International investors can now access Iran’s stock market with greater ease and the oil-rich nation has a greater chance of saving its struggling economy.
A Quick Flashback
After the Iranian Revolution in the 1970s, Iran continued its illicit nuclear activities despite concerns brought out by the US and other world powers. Due to continued noncompliance with its obligations to the Nuclear Non-Proliferation Treaty (NPT), the UN Security Council’s P5+1 (consisting of the United States, China, France, Russia, the United Kingdom and Germany) imposed prohibitive sanctions in 2006 to 2010.
This immensely restricted the country’s access to materials and technology necessary for improving efficiency in the Oil and Energy sectors. A domino effect followed: Oil production declined and foreign direct investment plummeted because oil companies were discouraged and withdrew from Iran.
Even though investments on Iran’s bourse was still legal for a good number of international investors, international financial transactions became almost impossible due to the prohibitive sanctions on Iran’s banking system.
Over the years, the country suffered severely and experienced a plunge in the economic standpoint, with $100 billion dollars lost in oil revenues and its Iranian Rial devaluated almost beyond recovery.
The End of the Dark Age
Iran is now welcome to join the International trade. The international sanctions have been recently lifted just this January 16, 2016.
The International Atomic Energy Agency (IAEA) confirmed that Iran had effectually disassembled its nuclear weapons program, and so the lifting of sanctions almost instantly followed. This ensued the meeting between P5+1 and Iran held in Lausanne, Switzerland back in April 2015, wherein a provisional agreement to ease sanctions in exchange for prohibitions on Iran’s nuclear ambitions was reached.
Oil export sanctions have been removed and foreign firms can now negotiate investments with Iran not only concerning oil and gas, but also automobiles, hotels and other sectors.
Iran’s funds abroad, approximating $100 billion, is now declared unfrozen. Reconnected to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the country can now utilize the global banking system.
Why Invest in Iran
- Although already highly industrialized, Iran’s industry still continues to grow. Back in 2007, 324 companies were listed on the Tehran Stock Exchange (TSE). It had a total market capitalization (MC) of US$42,452 million. Fast-forward to 2012 and 324 became 339, an impressive growth rate in a span of five years. The combined MC of these 339 companies was a whopping $104.21 billion.
- In 2015, Iran was described by the Wall Street Journal as “full of well-run companies.” The energy superpower is directly involved in 37 industries in the automotive, petrochemical, steel iron, copper, agriculture, telecommunications, banking and insurance, and financial mediation sectors. A high percentage of said industries are active traders in the Stock Market.
- The 2004 amendment of Article 44 in the Iranian Constitution makes things even easier. Its general policies promote the privatization of a good number of state-owned firms. People can now buy shares of these newly-privatized firms.
- Iran has a market cap of roughly $90 billion and ranks fifth in the largest stock market largest stock market in the Middle East. It is now in competition for investors with Saudi Arabia, which ranks first as the largest stock market in the region to establish direct foreign ownership seven months ago.
- Iran is the second largest oil exporter, as recognized by the Organization of Petroleum Exporting Countries (OPEC).
- It is the fourth in oil reserves, estimated to have 153 billion barrels.
- Second only to Russia, it is home to an overwhelming 33.6 trillion cubic meters of gas reserves.
- In addition, it is the third largest natural gas production, next to Indonesia and Russia.
The Investors’ Dilemma
From the outside looking in, the ‘big news’ about Iran’s sanctions being lifted sounds pretty exciting. On the other hand, seasoned investors are well aware of the obstacle course that awaits them. A certain amount of risk-taking and daring attitude is necessary if you wish to pursue your investments with Iran.
Certain sanctions may have been lifted, but there are still remaining ones that can present quite a dreadful affair for the compliance departments of larger institutions.
Danforth Newcomb, a sanctions lawyer at Shearman & Sterling in New York emphatically said, “Many of the major European-based financial institutions have recently been involved in enforcement proceedings because of problems they’ve had with U.S. sanctions.” To settle these inevitable disputes, they “put in place what are U.S.-style sanctions-compliance programs, and that will make many of those institutions gun-shy about having financial transactions with Iran,” Newcomb added.
Then here’s another vital thing that should not be overlooked. The nuclear deal which will undoubtedly boost Iran’s economic gain has provisions that can reinforce sanctions when circumstances demand it. This agreement is within a 10-year period after the deal is sealed. And a lot can happen in a span of 10 years. International investors are at risk of having their money trapped if ever circumstances lean on the extreme side.