearly 50,000 million subscribers, and generating USD 1.2 billion in revenue in 2016. Iran is MTN’s third most valuable market after South Africa and Nigeria despite operating in Iran in a joint-venture.

Despite the importance of the market, for several years MTN downplayed its Iran operations as international sanctions were levied on Iran. The country was mentioned sparingly in investor reports and primarily in regards to steps MTN had taken to mitigate regulatory and sanctions risks.

But in a sign of the new post-sanctions environment, Thursday’s presentation, led by Group CEO Rob Shuter and Group CFO Ralph Mupita, included considerable detail on the progress MTN has made in the Iranian market, with subscriber numbers and revenues rising. Their presentation offers a compelling example of the proactive financial communications that more listed firms are bound to follow in the coming years.

By way of comparison, the half-year presentation of Groupe PSA, the corporate entity of Peugeot and Citroen, made little mention of Iran despite Iran being the best-performing market and the source of key sales growth.  

The MTN presentation set a strong example for how Iran can be positioned within the strategic vision of a company. MTN Group is active in a number of complex markets, including South Africa, Ghana, Cameroon, and even Syria and Sudan. For Group CEO Shuter, the company mission is to “build credibility as an operator of emerging markets telecommunications.” This mission helps explain the Group’s commitment to the Iran and the appetite for the risk and uncertainty it poses.

The Group’s resolve was tested as the imposition of financial sanctions on Iran had made it impossible to repatriate revenues from MTN Irancell. Following the nuclear deal, MTN was able to reestablish its banking channel, and has since repatriated nearly USD 1 billion in cash.

Buoyed by the fact that Iran revenues can more reliably contribute to the group’s overall performance, Shuter noted that the Iran joint-venture is a “very high margin business” even with the “significant government revenue share.” MTN holds 49%, while Iran Electronic Industries is a relatively passive majority partner. The company expects Iran is continue to deliver growth. Data usage, the most lucrative revenue source for MTN, rose 160% in Iran year-on-year. MTN plans to drive more data usage through investments in thousands of 3G and 4G sites. Data revenue is already up 68% in the first half of 2017.

The public disclosure of detailed operational and financial data of an Iran business unit remains rare. For globally-recognized listed company, reporting financial results is mandated. But in Iran major state and private companies listed on the stock exchange have yet to adopt best-practices for investor relations. MTN’s clear effort to report on their Iran operations  in a manner consistent with other markets a kind of proactive communications that will need to be adopted by other multinational firms as they enter into joint-ventures in the market.

MTN’s relatively passive partner in Iran, Iran Electronic Industries, which owns 51% of MTN Irancell, is a state-owned enterprise. Multinationals in the oil and gas, automotive, metals and mining, and infrastructure sectors are currently entering into similar engagements with state enterprises.

As more multinational companies establish joint-ventures with Iran, investors both within Iran and abroad will gain access to more detailed financial results and strategic outlooks. The foreign partners (and foreign regulators) will require transparency, and these requirements could prove transformative.

Finally, the MTN presentation offered a vision of innovation that did not just include Iran, but put Iran at its center. Group CEO Shuter highlighted Snapp, Iran’s answer to Uber, as an example of a market-leading start-up to emerge from an MTN-backed accelerator.

No doubt, for the analysts, investors, and journalists watching the MTN interim results it was a case of “business as usual”—another well-scripted, well-choreographed company presentation. But for those with an eye on Iran, the presentation was reminder that investor relations in that market has a long way to go, particularly for those multinationals currently trading in the country. With its transparency and bold vision, MTN is setting a strong example that others ought to follow.

Photo Credit: MTN Group

“Davos of Iran” to Convene as Post-Sanctions Trade and Investment Reaches Critical Juncture

European business leaders and policymakers will convene with their Iranian counterparts at a critical time, setting an agenda for trade and investment as the Trump administration signals its skepticism regarding the Iran nuclear deal.                                                                                 

The fourth edition of the Europe-Iran Forum, which has been called the “Davos of Iran,” returns to the historic Dolder Grand Hotel in Zurich on October 3-4, 2017. The summit is set to be the most significant gathering of Iranian and European business leaders and policymakers to date, demonstrating a clear commitment to the economic dividends of the nuclear deal.

“Multinational companies have now spent two years studying the feasibility of new investments in Iran, and pressure is increasing for long-expected deals to reach the contract stage. Encouragingly, with a number of major agreements signed in the last few months, it seems the commitment to the Iranian market remains strong,” said Esfandyar Batmanghelidj, founder of the Europe-Iran Forum.

“The aim now is for European leaders to work with Iranian partners to find a sustainable agenda for trade and investment with a view to the long term.”

Helga Schmid, Secretary General of the European External Action Service (EEAS) and a key figure in the negotiation of the Joint Comprehensive Plan of Action (JCPOA) will give a keynote speech outlining the European commitment to the nuclear deal and the provision of sanctions relief to Iran in exchange for its verified compliance. This is the first time that the Secretary General, one of Europe’s top diplomats, will address an audience of business leaders on these matters.

The European push for “business diplomacy” will be bolstered by the participation of an unprecedented multilateral gathering of senior diplomats, including the Belgian, British, Danish, Dutch, and Polish ambassadors to Iran.

There will also be strong representation from the Rouhani administration, which is determined to push forward its agenda of economic engagement following a resounding election victory in May and the President’s inauguration on August 5.

Mohammad Khazaee, the Deputy Minister for Economic Affairs and Finance and President of the Organization for Investment, Economic, and Technical Assistance of Iran (OIETAI), will outline the administration’s agenda for monetary policy and regulatory reform. Iran is seeking to make more progress on banking challenges, particularly by improving its compliance with the recommendations of the Financial Action Task Force (FATF), an intergovernmental body that establishes regulatory standards for international finance.

Deputy Minister of Industry, Mine, and Trade Mehdi Karbasian, and Deputy Minister of Foreign Affairs Seyyed Kazem Sajjadpour, will also speak at the 4th Europe-Iran Forum.

Senior business leaders from Iran speaking at the conference include Farzaneh Sharafbafi, the newly appointed CEO of Iran Air and the first woman to lead Iran’s national airline. This will be Dr. Sharafbafi’s first major international address in her new role. Iran Air’s pending deals with Airbus and Boeing, valued at USD $10 billion and USD $17 billion respectively, count among Iran’s most important post-sanctions contracts.

Dr. Mohammad Saeedi, Chairman and Managing Director of the Islamic Republic of Iran Shipping Lines (IRISL), will outline how Iran seeks to modernize its merchant fleet and port infrastructure to keep up with rising trade flows. Iran’s non-oil trade hit nearly USD $30 billion in the four months since the beginning of the Iranian calendar year (March 2017). 

Masoud Khansari, President of the Tehran Chamber of Commerce, Industries, Mines, and Agriculture, will detail the ways in which Iran’s private sector has been empowered to drive economic growth across sectors, including those traditionally dominated by state enterprise.

A wide range of panels will discuss how Iran is succeeding in attracting foreign investment through new partnership models. Of particular importance will be a panel on transportation and logistics, with senior representatives from Alstom, Siemens, and Port of Antwerp discussing the holistic regeneration of Iran’s transport infrastructure and the concrete achievements of their companies in the market, in addition to ongoing efforts to mitigate risk and ensure adherence with global compliance standards.

Moreover, several of Iran’s key private equity and venture capital executives will explore how foreign capital has begun to enter Iran, supporting growth within the vibrant private sector.

Omid Gholamifar, CEO of Serkland Invest, a Swedish investment company focused on Iran, and a participant on the private equity panel, notes, “Over the last two years, foreign investors have deployed venture capital in Iran, supporting young digital businesses. Those investments have done well, spurring entrepreneurship and bringing new services to the market. Now investors are beginning to look at more mature companies and these growth capital investments could turbocharge Iran's private sector." 

The Forum will also mark the release of a new study measuring business confidence in Iran, commissioned in partnership with noted research firm IranPoll. The first-of-its-kind survey examines attitudes among Iranians towards domestic and multinational businesses, as well as the extent to which Iranians believe that business leaders will deliver on important commitments such as job creation, environmental protection, and innovation.

The 4th Europe-Iran Forum is organized by Bourse & Bazaar in partnership with Adam Smith Conferences. It is supported by KPMG, Dentons, and Manoir Industries among other world-class sponsors.

Photo Credit: Europe-Iran Forum

Struggling to Trade With Iran, Japanese Companies Look to European Examples

On July 19, Bourse & Bazaar held a round table in Tokyo, part of a global series of meetings being held in advance of the 4th Europe-Iran Forum. This event, hosted by the JIME Center of the Institute for Energy Economics, Japan’s leading Middle East research institute, brought together senior executives from some of the largest Japanese companies to discuss their progress and frustrations in the Iranian market.

Since Implementation Day, Japan has been slowly increasing its economic activity in Iran. Japan has committed to establishing a financing facility worth USD 10 billion to support new investments in Iran by Japanese companies, which have begun to sign new investment contracts across several sectors. Most recently, Toyo Engineering Corporation signed an agreement with Iran’s National Iranian Oil Company to rehabilitate Iran’s Salman oil and gas field in partnership with domestic oil firm Petropars.

However, the pace of post-sanctions trade and investment has lagged behind expectations. Japan was among Iran’s most established trading partners prior to the tightening of international sanctions, and Japanese multinationals have longstanding partnerships in the country. But the rush of activity from European and Korean multinationals has seemingly left the Japanese behind. Japanese executives are asking: “How are the Europeans doing it?” As Trump ups his rhetoric against Iran, and as the GCC crisis continues to roil, Japanese companies are trying to understand and replicate the ability of European multinationals to forge ahead and sign binding commercial agreements in Iran.

On one hand, Japanese companies should be better suited than their European counterparts to crack-open the Iranian market. From a management perspective, Japanese multinationals benefit from tight coordination across sectors and secondarily, a close relationship with the relevant government ministries. The so-called keiretsu, or business groups, link together financial institutions, industrial giants, energy firms, and shipping companies into informal groups that commonly work together in domestic and international markets. Though keiretsu ties are now looser than in their 1990s heyday, bids for large infrastructure or industrial projects by Japanese multinationals are often enhanced by the provision of financing by the main keiretsu bank. At a time when Iran is starved for financing, and while European companies are struggling to enlist major banks for Iran investments, this historic coordination could put Japan in a highly competitive position. Japanese megabanks maintain significant non-dollar financial channels and  Iran possesses significant yen-denominated reserves in Japan—proceeds from decades of oil sales.

Yet, coordination is also a curse when the importance of coordination among companies is also reflected within decision-making processes. Japanese companies are managed on the basis of consensus. Approval for decisions is achieved through the process of nemawashi, by which support for an idea is achieved by gathering input and support from a wide range of internal stakeholders. This process both helps explain the impressive track record of Japanese companies in finding commercially successful strategies, but it is also a reflection of the high-degree of caution exercised by Japanese managers, who seek a wide consensus on any given strategy, rather than assume sole responsibility for risky decisions.

Both the aversion to risk and the responsibility for risk pose an understandable barriers when comes to Iran investments. Multiply risk aversion across company departments, and then across the companies within a keiretsu group, and subsequently, the prospects for an Iran investment “green light” grow slim. The Japanese country managers responsible for business development in Iran have the unenviable task of seeking especially broad consensus for key decisions, likely involving a greater number of individuals than in a European corporate context. Consensus-building is further complicated by the fact that the political environment for Iran trade and investment seems to change on a near weekly basis. The longer the decision-making process, the more likely it will be that decision-makers will want to reevaluate in light of recent developments.

Crucially, Japanese management teams are struggling to build consensus around new investments in Iran in part because of lack of political support. The largest Japanese enterprises are in regular communication with organizations such as the Ministry of Economy, Trade and Industry (METI), the Ministry of Foreign Affairs, and the Japanese External Trade Organization (JETRO). Each of these organizations boast staff with deep knowledge of the Iranian market and experience executing large agreements that is perhaps even deeper than among the equivalent European agencies. But Japan, unlike Europe, has yet to set an overarching policy regarding renewed economic ties in Iran, rendering this coordination with government inert. 

The lack of high-level political support remains the primary difference between the recent experiences of European and Japanese enterprises in Iran. Japanese Prime Minister Shinzo Abe was scheduled to travel to Iran in August 2016, only for the trip to be delayed over concerns that Japan’s first such visit since 1978 could sour possible ties with Donald Trump, who was growing resurgent in the U.S. presidential elections at the time. While Rouhani and Abe did meet on the sidelines of the United Nations General Assembly in October 2016, a high-level state visit to Iran is now on indefinite hold. Trump's eventual triumph saw Abe become among the first world leaders to visit the new president, in February of this year. While numerous European heads of state have traveled to Iran in the last two years, offering valuable political support to their engaged companies, Abe’s lack of a clear stance leaves Japanese companies exposed to possible reputational risks in the United States possibility even at the hands of Trump himself. 

Second, Japan’s government and Japanese companies are contending with political pressure from Saudi Arabia and the United Arab Emirates. While Iran was Japan’s largest exporter of oil up until the tightening of international sanctions in 2012, Iranian oil imports were replaced by imports from Saudi Arabia and the United Arab Emirates. Recent data from the Petroleum Association of Japan shows Saudi and UAE oil accounting for a combined 70% of the country's imports. 

The governments of Saudi Arabia and the United Arab Emirates have used this energy dependence to send a clear message to Japanese companies regarding Iran: “It is us or them.” This pressure explains in part why Japan’s oil imports from Iran in 2017 are down 51% on the previous year. Japanese companies report being pressured not to invest in Iran, at the risk of losing major contracts in Saudi Arabia and UAE. European companies have also been subject to similar pressure from Saudi and Emirati authorities, but have been more effective in pushing back on false ultimatums. In a recent investor call, Total CFO Patrick de la Chevardiere disclosed that the company had informed its Saudi partners about its intention to sign a full agreement to develop Iran’s South Pars Gas field.

Absent more direct political support, Japanese companies may remain frustrated in their attempts to engage Iran’s investment opportunities more aggressively. But there are a few strategies that could help create basic momentum behind investment plans while still mitigating risk. 

First, Japanese companies need to take the keiretsu mentality and use it to create consortia with European firms. European companies have already sought partnerships with Chinese financial and industrial partners to help spread the risk of projects in Iran. Japanese multinationals should more actively position themselves as possible partners for such arrangements, particularly given that Japanese companies already operate substantial business units or joint-ventures in Europe with many of the European companies engaged in Iran. 

Second, Japanese companies should be more creative in seeking ways to build credibility and stakeholder relationships in Iran. European companies, cognizant that significant investments would take a long time to move from initial discussions to binding contract, have used smaller projects to help demonstrate their commitment to the market while negotiations are ongoing. One compelling example can be seen in the case of French carmaker Renault, which has provided hardware and expertise to support the study of electric vehicles by students at Azad University. Japanese companies, which lead the world in many technologies, would be well-positioned to devise similar knowledge transfer projects in Iran. Such efforts who help build stakeholder relationships and also provide Japanese companies early examples of corporate social responsibility in Iran that can be used to help mitigate reputational risk. 

Japanese ambitions in Iran may remain constrained by politics for some time. But Japanese multinationals can and should remain committed to the market, seeking creative solutions to remain present and active. Ceding market share to European, Chinese, and Korean multinationals would prove a strategic blunder, particularly as cooperation remains a viable option. 

Photo Credit: IranThisWay

Is France Ready to Stand Up to Trump on Iran?

This article was originally published in LobeLog.

On July 26th, the French foreign ministry issued a declaration about the package of new sanctions targeting Russia and Iran making its way through Congress to President Trump’s desk in the Oval Office.

In the estimation of the French foreign ministry, “the extraterritorial scope of [the sanctions] appears to be unlawful under international law.” The statement outlined the need for the Europeans to “adapt our national mechanisms and update European mechanisms” to protect themselves from the U.S. legislation. The French foreign ministry called for coordination with European partners to address American overreach.

Although Germany is likely to lead the fight against additional Russian sanctions because of its reliance on Russian energy supplies, the French are likely to lead on the European pushback on new Iran sanctions, and even more urgently, to advocate for the preservation of Iran nuclear deal, otherwise known as the Joint Comprehensive Plan of Action (JCPOA).

In a recent interview with the Wall Street Journal, Trump stated, “If it was up to me, I would have had [Iran] noncompliant 180 days ago.” Subsequent reports suggest that the administration may be seeking additional access to Iranian nuclear sites. The combination of Trump’s statement and the rumored actions has put the survival of the JCPOA at risk.

France as Lead Investor

For the French, the timing of the new Iran sanctions and Trump’s statements on the nuclear deal are especially troubling. French companies have reached important milestones in the past few weeks that could be jeopardized if political uncertainty begins to undermine business confidence.

On July 3, French energy giant Total signed a landmark $5 billion contract to develop Iran’s South Pars Gas field. Twenty days later, French transportation company Alstom signed a major joint-venture agreement to produce metro carriages in Iran. French carmaker Renault is expected to conclude its long-awaited contract defining the operation of a full-fledged Iran business unit in the next week. At the same time, a steady stream of smaller French investments have brought activity to other corners of Iran’s economy. Sushi Shop, a French fast-casual restaurant chain, opened its first branch in Tehran this week. Add to this Airbus and ATR’s sale of aircraft to Iranian airlines, the mooted market entry of telecommunications giant Orange, and the local expansion of hospitality giant Accor, and the scope of French enterprise is quite large. For France, Iran is a cornerstone market, a rare country where French companies have market-leading positions in strategic sectors.

The success of French enterprises in Iran is a crucial part of France’s program to boost its global competitiveness. In a recent interview, French Minister of Foreign Affairs Jean-Yves Le Drian, noted France’s dismal trade deficit, amounting to 48 billion euros in 2016. Le Drian drew a comparison to France’s European neighbors: “France suffers from a lack of exporting companies: there are only 125,000—half of which work with only one country. We aren’t competitive enough in this respect.” 

Le Drian was no doubt referencing the export prowess of Germany. This prowess also explains the differing positions of Germany and France vis-a-vis Iran. Despite being Iran’s largest trading partner prior to the imposition of sanctions, Germany sees Iran as only a part of a wider portfolio of trade partners, one of which is the United States. Tellingly, the value of German exports to the US was $114 billion in 2016, whereas French exports were valued at just $47 billion. The respective 2016 export figures for Iran are 2.9 billion euros for Germany and 1.7 billion euros for France. So, although French trade to the US dwarfs the total value of French trade with Iran, in relative terms, Iran is a more important market for France than for Germany.

This is especially true for foreign investment. French companies are increasingly establishing majority-owned business units in Iran. These units, when they become revenue generating, will deliver significant shareholder value. The best example of this is Peugeot, whose sales in the first half of 2017 dipped in both Europe and China, only to remain positive overall because of strong performance in Iran. Importantly, Peugeot does not sell cars in the United States. Although Peugeot may be an extreme case of reliance on the Iranian market, Iran-based revenues can certainly deliver increased shareholder value to French companies.

For Emmanuel Macron, who faces a massive task in revitalizing French business, the economic boon of the Iran deal will prove strong incentive to advocate for its preservation over and above the fundamental security gains that the deal was able to achieve.

France as Deal Saver?

Although coordinated action from all European allies will be necessary to convince the Trump administration to stay the course with the deal, which the international community believes to be working, France may be the country best positioned to lead on the issue. There are a few reasons why.

First, Macron has spent a considerable amount of time with Trump both in Washington and Paris, and has developed a personal relationship that constitutes, if not out-and-out rapport, then at least a kind of understanding between two self-styled “alpha males.” This relationship should give Macron the chance to appeal to Trump more directly, not necessarily relying on communications via his fractured circle of advisors, for whom Trump has “great respect” but to whom he may not listen.

Second, the timing for French leadership on the issue is right. Macron remains energized by his recent election triumph, and one recent study has seen France rise from fifth to first in a world-ranking of soft power, due to both Macron’s popularity and the influence of France’s diplomatic network. Both qualities would be brought to bear in any multilateral outreach to preserve the Iran deal in Washington. Moreover, Germany’s Angela Merkel and her government are set to enter an election contest in September, monopolizing attention during this critical period of equivocation from Trump. It would also be wise to separate the advocacy on Russia and Iran sanctions issue given the complicated ways in which the political circumstances of the two countries are both related and unrelated.

Finally, France could prove the most credible advocate for the Iran deal in Europe, since it was the toughest of the European negotiating parties of the JCPOA. Laurent Fabius, the then-French foreign minister, was seen as a potential spoiler of the deal given the firmness of French demands. The French insistence on strict Iranian adherence to the deal was underscored when Macron emphasized the point in his phone call congratulating President Hassan Rouhani on his reelection. Moreover, to the extent that the conversation around Iran’s non-compliance has been conflated in Washington with a discussion of regional security issues like support for terrorism, French intervention could be key. France is the European country most engaged on confronting global terrorism and could credibly mediate between Iranian and American political and military leaders around some of these issues.

Whether or not Macron and his team are ready to spend the time and energy to safeguard the deal is yet to be seen. But like Trump, Macron needs to show that he is “winning.” French businesses are winning in Iran right now, and the loss of the deal could mean the loss of a significant market once more.

Photo Credit: Wikicommons