In July 2015, Iran, the P5+1 (United States, China, Russia, France, the United Kingdom, plus Germany) and the European Union were signatories to the Joint Comprehensive Plan of Action (“the JCPOA”). The agreement would curtail international sanctions against Iran in exchange for reductions of its nuclear activity. Specifically, Iran will have to reduce its centrifuges, which are used to enrich uranium, by two-thirds but allows it to keep 3% of its current uranium supplies and continue its uranium enrichment to levels sufficient for civilian nuclear power and research. Essentially, the deal allows Iran to keep a basic nuclear program alive but one without the resources immediately necessary to create a nuclear threat. The deal would additionally allow inspectors from the International Atomic Energy Agency (“the IAEA”) to randomly inspect the country’s nuclear facilities or any sites deemed suspicious. In exchange, Iran will find relief from economic sanctions, including those placed on its banking institutions, energy sector, shipping, automotive industry and commercial aviation. If at any point in the future Iran violates the terms of the deal, the “snap-back” provisions of the deal will reinforce current sanctions.
Timeline and Status Quo
The U.S. Congress has until September 17 to reject or approve the deal, and President Obama has another 22 days to veto any disapprovals. Although there is concern that the Republican Party, along with a few Democrats, could pass a measure which would effectively block President Obama’s veto, the international community generally regards the deal as if it has already been fully ratified and approved by all parties.
While American companies remain cautious, other state bodies and members of the private sector have already made bold steps towards rebuilding their financial relationships with Iran. Germany, Spain, France, Italy, Austria, Sweden and Switzerland have already sent or will soon send trade delegations to Iran. Chinese automakers and Russian nuclear energy companies have eagerly partnered with domestic companies and begun production processes. Top officials from India, Thailand and South Korea are reported as being optimistic about the future of economic relations between their countries and Iran. On the other hand, American companies—for example GE, Chevron, Boeing, Ford—are all quoted as being more wary. While potentially interested in pursuing business opportunities, all are still waiting for the ultimate go-ahead by Congress. It should be noted that for U.S. businesses and individuals, all American sanctions levied against Iran for its human rights abuses, terrorism support and missiles will still be intact. U.S. stringent embargo laws will criminalize investment in Iran outside the specific sectors detailed in the agreement. Dealings with the Iranian Revolutionary Guards Corp. and certain Iranian banks are forbidden, even for non-U.S. persons through secondary sanctions.
The less discussed but equally delicate issue that can prevent the success of the deal is the Supreme Leader Khamenei’s approval of it. As the Nuclear Program falls under his jurisdiction and not President Rouhani’s, there are significant questions whether Iran will ultimately cooperate to make the deal work. However, the economic and political advantages in store for Iran under the deal are substantial and it would be extremely short-sighted of its leaders to reject it. Given this timeline for approval, the estimated six to nine months it will take for Iran to implement the JCOPA provisions and IAEA’s verification of its full integration of these requirements, it is unlikely that the sanctions will be lifted prior to an “Implementation Day” in mid-2016.
As Iran presents itself as a re-emerging investment opportunity, it would be remiss to not advise any hopeful investor to act with great caution and awareness. This especially applies to all American persons and entities and other foreign investors which have significant business dealings with the U.S. It must be emphasized that persons interested in pursuing this opportunity are legally prohibited from taking any actions even transiently related to Iran before the Implementation Day. Failure to adhere to these rules of engagement will almost certainly expose such persons to considerable legal and financial repercussions.
Sanctions relief is only the very first step in a long procession of changes that need to occur before Iran can be a safe investment. The Iranian government must also lift the heavy regulatory obstacles that have stifled free investment since the 1979 Islamic Revolution. There is substantial state involvement in many sectors and concerns about corruption levels, and unless this is reformed, the historical risk of investing in Iran will continue to exist.
Upon initial sanctions relief, in all likelihood international eyes will closely watch the foreign companies who decide to operate there. Any entities contemplating joint ventures should note that partner risk in any Middle Eastern nation is significant and should certainly not be discounted here. Given the multiple levels of complexity and potential for hazard here, appropriate due diligence measures will need to be taken if there is any hope of success. At this stage in the waiting game, firms should use this time wisely and plan how best to penetrate the market with minimal risk to their businesses and personnel.
Unlike many of its Gulf neighbours, Iran has a highly educated population with an 80% literacy rate and high levels of university enrollment. The economic growth potential for a country as developed and sophisticated as Iran already is extremely high. It already has substantial industrial and manufacturing capabilities. Aside from having high-quality human capital and developed infrastructure, Iran’s natural resources are also extensive; it has the world’s fourth-largest crude oil reserves and second-largest natural gas reserves. That most of Iran’s reserves are onshore fields, rather than offshore or in harsh conditions, is another tempting reason for foreign investors to come in. Assuming the agreement is approved by all parties in a best case scenario, Western and regional financial analysts estimate that within a decade Iran’s GDP will likely surpass those of both Saudi Arabia and Turkey, the giant economies in the region.
However promising Iran’s future appears, it will need substantial time and foreign investment to get there. Optimistic investors should be cautioned against expectations of immediate results as it will take several months for even the first stage in economic recovery—the legal removal of sanctions—to occur. An estimated $100 billion in frozen assets will now be able to flow back into Iran. However, given the complexity of where and how this money is held, the process of sorting through financial claims, namely with the U.S. and the UN, will take time. Dozens of pages in the JCPOA are dedicated to listing individuals and entities that were sanctioned against and had assets frozen, and many of these are private funds that will not be at the disposal of the government or the Central Bank of Iran (“the CBI”). In fact, the CBI estimates that the amount of usable assets is only $26 billion. Iran’s road to economic recovery therefore requires a huge influx of foreign investment. In its oil and gas sector alone, some estimates put the need at $230–$260 billion to recover its production levels within the next five years, and exceeding $1 trillion for the nation generally, significantly more than its own assets allow.
Even the expected surge in the world’s oil supply can only occur gradually. When the JCPOA deal was announced, oil prices initially fell almost 2% before recovering, and this price drop reflects the expectation that Iran will soon release some of its estimated 20–30 million reserve barrels of oil. This will not occur in the near future, however, given a substantial portion of these reserve barrels is intended for domestic use and the oil cannot be exported until sanctions are removed. The effect of the sanctions cut crude oil production by 1.1 million b/d, and as Iran cannot immediately reverse this substantial decline in oil production, it has been estimated Iran will not be able to increase production by at least 600,000 b/d until the end of 2017. Any expected “surge” in the oil supply will occur moderately and steadily, rather than instantaneously, and any downturn in oil prices should then also occur gradually. The national oil company will be off limits to foreign investors, but joint ventures present significant opportunity to become involved in Iran’s energy sector.
However rich Iran is in natural resources, it should not be understated that its most important asset is undoubtedly its human capital in a region that severely lacks it. It is a very young nation with 67% of its 80 million population under 35 and 42% under 24, meaning both great potential for talent and a huge consumer population. The country holds the highest number of educated individuals in the region. Additionally, 74% have access to the internet, 92% have debit cards and the ability to make online transactions, and about 40% have smartphones. These numbers indicate a consumerist nation interested in technology with substantial potential for tech entrepreneurship and start-up capability. The operation cost is low comparative to other nations in the region and there is already one official angel investment network, a few dozen angel investors and about a dozen start-up accelerators in the country. Given the existing legal barriers to foreign investment, most of these current investors are local. The potential of this customer base is tremendous; tourism, hospitality, cosmetics and retail all appear to be attractive sectors for investment.
The Dubai “Portal”
Opening up Iran will likely have substantial benefits for its trading partners and positive rippling effects for many of its neighbours. Given the short two-hour flight between Dubai and Tehran, the trading relationship between the two states has been strong for several decades and is estimated to only increase now, especially in Dubai’s tourism, aviation, real estate and finance sectors. The emirate is home to over 400,000 Iranian expatriates, more than 10,000 Iranian businesses, and serves as Iran’s second largest trading partner after China. Once their assets are unlocked, Iranians will begin seeking nearby investment opportunities and both Dubai’s ease of access and sophistication as a trading hub lends it to be a convenient choice. And as it is already one of the most accessible business arenas in the region for foreign investors hoping to gain access to underdeveloped markets in Africa and the Middle East, it is likely to become a similar hub for foreign investors hoping for a piece of Iran.
While Iran’s economic opportunities appear great, there is unlikely to be any instant growth or profitability as there needs to first occur a significant revamp of its energy and financial sector. Any potential investors interested in Iran need to think long-term. American investors and corporate entities should be especially cautious before considering any business venture in the region. It must be said that the possibilities in Iran, given its human capital and natural resources, are huge, and it is rare for any investor to encounter an opportunity of this scale. While it will take several months before foreign investors can legally enter the market, now is the time for businesses to begin their due diligence on Iran’s untapped markets and potential business opportunities.