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Capital Acumen Issue 31

Investing In Iran: Roses Or Thorns?

In a nation newly open to foreign commerce, we find an abundance of investment opportunities — and caveats.

Illustration of bird and flowers

Eric Lafforgue/Getty Images

He who wants a rose must respect the thorn.

Ancient Persian proverb

Iran, with its roughly $400 billion market potential, abundant natural resources and young, well-educated population, is open for business. In the wake of several major economic sanctions being lifted in January 2016, the Middle Eastern country has emerged as one of the last frontiers for emerging markets — a relatively unspoiled canvas with significant potential across various industries, including aerospace, agriculture, technology and travel.1

What Iran Needs

In place for decades, Western sanctions — on banking, investments, imports and more — essentially hamstrung the nation, with dire results. While estimates vary, Iran’s capital-starved energy infrastructure could need a $1 trillion investment over the next decade. And with fewer than 100 hotels in Tehran compared with some 270 in New York City, the nation’s tourist infrastructure appears woefully undercapitalized. In addition, some aircraft in the Iranian national fleet predate the 1979 revolution, and the airline’s safety record is among the poorest in the world. Similarly, about one million of the cars currently driving on Iranian roads are more than two decades old.2 The current outlook finds the country expecting to plow billions of dollars into its energy grid and rail and water infrastructures in the years ahead.

Headshot of Joseph Quinlan

Photograph by Andy Ryan

 

Business opportunities in the country should be plentiful, but they are not for everybody.

Unequal Access

Given these recent developments, business opportunities in the country should be — and it seems are — plentiful, but are not without risk or for everyone, specifically firms based in the United States. While international sanctions connected to Iran’s nuclear program were lifted at the beginning of the year, other restrictions — related to accusations of state-sponsored terrorism and human rights violations — remain in place. As a consequence, trade that is outside areas such as aviation, carpets and agricultural products remains largely off limits to U.S. companies. Meanwhile, however, the door has opened for businesses operating in European and Asian countries:3

  • A European aviation company has already signed a deal to deliver more than 100 aircraft to Iran.
  • A French automaker is set to sink over $400 million into a new plant and equipment.
  • French, Italian and Chinese mining and energy companies are vying for business in Iran’s energy sector.  
  • Iran reportedly has signed a $600 billion trade deal with China and $55 billion in commercial deals with Italy and France.

But even these firms and countries may not find Iran an easy place to do business. Indigenous vested interests — notably the commercially minded branch of the Islamic Revolutionary Guard — appear to be well entrenched in the economy and represent significant barriers for outside companies.

Looking Forward

We believe that Iran’s economic outlook remains quite promising, assuming there is no “snap-back” in sanctions. As capital flows back into the oil and gas sector, oil exports are forecast to rise by roughly 700,000 barrels per day by the end of the year.4 Iran earned just over $41 billion in oil exports in 2015, and that figure could almost double by 2020.5 Near term, however, depressed oil and gas prices are clouding Iran’s energy earnings potential. In the financial sector, the reincorporation of Iran into the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network earlier this year should help grease the wheels of commerce. On the downside, the availability of U.S. dollars remains constrained by U.S. restrictions on bank lending and loans. As for the Iranian consumer, retail sales plummeted 11.3% in 2013, and dropped another 19% and 2.5% in 2014 and 2015, respectively, as sanctions bit deeper into the economy.6 Yet, pent-up demand and elevated job growth should help boost consumer spending in the near term, adding more heft to Iran’s growth outlook. Young and tech-savvy, Iran’s consumer base represents significant up­side for leading technology firms.

Iran energy reserve statistics

The Big Picture

Adding all this up, we expect Iran’s economy to expand by 5% this year, and potentially do so for the remainder of the decade, making the Persian regional economic power among the most dynamic in the Middle East. In time, America’s leading multinationals may garner an increasingly larger portion of the Iranian economic pie. For now, though, the most effective way for U.S. investors to play Iran is indirectly — mainly via large-cap European firms in energy, infrastructure, banking, capital goods, tourism and autos. When it comes to investing in Iran, at least for the time being, expect both roses and thorns.

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