Awaiting a successful end to the current nuclear negotiations between Iran and the P5+1 nations, international business executives have booked out most hotels in central Tehran.
According to a report by Andrew Critchlow for the Daily Telegraph, fund managers, business executives and investors from around the globe are gearing up to enter Iran once sanctions are over. The last few months has seen a steady influx of international investors visiting the capital despite the never ending negotiations that have been extended yet again.
One the sanctions are lifted the country will be the hub of economic activity between the east and the west. The young educated population and the natural mineral resources will propel Iran into an economic powerhouse. Iran already has a large eager middle-class population demanding the latest of the latest the world has to offer. A broad industrial base already exists despite years of economic sanctions through some companies linked to the political wing of the country’s hard-line Revolutionary Guards Corps.
The Daily Telegraph reports:
Holding the world’s fourth largest oil reserves and the second largest stocks of natural gas, Iran is often thought of as simply another Middle Eastern “petrodollar” economy.
However, in reality Iran is perhaps the region’s most diverse economy with an established capital market, a well-developed industrial base and a large population that generates a significant demand for services such as telecommunications and banking.
According to emerging market investment house Renaissance Capital, its gross domestic product last year was around $437bn (£282bn), ranking it as the world’s 27th largest economy, ahead of nations such as Austria.
Despite strict economic sanctions, which prohibited most international companies from doing business with the Islamic republic and prevented Iranian firms from financial transactions overseas, the economy has survived because of the depth of Iran’s industrial base and high levels of education. These characteristics, coupled with its population of over 80m, prompted Sir Martin Sorrell, chief executive of advertising giant WPP, last year to describe Iran as one of the last major untapped frontiers for business.
As a nuclear deal with the so-called P5+1 nations, US, Russia, China, France, Britain and Germany, draws near – another deadline looms on Monday –international business has begun to take seriously the opportunities that could soon open up. Although negotiators were unable to present a definitive agreement within the deadline set by the US Congress, businesses have already been gearing up to return to Iran.
“For the past several months there has been a lot of excitement about sanctions lifting,” said Reza Soltanzadeh, managing director of the Iran Industries Investment Company. “Companies from Europe, America and Asia have all been here recently to take a look.”
Iran Industries Investment Company is the country’s largest privately-owned fund manager operating on the Tehran Stock Exchange, where it manages a portfolio of around $350m through its securities subsidiary. Mr Soltanzadeh expects about $1bn will flood on to Iran’s capital market, which is valued at around $120bn, within the first 18 months of sanctions being lifted.
He believes that most of this money will be directed towards high-value petrochemicals industries and metals industries in which Iran has a competitive advantage. Unlike its Sunni Muslim neighbours such as Saudi Arabia and the United Arab Emirates, Iran has a much larger domestic population, which can sustain larger-scale industrial development.
Unlike its neighbours in the Gulf, which remain heavily dependent on the hydrocarbons sector, Iran has managed to develop a broad industrial base. Its car industry produces over 1m vehicles per year, despite the limitations to accessing new technologies and finance. Part of its success is due to large demand from Iran’s large middle-class population but also the links of many companies to the political wing of the country’s hard-line Revolutionary Guard.
“Global investors are never going to see a country of this size and sophistication open up again” said Renaissance’s chief economist, Charles Robertson. ”
He says Iran’s economy is comparable to Turkey in its potential but with the added benefit of vast oil reserves and lower average wages. His top tips for investment are retail, telecommunications and the internet, with the country far behind its neighbours in terms of access.
“The country just needs investment and foreign capital,” said Mr Robertson.
Oil and gas will, of course, attract most interest. Oil majors such as Royal Dutch Shell have already sent delegations to Tehran as expectations of a deal on sanctions have grown. At its peak before the Islamic revolution in the 1970s, Iran was producing between 5m and 6m barrels per day, and has the potential to return to that level if sanctions are dropped.
But for that to happen, the government will have to reform its contract terms to give international investors a greater share of the profits from any additional oil and gas they produce. Details of the new terms are expected to be released within weeks.
However, the most important area of the economy outside oil to be revitalised once sanctions are eventually lifted will be banking. US embargoes have focused on restricting Iran’s financial sector and specifically the capacity of Iranian and international lenders to act as intermediaries for trade with the outside world. Allowing Iranian banks to conduct foreign currency transfers in addition to unlocking billions of dollars of Iranian funds trapped overseas would help the country back on to its feet. Lifting sanctions would also allow Western banks to reopen branches in Tehran closed for years.
“Banking measures will be near the front of the queue of sanctions that are eventually lifted,” said Henry Smith, Middle East and North Africa analyst at Control Risks.
Despite its economic potential Iran still has profound economic problems. Unemployment is around 25pc and although inflation has fallen back, the rial remains hopelessly undervalued.
There may also be risks for international investors from the deteriorating political situation in the region between Shia-Muslim dominated Iran and its Sunni Arab neighbours. Iran is already facing off against Saudi Arabia in proxy wars under way in Yemen and Syria. International investors face the risk of losing favour in Arab markets if they invest heavily in a reopening Iran.
“There is something in Iran for everyone, but people are still concerned by the risks while sanctions are still in place,” said Mr Smith.
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