Iran

Iran’s markets come in from the cold

Published in Euromoney, 3 October 2016

The country’s financial system is still not easy to access; money has trickled rather than flooded into its stock exchange since January’s deal with the US to lift sanctions. Nevertheless, as the country emerges from years of isolation, important changes are taking place that could herald a new era for Iran’s capital markets.

Attracting investors to the Iranian capital markets has long been a challenge. International investors have been scared off by sanctions and the reputational risk of doing business in Iran; even their domestic counterparts have found it more profitable to keep their money in banks than in the more volatile stock market. Yet the outlook is changing for both groups. Could the Tehran Stock Exchange be on the cusp of a breakthrough?

The appeal for many investors of the TSE and the junior Farabourse market is largely tied to the difference between bank deposit rates and the returns they can expect from investments in listed companies. That gap has been narrowing, most recently in June when the Central Bank of Iran cut the one-year deposit rate from 18% to 15%, still an astronomical level for most markets.

Turquoise Partners, a Tehran-based investment firm, noted hopefully in a recent market review issued “with dividend yields on the market at 12%, not far below deposit rates of 15%, things are edging ever closer to a tipping point where the stock market becomes the most attractive asset class.”

For foreign investors, the big change was the Joint Comprehensive Plan of Action (JCPOA) in January to lift most sanctions, in return for Tehran scaling back its nuclear programme. Since then, investors have been keen to unearth opportunities to justify the hype. Invariably, those coming to Iran find the puzzle that is more complex than they might like, but the pieces are gradually falling into place.

“We are seeing signs of increased activity, both in terms of FDI [foreign direct investment] and foreign portfolio investment,” Ramin Rabii, chief executive of Iran-focused Turquoise Partners, said on a call with investors in mid-June. “Having said that, the ease of doing business is far from perfect. There are a lot of challenges. The main one is the issue of the banking route and banking transfers, which has remained a main obstacle for transfer of funds back and forth.”

Just how difficult it has been to move money into the country (or indeed out again) is obvious from a story dating back to January, when the US government put $400 million worth of cash, made up of Swiss francs, euros and other currencies, onto a cargo plane and flew it to Tehran. This was part of a larger debt the US has owed Iran for decades, after a deal to sell military equipment was cancelled in the wake of the 1979 revolution. It was a rather novel way of getting around the lack of formal banking channels between the US and Iran; it also highlighted that doing business with Iran sometimes requires a flexible approach.

A number of smaller European banks are now said to be processing transactions with Iran, along with others in Malaysia and the UAE. The Iranian authorities have also been trying to forge new banking ties with other countries. For example, in August, the central bank signed a memorandum of understanding with its counterpart in Azerbaijan to set up correspondent relationships between banks in the two countries.

A second sticking point has been the relatively high cost of bank transfers, but this is also set to change. Until recently, bank transfers had to be based on the official exchange rate, which in early August was running at IR30,900 to the dollar, around 14% more expensive than the market rate of IR35,344. However, in late July the central bank said it would allow banks to offer the market rate on foreign exchange transactions, which should mean that more investment will flow into the country through the banks.

“This is very significant, as it should allow large FDI to come into Iran more easily,” says Kiyan Zandiyeh, portfolio manager for London-based Sturgeon Capital, which operates an equity fund investing in listed Iranian companies.

In the medium term, the central bank has vowed to close the gap between the two rates and end the system of parallel exchange rates, either later in 2016, or at least by the end of the current Iranian year, which falls in March 2017.

The cost and complexity of bank transfers has not put off all investors. German industrial conglomerate Henkel, which has been active in Iran since the early 1970s, increased its stake in local detergent manufacturer Henkel Pakvash, which is listed on the Farabourse, from 60% to 90% in May. Wulf Klüppelholz, a spokesman for Henkel, confirmed the deal but declined to give any further details.

However, Afsaneh Orouji, director of inspection and audit at the Farabourse, said in a statement issued a few days after it was completed that the deal for €51 million was approved by the Securities and Exchange Organization and that “the amount was calculated in the currency exchange rate set by Iran’s Central Bank rather than [the] free market rate in the country”.

Exchange houses

Instead of using banks, other investors have preferred to transfer money into Iran via exchange houses – credit institutions regulated by the central bank that can facilitate cross-border money transfers.

Before the recent change in rules for banks, the exchange houses had the key advantage that their transactions were based on the cheaper market rate for the Iranian rial. Several of the international funds investing in the country’s stock market have used them, including Sturgeon Capital and Charlemagne Capital, which is also based in London. Now that banks are also able to offer the market rate, the exchange houses are likely to lose out on some or all of this business.

To date the amount of money that has come into the market has been limited, even if the number of potential investors continues to rise. According to the Central Securities Depository of Iran, stock market trading licences have been given to 636 foreign investors to date, including 25 in July alone. The investors come from 31 countries, ranging across Asia, the Middle East, Africa and Europe, as well as the US, despite some sanctions remaining in place.

Such licences are necessary to buy and sell shares. However, given the amount of money that has actually been invested, it appears that many are setting up, but not yet making meaningful investments in shares, with the bulk of the money ending up in bonds. Ali Naghavi, chairman of the Iran Financial Centre, says around $500 million has been invested in the Iranian capital market since January.

But Zandiyeh says, excluding the Henkel deal, overseas investors have put just $22 million into listed Iranian companies so far this year. On an exchange with a total market capitalization of more than $90 billion, that is a very small drop. Zandiyeh says, the numbers suggest “there’s a lot of money waiting on the sidelines”.

Sturgeon Capital launched its Cayman Island-domiciled Iran fund in December 2015 and has just under $10 million in assets under management with stakes in 20 listed companies across the TSE and Farabourse, as well as in three bond issues.

The UK’s Charlemagne Capital is running another fund in partnership with Turquoise Partners. Turquoise set up the Cyprus-domiciled fund in 2006 and Charlemagne came on board in December last year. At roughly €65 million, it is the largest active fund investing exclusively in Iranian securities, according to Dominic Bokor-Ingram, fund manager at Charlemagne.

Both Sturgeon and Charlemagne say their equity funds have made good gains so far this year. Zandiyeh says Sturgeon’s fund is up more than 14% in euro terms since it started investing in February, while Bokor-Ingram says that as of June the Charlemagne-Turquoise fund was up by 26% from the start of the year.

Another new entrant is the Griffon Iran Flagship Fund, launched by Tehran-based Griffon Capital earlier this year. The fund is also domiciled in the Cayman Islands.

Alongside these, there has also been a small but noteworthy trend for new private equity funds. Griffon already runs one such fund, while Turquoise is setting up a venture capital fund, in partnership with Swiss firm Reyl & Cie. The Iranian firm says it will focus on local consumer goods, pharmaceuticals and hospitality companies and is aiming to raise $200 million this year. It’s also looking at establishing a fixed-income fund for the Iran market.

Another, indirect route for investors wanting exposure to Iran’s stock market should emerge in the coming months, when Swedish investment house Pomegranate lists its shares on the Stockholm Stock Exchange, which it plans to do before May 2017. Pomegranate focuses on investments in unlisted consumer technology companies in Iran, such as car-sharing start-up Carvanro and online classifieds platform Sheypoor. However, it also has a 15.2% stake in Griffon Capital, which it valued at €2.8 million in its 2015 annual report.

In May this year, Pomegranate raised €60 million in what it described as a pre-IPO placing. The investors were mainly from Europe. That fits in with a larger pattern of corporate investment in Iran in the months since the JCPOA came into force.

However, some investment executives say they are seeing most interest from the US. While US citizens are barred from dealing with Iran due to the continuing sanctions programme, there are efforts afoot to explore any legal loopholes that could bypass these provisions. Some doubt that such an option will be possible for some time and the Office of Foreign Assets Control (OFAC), the arm of the US Treasury that deals with sanctions, is likely to keep a close eye on anyone who tries.

Ali Nassersaeid, co-founder of the American-Iranian Business Council, says the chances of US investors being able to access the TSE are “pretty much slim to none, at least for the next couple of years. There are ways to structure an entity outside the US to conduct transactions. However, the entity cannot include a US person in a controlling capacity. The only safe way to proceed with such a plan involving a US person would be to apply to OFAC for a licence.”

Volatility

For those who are willing and able to get involved, there are some decent gains to be made, although there are many risks too. The Tedpix, the TSE’s main index, has more than tripled in value over the past four years, rising from around 24,000 points in August 2012 to more than 78,000 points by August this year. In comparison, the MSCI Emerging Markets index has lost 8% of its value over that time, while the MSCI Frontier 100 Index rose by 26.5%.

Of course a stock market would not be a stock market without volatility, and there has been plenty of that too. The Tedpix was on a bull run from late 2012 until it peaked at 89,500 points on January 5, 2014. Some of those gains drifted away over the course of the next two years, but the market has rebounded strongly this year. The index shot up in January, around the time the sanctions deal was confirmed. It continued to rise in February and March. Thereafter some ground was lost, with a 9% fall in the second quarter of the year, followed by a rebound in July and August. Even with that second quarter slump, the market was up 26% since the turn of the year.

This year’s movements reflect two big (and opposing) trends: enthusiasm for companies’ prospects in a post-sanctions era, mixed with realism about the difficulty in attracting capital from overseas. For investors this means that stocks have to be chosen with care. Sentiment and rumour play a big part in the trajectory of stocks on the TSE, not least because retail investors account for around half of the trading volumes, but also because reliable information is often a scarce commodity.

“The crucial part of the process is to ensure that buy/sell decisions are based on accurate information,” says Nassersaeid. “The TSE and its regulatory branches are still working through their processes to ensure accurate, timely and transparent information is released.”

Unsurprisingly, views differ widely as to what sectors offer the best opportunity in such a market. Naghavi points to petrochemicals, insurance, power and industries related to oil and gas as attractive options. Nassersaeid suggests the two most promising sectors for the longer term are petrochemicals and raw materials firms producing copper, iron ore and the like. He is warier about other areas such as construction, banking, insurance and IT until economic conditions improve.

There is certainly the potential for the Iranian economy to grow quickly, but its short-term fortunes rely on domestic and international political issues, which are hard to predict. For one thing, the outcome of Iran’s presidential elections in May 2017 will set the template for the country’s relations with the outside world for years to come. Even so, some appear optimistic.

“Our thesis for Iran is the same as in any frontier market that’s coming out of one political or economic system and going into another,” says Bokor-Ingram. “Political reform leads to economic growth and we want to be exposed to sectors and companies that can take advantage of that economic growth. We forecast that the Iranian economy, if things progress as they should do, can grow by 6% to 8% a year for the next 10 years. There’s certainly the spare capacity in the economy for that to happen, and we want to be in companies that can take advantage of that growth.”

Others predict slower growth rates for the near term, with the IMF suggesting GDP will expand by 3.7% to 4.5% between now and 2021. However, there are a few reasons why some companies should grow quickly in the coming years, even if the economy as a whole does not match the highest hopes.

For one thing, many Iranian businesses have been operating below capacity during the sanctions years and, with the shackles now removed, they should be able to expand their output even without much investment. For companies that were more productive, expansion plans that had been put on hold can start to move forward. Turquoise predicts that listed companies will post earnings growth of around 10% on average over the year to March 2017.

The biggest boost of all could come from Iran’s inclusion in international indices, such as those run by MSCI. Zandiyeh says that, based on the size of the TSE, it “should conservatively occupy between 25% and 30% of the MSCI Frontier Index. Looking at the money which tracks the index, up to $7 billion to $10 billion would have to enter the market. That could happen in the next year or two.”

Set against all that, there are some reasons for caution, not least the risk of ending up with a stake in a company run by the Islamic Revolutionary Guards Corp (IRGC), which remains a firm target of US sanctions. IRGC’s principle holding in a publicly listed company is in Telecommunication Company of Iran (TCI), the monopoly fixed-line telecoms provider. The IRGC owns 50% of TCI via its Etemad-e Mobin affiliate. TCI in turn owns 90% of Iran’s largest mobile operator, Mobile Telecommunication Company of Iran (MCI), which has its own stock market listing. Both TCI and MCI are among the top five companies on the Iranian bourse, with market values of $4.2 billion and $4.1 billion respectively at the end of June.

There have been suggestions that the IRGC could sell its stakes in these firms. The IRGC did offload its interest in carmaker Bahman Group in June, with local media reporting that Visman Motor has become the majority shareholder.

“The removal of sanctions has opened up the available pool of companies that Sturgeon Capital can invest in,” says Zandiyeh. “Of the 600 or so stocks across the TSE and the Farabourse, all but 50 were off-limits while sanctions were in place. Now the investment universe has expanded to include almost the entire stock market, with the only exceptions being companies controlled by the Revolutionary Guards.”

Further concerns

Beyond the problems of scarce banking links, parallel exchange rates and IRGC involvement, there are further concerns for investors, as a consequence of the relatively immature nature of the market and because it has been separated from the international mainstream for so many years.

Local regulations stipulate that stocks cannot be held by a global custodian, but instead must be held by the Central Securities Depository of Iran (CSDI). That will be a stumbling block for those leading institutional investors that prefer to use custodians. The authorities have tried to address this problem, with Mohammad Sajjad Siahkarzadeh, international affairs director at the CSDI, telling the Securities & Exchange News Agency in August that there are numerous other ways to invest in the market without using a global custodian.

“There are at least six ways for foreign investors to get into the Iranian market,” he said, although the report then somewhat confusingly included the option of using global custodians to help with investment as one of the six.

Furthermore, there are no credit ratings agencies working in Iran, nor a culture of analyst reports and coverage. Financial reports and other data are often only available in Farsi, and global accounting norms, such as international financial accounting standards are only starting to be introduced. All this makes it harder to evaluate companies for investment. Instead, investors will have to rely on the forward guidance that companies issue and their own research into a company’s performance and prospects.

Some of these concerns are being addressed and there have been signs that the market is moving to become more professional, with a wider range of tools on offer to investors. For example, Pouya Finance, a subsidiary of Mofid Securities, the largest broker in Iran, recently launched BourseView, an online tool providing real-time and historic information about TSE and Farabourse stocks. One investor describes this as “the Bloomberg of Iran”. In addition, the Securities and Exchange Organization (SEO) has invited credit ratings agencies to apply for licences.

The regulatory structure is also undergoing change, with Shapour Mohammadi appointed as the new chairman of the SEO in July, taking over from Mohammad Fetanat, who resigned and has been appointed as an adviser to Ali Tayebnia, minister of economic affairs and finance. Mohammadi subsequently outlined some of his priorities in a speech, including a promise to push for the introduction of derivatives trading, short-selling and buying stocks on credit.

Macroeconomic trends in Iran ought to drive more investors towards the market too, helping improve liquidity levels, which are another concern, particularly for many of the smaller stocks.

As well as bank interest rates dropping from 18% to 15%, interest rates on loans came down from 22% to 18% in June and the inflation rate has also been steadily falling since president Hassan Rouhani came to power in August 2013. Three years ago, inflation was running at close to 40%, by this summer it had dropped below 10%.

Bonds are underwritten by the banks in Iran, carry high fixed interest rates for multiple years and can always be redeemed for at least their par value. That means investors can lock in high double-digit returns for several years.

Clemente Cappello, chief investment officer of Sturgeon Capital, says: “Nearly $10 trillion in global bonds trade at negative yields, whereas in Iran the yields are 18% to 20%. GDP is rising, and the population is young – 60% are under the age of 30 – while it is ageing in the west. It makes for an interesting situation for investment.”

The question is how quickly will international investors be willing, able or brave enough to take advantage of those trends.

Iran’s markets come in from the cold

Published in Euromoney, 3 October 2016

The country’s financial system is still not easy to access; money has trickled rather than flooded into its stock exchange since January’s deal with the US to lift sanctions. Nevertheless, as the country emerges from years of isolation, important changes are taking place that could herald a new era for Iran’s capital markets.

Attracting investors to the Iranian capital markets has long been a challenge. International investors have been scared off by sanctions and the reputational risk of doing business in Iran; even their domestic counterparts have found it more profitable to keep their money in banks than in the more volatile stock market. Yet the outlook is changing for both groups. Could the Tehran Stock Exchange be on the cusp of a breakthrough?

The appeal for many investors of the TSE and the junior Farabourse market is largely tied to the difference between bank deposit rates and the returns they can expect from investments in listed companies. That gap has been narrowing, most recently in June when the Central Bank of Iran cut the one-year deposit rate from 18% to 15%, still an astronomical level for most markets.

Turquoise Partners, a Tehran-based investment firm, noted hopefully in a recent market review issued “with dividend yields on the market at 12%, not far below deposit rates of 15%, things are edging ever closer to a tipping point where the stock market becomes the most attractive asset class.”

For foreign investors, the big change was the Joint Comprehensive Plan of Action (JCPOA) in January to lift most sanctions, in return for Tehran scaling back its nuclear programme. Since then, investors have been keen to unearth opportunities to justify the hype. Invariably, those coming to Iran find the puzzle that is more complex than they might like, but the pieces are gradually falling into place.

“We are seeing signs of increased activity, both in terms of FDI [foreign direct investment] and foreign portfolio investment,” Ramin Rabii, chief executive of Iran-focused Turquoise Partners, said on a call with investors in mid-June. “Having said that, the ease of doing business is far from perfect. There are a lot of challenges. The main one is the issue of the banking route and banking transfers, which has remained a main obstacle for transfer of funds back and forth.”

Just how difficult it has been to move money into the country (or indeed out again) is obvious from a story dating back to January, when the US government put $400 million worth of cash, made up of Swiss francs, euros and other currencies, onto a cargo plane and flew it to Tehran. This was part of a larger debt the US has owed Iran for decades, after a deal to sell military equipment was cancelled in the wake of the 1979 revolution. It was a rather novel way of getting around the lack of formal banking channels between the US and Iran; it also highlighted that doing business with Iran sometimes requires a flexible approach.

A number of smaller European banks are now said to be processing transactions with Iran, along with others in Malaysia and the UAE. The Iranian authorities have also been trying to forge new banking ties with other countries. For example, in August, the central bank signed a memorandum of understanding with its counterpart in Azerbaijan to set up correspondent relationships between banks in the two countries.

A second sticking point has been the relatively high cost of bank transfers, but this is also set to change. Until recently, bank transfers had to be based on the official exchange rate, which in early August was running at IR30,900 to the dollar, around 14% more expensive than the market rate of IR35,344. However, in late July the central bank said it would allow banks to offer the market rate on foreign exchange transactions, which should mean that more investment will flow into the country through the banks.

“This is very significant, as it should allow large FDI to come into Iran more easily,” says Kiyan Zandiyeh, portfolio manager for London-based Sturgeon Capital, which operates an equity fund investing in listed Iranian companies.

In the medium term, the central bank has vowed to close the gap between the two rates and end the system of parallel exchange rates, either later in 2016, or at least by the end of the current Iranian year, which falls in March 2017.

The cost and complexity of bank transfers has not put off all investors. German industrial conglomerate Henkel, which has been active in Iran since the early 1970s, increased its stake in local detergent manufacturer Henkel Pakvash, which is listed on the Farabourse, from 60% to 90% in May. Wulf Klüppelholz, a spokesman for Henkel, confirmed the deal but declined to give any further details.

However, Afsaneh Orouji, director of inspection and audit at the Farabourse, said in a statement issued a few days after it was completed that the deal for €51 million was approved by the Securities and Exchange Organization and that “the amount was calculated in the currency exchange rate set by Iran’s Central Bank rather than [the] free market rate in the country”.

Exchange houses

Instead of using banks, other investors have preferred to transfer money into Iran via exchange houses – credit institutions regulated by the central bank that can facilitate cross-border money transfers.

Before the recent change in rules for banks, the exchange houses had the key advantage that their transactions were based on the cheaper market rate for the Iranian rial. Several of the international funds investing in the country’s stock market have used them, including Sturgeon Capital and Charlemagne Capital, which is also based in London. Now that banks are also able to offer the market rate, the exchange houses are likely to lose out on some or all of this business.

To date the amount of money that has come into the market has been limited, even if the number of potential investors continues to rise. According to the Central Securities Depository of Iran, stock market trading licences have been given to 636 foreign investors to date, including 25 in July alone. The investors come from 31 countries, ranging across Asia, the Middle East, Africa and Europe, as well as the US, despite some sanctions remaining in place.

Such licences are necessary to buy and sell shares. However, given the amount of money that has actually been invested, it appears that many are setting up, but not yet making meaningful investments in shares, with the bulk of the money ending up in bonds. Ali Naghavi, chairman of the Iran Financial Centre, says around $500 million has been invested in the Iranian capital market since January.

But Zandiyeh says, excluding the Henkel deal, overseas investors have put just $22 million into listed Iranian companies so far this year. On an exchange with a total market capitalization of more than $90 billion, that is a very small drop. Zandiyeh says, the numbers suggest “there’s a lot of money waiting on the sidelines”.

Sturgeon Capital launched its Cayman Island-domiciled Iran fund in December 2015 and has just under $10 million in assets under management with stakes in 20 listed companies across the TSE and Farabourse, as well as in three bond issues.

The UK’s Charlemagne Capital is running another fund in partnership with Turquoise Partners. Turquoise set up the Cyprus-domiciled fund in 2006 and Charlemagne came on board in December last year. At roughly €65 million, it is the largest active fund investing exclusively in Iranian securities, according to Dominic Bokor-Ingram, fund manager at Charlemagne.

Both Sturgeon and Charlemagne say their equity funds have made good gains so far this year. Zandiyeh says Sturgeon’s fund is up more than 14% in euro terms since it started investing in February, while Bokor-Ingram says that as of June the Charlemagne-Turquoise fund was up by 26% from the start of the year.

Another new entrant is the Griffon Iran Flagship Fund, launched by Tehran-based Griffon Capital earlier this year. The fund is also domiciled in the Cayman Islands.

Alongside these, there has also been a small but noteworthy trend for new private equity funds. Griffon already runs one such fund, while Turquoise is setting up a venture capital fund, in partnership with Swiss firm Reyl & Cie. The Iranian firm says it will focus on local consumer goods, pharmaceuticals and hospitality companies and is aiming to raise $200 million this year. It’s also looking at establishing a fixed-income fund for the Iran market.

Another, indirect route for investors wanting exposure to Iran’s stock market should emerge in the coming months, when Swedish investment house Pomegranate lists its shares on the Stockholm Stock Exchange, which it plans to do before May 2017. Pomegranate focuses on investments in unlisted consumer technology companies in Iran, such as car-sharing start-up Carvanro and online classifieds platform Sheypoor. However, it also has a 15.2% stake in Griffon Capital, which it valued at €2.8 million in its 2015 annual report.

In May this year, Pomegranate raised €60 million in what it described as a pre-IPO placing. The investors were mainly from Europe. That fits in with a larger pattern of corporate investment in Iran in the months since the JCPOA came into force.

However, some investment executives say they are seeing most interest from the US. While US citizens are barred from dealing with Iran due to the continuing sanctions programme, there are efforts afoot to explore any legal loopholes that could bypass these provisions. Some doubt that such an option will be possible for some time and the Office of Foreign Assets Control (OFAC), the arm of the US Treasury that deals with sanctions, is likely to keep a close eye on anyone who tries.

Ali Nassersaeid, co-founder of the American-Iranian Business Council, says the chances of US investors being able to access the TSE are “pretty much slim to none, at least for the next couple of years. There are ways to structure an entity outside the US to conduct transactions. However, the entity cannot include a US person in a controlling capacity. The only safe way to proceed with such a plan involving a US person would be to apply to OFAC for a licence.”

Volatility

For those who are willing and able to get involved, there are some decent gains to be made, although there are many risks too. The Tedpix, the TSE’s main index, has more than tripled in value over the past four years, rising from around 24,000 points in August 2012 to more than 78,000 points by August this year. In comparison, the MSCI Emerging Markets index has lost 8% of its value over that time, while the MSCI Frontier 100 Index rose by 26.5%.

Of course a stock market would not be a stock market without volatility, and there has been plenty of that too. The Tedpix was on a bull run from late 2012 until it peaked at 89,500 points on January 5, 2014. Some of those gains drifted away over the course of the next two years, but the market has rebounded strongly this year. The index shot up in January, around the time the sanctions deal was confirmed. It continued to rise in February and March. Thereafter some ground was lost, with a 9% fall in the second quarter of the year, followed by a rebound in July and August. Even with that second quarter slump, the market was up 26% since the turn of the year.

This year’s movements reflect two big (and opposing) trends: enthusiasm for companies’ prospects in a post-sanctions era, mixed with realism about the difficulty in attracting capital from overseas. For investors this means that stocks have to be chosen with care. Sentiment and rumour play a big part in the trajectory of stocks on the TSE, not least because retail investors account for around half of the trading volumes, but also because reliable information is often a scarce commodity.

“The crucial part of the process is to ensure that buy/sell decisions are based on accurate information,” says Nassersaeid. “The TSE and its regulatory branches are still working through their processes to ensure accurate, timely and transparent information is released.”

Unsurprisingly, views differ widely as to what sectors offer the best opportunity in such a market. Naghavi points to petrochemicals, insurance, power and industries related to oil and gas as attractive options. Nassersaeid suggests the two most promising sectors for the longer term are petrochemicals and raw materials firms producing copper, iron ore and the like. He is warier about other areas such as construction, banking, insurance and IT until economic conditions improve.

There is certainly the potential for the Iranian economy to grow quickly, but its short-term fortunes rely on domestic and international political issues, which are hard to predict. For one thing, the outcome of Iran’s presidential elections in May 2017 will set the template for the country’s relations with the outside world for years to come. Even so, some appear optimistic.

“Our thesis for Iran is the same as in any frontier market that’s coming out of one political or economic system and going into another,” says Bokor-Ingram. “Political reform leads to economic growth and we want to be exposed to sectors and companies that can take advantage of that economic growth. We forecast that the Iranian economy, if things progress as they should do, can grow by 6% to 8% a year for the next 10 years. There’s certainly the spare capacity in the economy for that to happen, and we want to be in companies that can take advantage of that growth.”

Others predict slower growth rates for the near term, with the IMF suggesting GDP will expand by 3.7% to 4.5% between now and 2021. However, there are a few reasons why some companies should grow quickly in the coming years, even if the economy as a whole does not match the highest hopes.

For one thing, many Iranian businesses have been operating below capacity during the sanctions years and, with the shackles now removed, they should be able to expand their output even without much investment. For companies that were more productive, expansion plans that had been put on hold can start to move forward. Turquoise predicts that listed companies will post earnings growth of around 10% on average over the year to March 2017.

The biggest boost of all could come from Iran’s inclusion in international indices, such as those run by MSCI. Zandiyeh says that, based on the size of the TSE, it “should conservatively occupy between 25% and 30% of the MSCI Frontier Index. Looking at the money which tracks the index, up to $7 billion to $10 billion would have to enter the market. That could happen in the next year or two.”

Set against all that, there are some reasons for caution, not least the risk of ending up with a stake in a company run by the Islamic Revolutionary Guards Corp (IRGC), which remains a firm target of US sanctions. IRGC’s principle holding in a publicly listed company is in Telecommunication Company of Iran (TCI), the monopoly fixed-line telecoms provider. The IRGC owns 50% of TCI via its Etemad-e Mobin affiliate. TCI in turn owns 90% of Iran’s largest mobile operator, Mobile Telecommunication Company of Iran (MCI), which has its own stock market listing. Both TCI and MCI are among the top five companies on the Iranian bourse, with market values of $4.2 billion and $4.1 billion respectively at the end of June.

There have been suggestions that the IRGC could sell its stakes in these firms. The IRGC did offload its interest in carmaker Bahman Group in June, with local media reporting that Visman Motor has become the majority shareholder.

“The removal of sanctions has opened up the available pool of companies that Sturgeon Capital can invest in,” says Zandiyeh. “Of the 600 or so stocks across the TSE and the Farabourse, all but 50 were off-limits while sanctions were in place. Now the investment universe has expanded to include almost the entire stock market, with the only exceptions being companies controlled by the Revolutionary Guards.”

Further concerns

Beyond the problems of scarce banking links, parallel exchange rates and IRGC involvement, there are further concerns for investors, as a consequence of the relatively immature nature of the market and because it has been separated from the international mainstream for so many years.

Local regulations stipulate that stocks cannot be held by a global custodian, but instead must be held by the Central Securities Depository of Iran (CSDI). That will be a stumbling block for those leading institutional investors that prefer to use custodians. The authorities have tried to address this problem, with Mohammad Sajjad Siahkarzadeh, international affairs director at the CSDI, telling the Securities & Exchange News Agency in August that there are numerous other ways to invest in the market without using a global custodian.

“There are at least six ways for foreign investors to get into the Iranian market,” he said, although the report then somewhat confusingly included the option of using global custodians to help with investment as one of the six.

Furthermore, there are no credit ratings agencies working in Iran, nor a culture of analyst reports and coverage. Financial reports and other data are often only available in Farsi, and global accounting norms, such as international financial accounting standards are only starting to be introduced. All this makes it harder to evaluate companies for investment. Instead, investors will have to rely on the forward guidance that companies issue and their own research into a company’s performance and prospects.

Some of these concerns are being addressed and there have been signs that the market is moving to become more professional, with a wider range of tools on offer to investors. For example, Pouya Finance, a subsidiary of Mofid Securities, the largest broker in Iran, recently launched BourseView, an online tool providing real-time and historic information about TSE and Farabourse stocks. One investor describes this as “the Bloomberg of Iran”. In addition, the Securities and Exchange Organization (SEO) has invited credit ratings agencies to apply for licences.

The regulatory structure is also undergoing change, with Shapour Mohammadi appointed as the new chairman of the SEO in July, taking over from Mohammad Fetanat, who resigned and has been appointed as an adviser to Ali Tayebnia, minister of economic affairs and finance. Mohammadi subsequently outlined some of his priorities in a speech, including a promise to push for the introduction of derivatives trading, short-selling and buying stocks on credit.

Macroeconomic trends in Iran ought to drive more investors towards the market too, helping improve liquidity levels, which are another concern, particularly for many of the smaller stocks.

As well as bank interest rates dropping from 18% to 15%, interest rates on loans came down from 22% to 18% in June and the inflation rate has also been steadily falling since president Hassan Rouhani came to power in August 2013. Three years ago, inflation was running at close to 40%, by this summer it had dropped below 10%.

Bonds are underwritten by the banks in Iran, carry high fixed interest rates for multiple years and can always be redeemed for at least their par value. That means investors can lock in high double-digit returns for several years.

Clemente Cappello, chief investment officer of Sturgeon Capital, says: “Nearly $10 trillion in global bonds trade at negative yields, whereas in Iran the yields are 18% to 20%. GDP is rising, and the population is young – 60% are under the age of 30 – while it is ageing in the west. It makes for an interesting situation for investment.”

The question is how quickly will international investors be willing, able or brave enough to take advantage of those trends?

Huge potential for investors in telecoms sector

Published in MEED, 24 August 2016

Iran’s telecoms sector is growing quickly, with several potential investors already linked to deals in the Islamic Republic

Iran’s telecoms sector is dominated by Telecommunication Company of Iran (TCI), a 45-year old business that is majority owned by Etemad-e Mobin, an affiliate of the Islamic Revolutionary Guard Corps (IRGC). TCI has a virtual monopoly on the fixed-line phone system. As of October, it had 29.8 million fixed-line subscribers for its Ashenaye Avval branded service, which it says is 99.3 per cent of the total market.

TCI also owns 90 per cent of Iran’s largest mobile operator, Mobile Telecommunication Company of Iran (MCI), which operates via its Hamrahe Avval brand (meaning ‘first operator’ in Farsi).

Both companies’ shares are traded on the Tehran Stock Exchange, where TCI had a market capitalisation of about IR131 trillion ($4.2bn), equivalent to about 4.8 per cent of the total market, as of late July. That is only slightly ahead of MCI, which had a market value of about IR125 trillion.

The main challenger in the mobile space is MTN Irancell, which is 49 per cent owned by South Africa’s MTN Group. MTN Irancell says it has 46.1 million subscribers, a figure that rose by 5 per cent in 2015 alone, and which gives it a market share of 46.7 per cent. Alongside this virtual duopoly, there are several smaller operators such as Tamim Telecom (which operates under the RighTel brand) and Taliya Mobile.

Iran’s mobile market has been slow to adopt new technologies, with 3G and 4G services only becoming widely available within the past two years. However, there have been some notable recent changes. Last year the Communications Regulatory Authority (CRA), which oversees the telecoms sector, invited bids for virtual mobile network operator licences. These allow companies to offer mobile services to the public while using an existing operator’s network, rather than having to build up their own infrastructure. According to Teyf Group, an Iranian telecoms consultancy, of the 51 firms that applied for a licence six have been approved so far, although up to 12 more may yet be approved.

The country is also about to introduce number portability, allowing customers to keep their existing mobile phone number if they switch from one service provider to another. Together, these measures should encourage far more competition between the networks. International investment and the January lifting of most sanctions on the Islamic Republic – which will make importing telecoms equipment and attracting external investment easier – should shake up the market even more.

Such developments will no doubt be welcomed by consumers, given the quality of the service currently available.

“The sector is ripe for more investment in infrastructure and the delivery of services and ancillary technologies and capabilities,” says Ali Nassersaeid, co-founder of the American Iranian Business Council. “Not all current providers have good coverage in all parts of the country and many people carry phones from two or three providers when they travel to ensure they can stay in touch.”

Promising signs

Some deals have emerged this year, offering a sign of what the future might hold in terms of international investment. In April, Italy’s ItalTel signed a memorandum of understanding (MoU) with TCI to modernise and develop its network. Details of what the deal will involve remain scant, however, and it is notable that for now it is simply an MoU rather than anything more definitive.

International telecoms firms, like companies in other sectors, still find it difficult to move money in and out of the country as most foreign banks are still refusing to deal with Iran. For as long as that remains the case, their ability to engage in the country will be limited. Nonetheless, several other potential investors, predominantly from Europe and Asia, have also been linked with deals in the Iranian telecoms sector, from France, Slovenia, Kazakhstan and South Korea.

For those already involved in the market, there should also be opportunities. In its most recent annual report, MTN Group says the easing of sanctions and the expected economic boost it will give to the country “offers significant opportunities to expand our services in the country”. In time it should also make it easier for MTN Group to repatriate some of its dividends and outstanding loans that have been stuck inside Iran. The firm says it currently holds some ZAR15.86bn ($1.1bn) in cash inside the country and is planning to invest ZAR3.5bn this year, as its share of MTN Irancell’s capital expenditure plans.

Even if no other large investments materialise in the near future, there should be other benefits for the local telecoms operators. In February, Davoud Zareian, a spokesman for TCI, said the cost of importing telecoms equipment could fall by 20-30 per cent in the wake of sanctions being lifted, as companies will no longer have to buy the equipment they need using brokers and other middle men. The process of procuring the equipment should also be far quicker.

Iran could certainly do with some improvements to its telecoms systems. The Switzerland-based World Economic Forum ranks the country’s electricity and telephony infrastructure 56th in the world (out of 140 countries), which puts it behind all the GCC states. In terms of fixed-line network it does fairly well, ranked 22nd in the world, but in terms of mobile phone subscriptions it is only 110th.

Those figures are further borne out by data from the Washington-based World Bank. Iran does better than its neighbours when it comes to the proportion of broadband subscriptions and far better in terms of fixed-line connections. However, it trails the rest of the Middle East and North Africa (Mena) region, and indeed the world in general, when it comes to its mobile phone penetration rate; this stands at just under 88 per cent, compared with a world average of 97 per cent and almost 110 per cent among Mena countries.

The potential for growth and development is something that local investors are well aware of, particularly given the country’s young population. According to the World Bank, nearly 24 per cent of the population is under 15 years old. That represents a lot of consumers who will be buying phones and getting online in the coming years. Tehran-based Turquoise Partners, which runs an equity fund investing in the TSE, says telecoms stocks are one of the main areas of investment it has identified as holding promise.

Shervin Shahriari, chief investment officer of Turquoise Partners, says telecoms accounts for the fifth-largest sector allocation of its fund. “The majority of the portfolio is invested in equities and companies that we believe will benefit from economic growth over the coming year,” he says.

IRGC exit

Shares in TCI and MCI have been off-limits to most international investors in recent years, due to the holding that the IRGC has in the two companies. That could change, with speculation that the body plans to offload its shares in TCI, and thus in its mobile subsidiary too. Daniel Riahi, managing partner of UK-based DRST Consulting, has described that as an “encouraging piece of news for foreign investors”, but not everyone is convinced it will happen. “[The IRGC have] said they might sell, but I doubt they will because it’s too important to them,” says one international investor.

Another point of strength for the industry is its profitability. MTN Group reported earnings before interest, tax and other charges from its Iran venture of ZAR5.7bn last year. Dividend payouts to local investors this year have also been good. According to Firouzeh Asia Brokerage, part of Turquoise Partners, telecoms firms have paid $685m in dividends this year and the sector had the highest dividend yield of any industry, at 16 per cent.

If international investors can find a way to tap into the market, there should be profitable pickings for them in the years ahead.

Iran lags behind the region in healthcare delivery

Published in MEED, 24 August 2016

Investors from Europe and Asia are eyeing opportunities in the country’s under-resourced medical system

With most sanctions on Iran now lifted, the country’s healthcare system has been drawing a lot of international interest, and it certainly could do with the boost that foreign capital and expertise could bring.

Iran’s Minister of Health & Medical Education Hassan Hashemi estimates the republic needs to add 100,000 in-patient beds and modernise 60 per cent of its existing healthcare facilities to meet international standards. Those two tasks, along with the need for more medical equipment, ambulances and specialised care facilities, mean investment of at least $25bn is needed in the coming years.

Hybrid system

The Islamic Republic’s healthcare system is a hybrid of public and private sector provision. The Minis­try of Health & Medical Education (MOHME) provides primary healthcare to everyone. More complex care is provided by a mixture of the MOHME, private operators and charities, and is mostly funded through insurance schemes such as the Iran Social Security Organisation (ISSO) and the Medical Service Insurance Organisation.

More than 90 per cent of Iranians have health insurance, which covers 70 per cent of the price of medicines and 90 per cent of the cost of hospital visits. However, there are allegations that some doctors demand fees beyond the set rates and, if the patient refuses, they withhold care. In any case, Iranians have long been used to paying for healthcare directly and out-of-pocket expenses account for almost half of medical spending.

All this leaves the country with a system that is better than some in the region, but far behind the best. While primary provision is generally seen as good, more advanced care is often only available from private clinics and even then does not always reach a high standard. The Switzerland-based World Economic Forum ranks Iran’s healthcare system at 69 out of 140 countries, above North African countries, but below its GCC neighbours.

Part of the problem has been sanctions. While medicines and medical equipment were exempted from trade embargoes, the system was still hobbled by the difficulty in paying for imports due to the lack of banking links. Many projects to renovate and upgrade facilities were put on hold, the cost of imported equipment rose by a third and there were shortages of some medicines. Opportunities to develop the medical tourism market, and thus take advantage of Iranian expertise in areas like cosmetic surgery, were also restricted.

Funding problem

Money is still an issue. The government spends 17.5 per cent of its budget on healthcare, with total spending equivalent to 6.9 per cent of GDP. That is higher than the 5.3 per cent average across the Middle East and North Africa (Mena) region, but below the global average of 9.9 per cent. On a per capita basis, Iran spends $351 a year, compared with $433 per person for the Mena region.

The sector is under-resourced in terms of personnel. According to the Washington-based World Bank, there are 0.9 doctors for every 1,000 people in Iran, compared with 1.6 doctors across the Mena region. There is an even larger gap when it comes to nurses and midwives, with 1.4 for every 1,000 people in Iran, compared with 2.5 in the wider region. Figures for hospital beds are far more worrying. There are just 0.1 beds for every 1,000 people in Iran, compared with 1 for the Mena region.

Iran needs a huge improvement in the quality and quantity of healthcare,” says Ali Nassersaeid, co-founder of the American Iranian Business Council. “It has no shortage of doctors and expertise, but it is short of just about everything else. Medical facilities that can provide high-quality service are rare. The situation is particularly bad in the smaller cities and rural areas.”

As the government has acknowledged, a lot of investment is needed and much of it is likely to come from overseas. With the shackles of sanctions now removed, several deals have already been signed with European and Asian companies. Among them, Italy’s Pessina Costruzioni signed a memorandum of understanding (MoU) in January to build and operate five hospitals, including a 1,000-bed facility in Tehran and 500-bed hospitals in Rasht and Nishapur.

Another Italian firm, the San Donato Hospital Group, is to build a 1,500-bed hospital in Isfahan, in a deal signed with Isfahan University of Medical Sciences in mid-May. A spokeswoman for the Italian group said it was premature to provide further details at this stage, given it is only an MoU. Austria’s Vamed is also partnering with Iran Housing Investment Company, an affiliate of ISSO, to build two 320-bed hospitals in Shiraz and Tabriz, in a deal worth €200m ($224m).

Among Asian companies, South Korean firms have been leading the way. The official Yonhap news agency reported on 18 May that seven firms have signed MoUs to build seven hospitals with a total capacity of 6,000 beds. Seoul’s Ministry of Health & Welfare reported that the deals were worth $2bn in total. Among those involved are major South Korean contractors such as Samsung C&T and Hyundai Engineering & Construction.

Of course, an MoU does not guarantee a formal contract will be signed and it is likely to take time before all these schemes move ahead. Ali Mirmohammad, senior consultant at US-based research firm Frost & Sullivan, says the banking problems first need to be fixed and predicts little will change before mid-2017.

It is not just a matter of building wards and operating theatres, however. There is also a need to modernise hospital equipment and develop medicine supply chains.

The medical devices market was worth almost $800m last year and is expected to surpass $1bn by 2021, according to India-based research firm Mordor Intelligence. Iranian officials have been seeking out new source markets for such goods. A trade delegation to Poland in May resulted in an MoU on the supply of hospital equipment among other things.

Local drugs

Pharmaceutical production is also developing. This is already a significant domestic industry, with more than 85 per cent of the 6,200 generic medicines used in the country produced locally, according to the Organisation for Investment, Economic & Technical Assistance of Iran, the country’s inward investment agency.

The value of the pharmaceuticals market was $4.2bn in 2015 and is expected to grow to $4.8bn by 2021, according to Mordor Intelligence. However, there are some concerns about the medicines produced locally, in terms of both quality and range. During the years of sanctions, Iranian producers came to rely on imports of cheap, low-quality active pharmaceutical ingredients (APIs) from China and India, which, according to Mirmohammad “led to many problems in the country and also led to some deaths among patients”.

It should now be easier to import higher-quality APIs, which should allow Iran to start targeting export markets. “The government plans to encourage foreign brands to transfer technology and [bring] new formulations to produce high-quality generic products, not only for the local market but also for export,” says Mirmohammad. He says the government plans to increase the export of medicines to more than $2bn over the next 10 years, from $180m at the moment.

The most significant recent deal in this area came in September, when Denmark’s Novo Nordisk, a specialist in diabetes, announced plans to build a €70m ($77.6m) facility to make insulin pens, in a deal signed with Iran’s Food & Drug Administration, part of the MOHME. This makes it the first Western pharmaceutical company to build a manufacturing plant in the country and could provide a model for others to follow.

Diabetes is a big problem for Iran. Ole Moelskov Bech, corporate vice-president of Novo Nordisk for the Near East, says “close to 5 million people” have diabetes in the country. According to the Switzerland-based World Health Organisation (WHO), diabetes and cardiovascular diseases are the principal causes of death in Iran, followed by cancer.

But Iranians are in better shape than many of their neighbours. According to WHO, life expectancy at birth in Iran is 74, compared with 68 years for the wider region. If the Islamic Republic can successfully tap into the investor interest in its healthcare system, that could yet improve even more.

Uncovering the tracks of Iran’s Revolutionary Guards

Published in MEED, 7 June 2016

The Islamic Revolutionary Guard Corps is often portrayed as playing a central role in the Iranian economy, but just how extensive are its business interests?

The Islamic Revolutionary Guard Corps (IRGC) is widely considered to play a central role in the Iranian economy and to be active in almost every sector. But to understand just how wide-ranging its involvement is is not a straightforward exercise. The organisation has become extremely good at hiding its tracks and there is a culture of secrecy and obfuscation in Iranian business life, which makes the job all the harder.

That does not stop people trying to put a number on it, however. In July 2015, UK news agency Reuters cited an unnamed Western diplomat who estimated that the annual turnover of IRGC-owned businesses was in the range of $10bn-$12bn, equivalent to about a sixth of Iran’s GDP at the time. If it was a regular company, that would place it among the biggest in the Middle East.

Other analysts have made similarly large estimates of the IRGC’s business empire. The Foundation for Defense of Democracies (FDD), a US think-tank that argues for tougher sanctions against the IRGC, estimates that the body’s investment portfolio includes substantial holdings in 14 firms traded on the Tehran Stock Exchange (TSE). The IRGC or other elements of the country’s armed forces also own significant stakes in a further 13 listed companies. In total, these 27 corporates are worth somewhere between $16.4bn and $19.7bn, and account for about 20 per cent of the bourse’s total market capitalisation. The IRGC’s share is about 10 per cent of the TSE.

Widespread influence

The companies involved cover a wide range of sectors and include carmaker Bahman Group, Telecommunication Company of Iran, Shiraz Petrochemical Company, Parsian Oil & Gas Development Company and Iran Zinc Mines Development Company. The nuclear deal with Tehran, which saw many sanctions removed from January this year, does not seem to have made much difference to its portfolio, according to Saeed Ghasseminejad, an associate fellow at the FDD.

We have not seen a fundamental change in the IRGC-military share of the TSE,” says Ghasseminejad. “Given that, unlike the macro-economic variables, market prices are forward-looking, one may conclude the market does not anticipate a fundamental change in the IRGC’s economic influence.”

In addition, the FDD says it has identified 218 private companies owned by the IRGC Cooperative Foundation, also known as Bonyad Taavon Sepah, and a further 85 businesses run by the Basij Cooperative Foundation, part of the IRGC’s volunteer militia arm, the Basij. These bonyads, or trusts, are even more opaque than regular companies, so it is all but impossible to know the true extent of their activities. In addition, the firms they have shareholdings in often have many subsidiaries, which in turn have subsidiaries of their own. This leads to a situation where the IRGC exerts influence or control over many ‘front companies’ that have no obvious ties to the organisation.

“When you’re doing due diligence, in many cases it’s quite difficult to get a clear understanding of who the shareholders are and of course the shareholders could include the IRGC, “ says John Whittaker, a partner at UK law firm Clyde & Co. “The problem is also in relation to bonyads. Because of the nature of trusts, you can’t really understand the ownership.”

Sanctioned firms

Some, but certainly not all, of the companies linked to the IRGC have been included in various sanctions put in place by the US, EU and others in recent years. Among the companies that the US authorities and others have identified as being owned by the IRGC are construction and engineering firm Khatam al-Anbia Construction Base, port operator Tidewater Middle East, and National Iranian Oil Company.

Of these, Khatam al-Anbia is one of the most significant, with extensive involvement in the oil and gas, petrochemicals, transport infrastructure, water, mining and other sectors. It employs an estimated 135,000 people, according to the FDD, and has more than 800 subsidiaries. Khatam al-Anbia has been involved in more than 50 contracts with the Ministry of Petroleum and numerous non-oil projects, including Line 7 of the Tehran Metro and the Bakhtiari Dam in the west of the country.

Finally, the IRGC is also thought to be heavily involved in the grey and black economies, although putting a valuation on that is difficult for obvious reasons. Ghasseminejad suggests Iran’s shadow economy is worth $100bn-$140bn a year. “The IRGC is the major player in this shadow economy,” he says.

All in all, this adds up to a complex and wide-ranging business empire taking place alongside the organisation’s original purpose of protecting the revolution from foreign and domestic opponents.

One reason why the IRGC has become so big and economically powerful is the sanctions themselves. When international firms were forced to leave Iran, it left the field open for domestic companies and the IRGC was able to step into the gap. It has a ready network of members and former members throughout the public sector, and this helps it win contracts and gain access to preferential exchange rates, among other benefits.

Powerful correlation

“There is a powerful correlation between the intensification of multilateral sanctions on Iran and the expansion of the political and economic influence of the Revolutionary Guards,” said Suzanne Maloney, senior fellow at US think-tank Brookings Institution, in a hearing at the US Congress on 17 September last year. “During the same years that the Iranian nuclear impasse intensified and economic pressure mounted, the political and economic role of the Revolutionary Guards expanded markedly.”

Now that many sanctions have been lifted and the economy is starting to open up, there will be more opportunities for IRGC-affiliated businesses. All of this matters for international firms because the IRGC remains under sanction by the US and others.

However, it is also perhaps easy to overstate the importance of the body and its related bonyads. While many of the companies they control are important actors within the economy, they still form just one part of the wider picture and the reforms of recent years have meant their relative power has diminished, according to some observers.

“We have quite a large group of semi-government institutions and players in the Iranian economy. They go well beyond the IRGC and the bonyads,” said Rouzbeh Pirouz, chairman of Tehran-based investment firm Turquoise Partners, speaking at an Iran investment conference in London in March. “As a result of the privatisation process that we’ve had over the past decade, the relative significance of the bonyads in the Iranian economy, relative to the pension funds, the Iranian social security fund and so on, is significantly diminished.”

Iran to get sovereign rating within months

Published in MEED, 10 March 2016

A rating will help Tehran access international capital markets

Iran could have a sovereign rating within the next few months according to industry figures, marking an important point in its return to the international mainstream.

The authorities in Tehran are understood to be in discussions with the three main ratings agencies and industry executives expect one or two of them to be given the go-ahead in the near future to prepare a rating.

The move would allow the Iranian government to access international capital markets and, more importantly, provide a benchmark for other corporate issuers in Iran. At the moment, in the absence of any ratings agencies, local banks in Iran provide guarantees for corporate bonds, but formal ratings would allow companies to access the debt market in a more straightforward fashion.

Iran has not had a sovereign credit rating from any of the big three agencies for at least eight years. Fitch Ratings withdrew its rating in 2008. At the time it gave the country a long-term foreign currency rating of B+. Moody’s Investors Service rated Iran at B2 from 1999 to 2002. Standard & Poor’s (S&P) has never rated Iran.

A Fitch executive confirmed that his company is in discussions with the Iranian authorities and that its team of sovereign analysts was “ready to go”.

If a deal is agreed, the task would be carried out by Fitch staff in London and possibly Hong Kong and it is likely to take six to eight weeks to do the necessary work, meaning the rating would be issued “hopefully by the summer” he said.

Fitch says it will be careful not to involve any US staff in the work, given the ongoing US sanctions which bar American citizens from involvement with Iran’s financial sector.

S&P and Moody’s both declined to comment on whether they were in talks with the Iranian authorities.

Any move to provide a new rating will be welcomed by the financial community within Iran. “Before sanctions, the government was rated [and] some of the Iranian companies – automakers, industrial companies – were rated. We hope to see that soon,” said Majid Zamani, chief executive of Kardan Investment Bank, speaking at the FT Iran Summit in London on 9 March.

Executives jet in to Iran, but legal pitfalls could put brake on investment

Published in Gulf States News, 26 November 2015

The world’s 28th largest economy holds almost as many risks as opportunities for international investors, and questions will persist about doing business in Iran even after sanctions are lifted.

Nothing has yet changed, for all the excitement caused by the agreement to end Iranian sanctions, signed by Tehran and the P5+1 group of six international powers in July. No sanctions have been removed and none will be until the United Nations’ nuclear watchdog, the International Atomic Energy Agency (IAEA), confirms that Iran has met its side of the Joint Comprehensive Plan of Action (JCPOA) by scaling back nuclear activities. When that happens, on the JCPOA’s ‘Implementation Day’, some elements of the trade embargo will be lifted, but many restrictions will remain, as credit insurers and trade financiers have understood since the deal was agreed.

It is not yet clear when Implementation Day will fall, although most expect it to happen in H1 16 – possibly as soon as Q1 16. At that point, there will be two distinct groups of international companies: US firms, for whom not much will change, and European Union companies, who have been flooding into Tehran.

A few areas will be loosened up for corporate America – for Persian carpets or US aircraft parts, for example – but sanctions imposed as a result of Iran’s alleged terrorism-related activity and money laundering will stay; Iran will remain off limits to most US businesses.

The EU will dismantle much of its trade embargo, and US sanctions that sought to prevent third parties from doing business with Iran, known as secondary sanctions, will be removed. Other governments that have broadly followed the EU’s sanctions policy, such as Norway and Switzerland, will probably take a similar position. “US companies are absolutely at a disadvantage as a result of this deal,” said Eytan Fisch, counsel at US law firm Skadden and a former Office of Foreign Assets Control (Ofac) official. “Non- US companies… are going to benefit most from the sanctions relief. They will have the greatest opportunity,” he told GSN.

Businesses that fall between these two groups are in a grey area. Non-US companies that are owned or controlled by US companies or individuals may still be subject to stringent US sanctions. “It is really up to the almost complete discretion of the US government as to what they decide to do,” said Fisch, of this third group. “It’s not clear exactly what will be done. It’s really a big unknown.”

All companies have other issues to navigate. The ban on US dollar transactions with Iran is likely to remain, and US banks will not be able to process most payments involving Iran. The export, or re-export, of any US-made goods to Iran will still be banned. Although European banks will be able to process payments from Iran, many will be cautious about doing so.

“Banks are very much in a wait-and-see scenario,” said British Bankers Association director of financial crime Justine Walker. “How do you really make sure that you carve out your business with Iran in a way that you’re not going to violate your US exposed individuals or business lines? That’s going to take time.”

Many Iranian individuals and companies will remain under US and EU sanctions until the IAEA concludes that Iran is behaving according to the deal. That point, known as ‘Transition Day’, is unlikely to happen for eight years. Among those that continue to be sanctioned will be important economic players, including companies associated with the Iranian Revolutionary Guards Corps (IRGC). The opaque nature of company ownership in Iran means that carrying out background checks on potential partners will be vital (although US due diligence firms may not be able to work on such projects).

Chief executive of London-based law firm W Legal Nigel Kushner said questions remained over companies that are potentially still politically compromised and have previously been placed under sanctions by the EU and UN, as well as Ofac. One example is Tidewater Middle East Company, the main container operator at Iran’s busiest port, Shahid Rajaee at Bandar Abbas, which has been traced to IRGC ownership and operations. “The way I read the asset freeze, it can be argued that any shipment to an Iranian port owned or controlled by Tidewater, or perhaps the Revolutionary Guards, will potentially result in criminal exposure for the shipper or the exporter,” Kushner said. “This issue is absolutely critical and must be addressed and clarified by the EU.”

Tidewater Middle East and associated companies were added to the US Department of the Treasury’s list of specially designated nationals on 23 June 2011, on the basis that it was owned by Mehr-e Eqtesad-e Iranian Investment Company, Mehr Bank and the IRGC, and that it has been used by the IRGC for “illicit shipments”. These companies have no relation whatsoever with giant US international shipping company Tidewater.

There is also the risk that sanctions may be re-imposed if relations between Iran and the west turn sour. Accounting for that ‘snap-back’ will require careful drafting of any contracts, so that international firms can retreat at minimal cost. “It’s imperative that people who jump back into Iran do so with their eyes wide open, knowing the commercial risks,” Kushner concluded. Iranian officials are counseling caution. Deputy oil minister Roknoddin Javadi told Mehr news agency that he expected only five major oil contracts to be signed with international companies before the government’s term ends in August 2017.