Iran Needs Western Investment As Falling Crude Oil Price Dampens Growth
$OIL
Isolated from the global economy for the past decade and with a population of 80-M, Iran is a fertile ground for business. But international investors will have to cope with obstacles including government control of as much as 70% of the economy, a judicial system unfavorable to foreigners, a dual exchange rate and a culture in which tough negotiations often go hand-in-hand with doing business.
The Iranian culture of having to negotiate your way through each aspect of a deal makes for a very complex market.
Since signing the nuclear accord on 14 July, Iran has hosted 15 trade delegations, including from Germany, Japan, France and Poland, to lay the groundwork for trade accords after sanctions are removed from the Crude Oil-rich economy. The removal of sanctions is expected in Q-1 of Y 2016.
Iranian President Hassan Rouhani seeks to deliver on his electoral promise to rekindle political ties with Western countries. He says he welcomes the participation of foreign companies, to inject capital and technology.
The principal channel is joint ventures with local companies.
The aim is to ensure that Iranian jobs are created and also to make Iranian companies more competitive, said the Chairman of Iran’s Chamber of Commerce and Industries, in an interview Tuesday.
“Our advice to European countries is that if you want to have a sustainable presence in Iran, look at accompanying and investing alongside companies in the private sector,” he said, in a downtown office a stone’s throw from Iran’s Oil ministry and some of the country’s biggest banks.
The lifting of sanctions will eventually release as much as $30-B of Iran’s foreign currency reserves held abroad and allow it to ramp up Crude Oil exports. With prices down more than 50% in the past year, that still will not be enough for Iran to meet its investment needs or reach its target of sustained 8% economic growth over the next 5 years, said an Iranian economist whose views are close to those of Pres. Rouhani’s government.
“I do not expect an explosion in foreign investment,” he said. “It will be gradual and in leading sectors like Oil, Nat Gas and petrochemicals where Iranians and Westerners already have experience working together.” Crude Oil accounts for about 16.7% of economic output.
Government participation in the private sector may pose difficulties.
A privatization program last decade saw dozens of previously government-owned companies floated on the Tehran Stock Exchange, including banks and petrochemical firms. Yet many of their majority shareholders are large state pension funds or conglomerates owned by state-run foundations or the Iranian Revolutionary Guards Corps.
About $46.4-B of shares in government-owned companies have been sold off by various means, including through flotations on the stock exchange, since Y 2001, the Iran Privatization Organization (IPO) said in August.
Almost 30%, more than $12-B of it has been transferred to the private sector in the past 2 years.
“As long as a policy is not adopted that does not nurture the private sector to the level that it seizes the whole of the economy, Iran will not witness the level of development that it needs,” Mohammad Sadr Hasheminejad, Chairman of Iran’s Eqtesade Novin Bank and the Stratus Holding Group, one of the country’s first privately owned conglomerates, said in his office in an affluent neighborhood of Tehran. Iran’s economic “sickness won’t be treated.”
Another obstacle: a dual exchange rate, one announced by the Central Bank of Iran and another used on open markets, that complicates operating in the country for foreign businesses.
Investor you should be able at any time to change money in the open market, but the government does not consider it legitimate. Only if the exchange rate is unified can foreign investment officially be brought inside the country.
For some investors the political risk of working in Iran poses serious questions, particularly when it comes to guarantees on their capital. The current nuclear deal contains a “snap-back” mechanism that would reinstate sanctions if Iran is seen not to have not kept to its terms.
Iranian officials have told visiting trade delegations that government regulations are designed to keep foreign investments safe using the central bank as a main guarantor. But questions remain over legal jurisdictions and how future disputes between a foreign commercial entity and the Iranian government can be resolved.
The Big Q: What happening around the Iranian negotiating table?
The Big A: Tea, coffee, cake, fruit, maybe some kebab before another coffee.
Iranian Supreme Leader Ayatollah Ali Khamenei, who has the final say on all affairs of the state, has called for boosting domestic production, along with increased competitiveness and efficiency. While that offers Pres. Rouhani political cover to forge more liberal economic policies, it also seeks to ease the concerns of conservatives who oppose widespread foreign ownership.
“There are a lot of opportunities in Iran,” Giulio Haas, Swiss Ambassador to Iran. “You will have to go after them cautiously. But Iran is a country that wants to develop. This is not a basket of gangsters, it is a BRIC in the making.”
Stay tuned…
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Paul Ebeling
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