Investors in Iran await Trump’s next move

Published in MEED, 2 April 2018

When Patrick Pouyanne, CEO of French oil major Total, said in mid-March that his company wanted to continue with its contract to develop phase 11 of Iran’s giant South Pars natural gas field, it represented an important vote of confidence for Tehran amid its standoff with the US administration of President Donald Trump.

Trump has repeatedly threatened to pull the US out of the Iran nuclear deal – formally known as the joint comprehensive plan of action (JCPOA) – and has set 12 May as a deadline for the other signatories to address his concerns. Given the uncertainty this creates, companies are having to think up contingency plans in case the mercurial president reneges on the deal.

For Total and other companies that have invested time and money in Iran, one option could be to seek a waiver from the US authorities. But for companies and investors who have not yet committed themselves, there is good reason to be circumspect.

“For a lot of investors, it doesn’t make sense to pull the trigger before 12 May,” says Kiyan Zandiyeh, portfolio manager of Sturgeon Capital’s Iran fund. “That’s not from a lack of interest in investing in Iran. It’s because the US is providing uncertainty.”

While some deals are still being negotiated and signed, they tend to be from companies and individuals that are less exposed to the US market. On 14 March, for example, a consortium of Russia’s Zarubezhneft and Iran’s Dana Energy signed a 10-year contract with National Iranian Oil Company (NIOC) to develop and operate the Aban and West Paydar heavy oil fields – work that anticipates an investment of $740m.

That is small compared to the $4.9bn commitment that Total is making to South Pars phase 11, but, says Homayoun Falakshahi, senior research analyst at energy consultants Wood Mackenzie, “it is nonetheless significant. It signals strengthening Russia-Iran relations and could pave the way for other Russian companies to invest in Iran’s oil and gas industry.”

Across Asia and Europe too, companies are being actively encouraged by their governments to invest – a trend evident from the willingness of export credit agencies such as France’s Bpifrance and Italy’s Sace to offer lines of credit for trade with Iran. China also views Iran as an important staging post on its ‘One Belt, One Road’ initiative to develop trade flows from Asia through to Europe.

Investment firms say they continue to see interest in the Iranian market from their clients in Europe and Asia, but note that activity is concentrated among investors with previous experience of the market.

“Currently, most investment [in Iran] is coming from private individuals and family groups who do not need to repatriate their profits via hard US currency, corporates who have the requisite exemptions from the sanctions regime from the US, or corporates supported strategically by EU governments,” says Hasnain Malik, global head of equity research at London-based Exotix Capital.

For those willing to get involved, there is nevertheless plenty of opportunity. The Iranian government is being encouraging towards inward investment and the Central Bank of Iran is even pressuring Iranian banks to offload non-core assets.

There is meanwhile plenty of scope for improving productivity among local companies and plenty of appetite for consumer goods from the country’s growing middle class.

In addition, the Iranian economy has, by some measures, been doing quite well. The Washington-based IMF estimates GDP grew by 4.3 per cent in the 2017/18 fiscal year, which ended on 20 March, and will be about 4 per cent in the current year. Inflation has been holding steady at about 10 per cent – which is considerably lower than it was a few years ago.

Corporate performance has also been strong and, as of early March, the main Tehran Stock Exchange index, the Tedpix, was 39 per cent higher than a year ago. Exporters of steel, copper, glass and other goods are all finding new markets overseas, and, for exporters earning hard currency, the fall in the value of the rial over the past six months has greatly improved the value of repatriated revenues.

For investors, there are opportunities both in the capital markets, where shares from 600 companies are traded, and among unlisted private companies. Valuations are often substantially lower than emerging and frontier market averages and an annual earnings growth of 20 per cent is not unusual, according to observers.

According to Malik, three areas of particular interest are “engineering products and services to upgrade underinvested infrastructure, aerospace and power; financial services to reconnect Iran to the global capital system; and local language technology firms addressing online media, e-commerce and fintech.”

Others are drawn to heavier industry. “A lot of investors like the consumer space because of Iran’s growing middle class,” says Zandiyeh. “But a lot of these companies have never been exposed to foreign competition before now. We like manufacturing, which has a huge cost advantage. Iran could be a manufacturing hub for the Middle East. It has an abundance of energy, extremely low labour costs and it has the ports and other infrastructure.”

Against all this must be set some significant risk factors. Until the threat of renewed US sanctions is lifted, Iran will find it tougher to convert interest into concrete deals, while the fall in the rial has highlighted the significant risk posed to investments by currency fluctuations.

The sourcing of credible local partners remains a challenge in Iran, not least due to the risk of accidental partnership with an offshoot of the Iranian Revolutionary Guards Corps. The political protests that swept the country in late 2017 and early 2018 have meanwhile served to underline the risk presented by the still simmering political tension in the country between conservative and reformist camps.

Senior Iranian officials prefer to focus the blame for the relatively paltry level of inward investment on the US. In this narrative, Washington’s threats to abandon the JCPOA and its maintenance of some sanctions on the country are the main reasons that trade and investment are being stifled.

“As far as Iran is concerned, the JCPOA is not a successful story,” deputy foreign minister Abbas Araghchi stated at the Chatham House policy institute in London in February. “We are fully complying with our obligations, [but] Iran is not benefiting from the sanctions lifting in full … [because] the US is not complying with its obligations.

“They have created an atmosphere of uncertainty about the JCPOA, which is like a poison to the business community in Iran … Instead of a constructive atmosphere, we have now a destructive atmosphere, preventing banks, companies and business entities from working with Iran.”

For investors, there are two great unknowns at this stage. The first is if Trump will make good on his threats to pull the US out of the nuclear deal. The second is what would happen then.

The EU, Russia and China continue to voice support for the JCPOA and have urged the White House to stick to its obligations, but officials in Tehran are unconvinced the deal can survive the departure of the US. “We believe that if US sanctions are back, the European countries cannot protect their own companies against penalties by the US,” says one senior official.

Even if resumed sanctions can be avoided – through loopholes or exemptions – some investors will surely decide that it will not be worth the additional risk. “It is already very difficult to invest capital in or engage in commerce with Iran. US withdrawal from the deal would again take the market off the radar for much of the mainstream multinational corporate sector,” says Malik.