Iran investors need to tread carefully

13 January 2016

Vast opportunities are presented by the lifting of sanctions, but interested firms must expect challenges

The prospective return of Iran to the international fold has been likened to a sleeping giant about to wake up. With a population of nearly 80 million and the second-largest GDP in the Middle East, the Islamic Republic is the largest economy cut off from international investors.

The removal of sanctions on Iran is one of the most significant changes to the business landscape ever seen

The lifting of economic sanctions, expected in early 2016, will unleash significant spending on the oil and gas industry as well as other sectors of the economy, which have been starved of investment and access to state-of-the-art technology for years.

It will also open up the Middle East’s second-largest consumer market after Egypt, with huge pent-up demand for goods and services, from cars and electronics to food and beverages.

Cautious approach

The removal of sanctions on Iran is one of the most significant changes to the business landscape ever seen in the region and it offers vast opportunities for local, regional and international firms. But companies need to tread with caution; the business environment is still challenging and complex.

With Iran having been closed off to much of the world for so long, obtaining detailed and accurate information is difficult and time-consuming for those considering entering the market.

With a GDP of about $400bn, Iran has the second-largest economy in the Middle East

Source: MEED

The Joint Comprehensive Plan of Action (JCPOA) to remove sanctions on Iran that was agreed on 14 July 2015 opens up the prospect for regional and international firms to once again do business with Iran. This will come in return for credible action by Tehran to demonstrate that its nuclear programme is designed purely for civilian purposes. In the agreement, Iran reaffirmed it will never seek, develop or acquire nuclear weapons under any circumstances.

Iran potential

With a GDP of about $400bn, Iran has the second-largest economy in the Middle East, while its population of nearly 80 million is the second-highest in the region.

Should international sanctions be lifted as expected in early 2016, the Iranian economy is set to enter an era of high growth driven by strong exports of oil, gas, petrochemicals and other manufactured goods.

The increase in export revenues, together with unfrozen assets and an inflow of foreign direct investment will enable Iran to move forward with a large pipeline of strategic projects that have stalled in recent years due to a lack of financing or technology.

The investment priorities in the oil and gas industry include enhanced oil recovery projects and the construction of liquefied natural gas (LNG) export facilities. Iran shares the world’s

largest gas asset with Qatar and has the potential to become a leading LNG exporter if it can access the right technology. To encourage foreign investment in the energy sector, the Petroleum Ministry is preparing to launch a new contract model known as the New Iranian Petroleum Contract.

Methanol production

Iran has the second-largest petrochemicals industry in the Middle East after Saudi Arabia and has huge plans to grow the sector further, including becoming the world’s largest methanol producer. Unlike elsewhere in the GCC, it has rising volumes of ethane feedstock, but restrictions on imports have constrained the industry in recent years, causing projects to stall.

The Islamic Republic also has ambitions to significantly increase production of steel, copper and aluminium by 2025. It already has the largest mining industry in the Middle East.

Electricity demand is expected to grow at 6.5 per cent a year until 2020 and it is estimated Iran will need to add some 25.6GW of new generating capacity over this period. The total required investment in generation, transmission and distribution projects is estimated at $70bn.

Transport overhaul

Iran benefits from an advantageous geographical location, with established export routes into Central Asia, the Middle East and beyond. However, all transport infrastructure is in need of modernisation. Plans are in place to build thousands of kilometres of new railways and metro lines as well as to upgrade existing ports and airports.

With the upsurge in interest in doing business in Iran, Tehran faces a severe shortage of hotel rooms, with just 96 hotels in the capital. International hotel chains are already eyeing the market.

With its huge population and hydrocarbons endowment, the Islamic Republic has the potential to quickly overtake Saudi Arabia as the region’s largest economy once sanctions are lifted.

The main risks include an uncontrolled collapse in world oil prices due to intra-Opec competition, principally involving Iran, Iraq and Saudi Arabia. Intense competition among energy suppliers is possible after the end of restrictions on Iranian oil exports, driving prices down further.

Another risk is the collapse of the sanctions relief programme either due to objections in the US or by the failure of the Islamic Republic to adhere to the conditions of the deal. This will immediately lead to the re-imposition of at least some sanctions.

This article is adapted from the executive summary of MEED’s Opportunity Iran 2015 report, a comprehensive assessment of the opportunities and risks of entering the Iran market. To find out more and purchase the report, visit


Sanctions timeline

Finalisation day: This is the signing of the JCPOA agreement on 14 July 2015.

UN Security Council approval: This was secured on 20 July.

Review by US congress: The president submitted legislation facilitating US engagement with the JCPOA for approval by Congress. Congress rejected it, and the president vetoed its decision. This could only be overridden by a two thirds majority in both the House of Representatives and the Senate, which the opposition to the legislation failed to reach. This meant the president did not need to use his power of veto on the decision.

Adoption day: On 18 October, the UN, multilateral and national jurisdictions reviewed the JCPOA.

Implementation day: This is when sanctions start being lifted. It can only be announced after the International Atomic Energy Agency (IAEA) has found Iran compliant with the conditions of the JCPOA. On 15 December 2015, IAEA director general Yukia Amano said Iran still had to take preparatory steps. “Confirming the level of enrichment will take a minimum of three weeks,” he said. Once Iran has finished its steps, he said, the time required would be “not days, not months”.

The first half of 2016 should see:

  • The US ceasing most sanctions, removing individuals and entities from blocked persons lists and terminating executive orders about Iran’s nuclear programme
  • The UN terminating the provisions of all sanctions called for in Security Council resolutions
  • The EU terminating and suspending all sanctions against Iranian agencies and individuals
  • All related national actions are also likely to be suspended at that point


Tehran exchange braced for fivefold gains

Market is seen as last major untapped opportunity

Iran’s Tehran Stock Exchange (TSE) market capitalisation could increase by more than 400 per cent to $500bn in the five years after sanctions are lifted, according to projections by local Turquoise Partners.

The TSE has a market capitalisation of $98bn, the second-smallest compared to GDP, at 25 per cent, in the Middle East, according to Dubai-based Mubasher Trade. This indicates that there is ample room for

expansion, given that Tehran has one of the most diversified economies in the region.

Turquoise Partners took the experience of Turkey, as foreign investment flooded in between 2002 and 2007, as a model. The Borsa Istanbul index rose 580 per cent over the period as foreign ownership grew from negligible levels to about 40 per cent.

“Turquoise Partners was contacted by over 100 serious investors in the week after the nuclear deal,” says Ali Mashayekhi, chief financial officer at the Iranian asset management firm. “They were mainly individual investors, but also emerging market funds and global banks doing fact-finding.”

Only about $1m of foreign investment is said to have flowed into the market so far.

The 10.4 per cent rise in the main index (Tepix) in the month leading up to the nuclear deal was mainly driven by renewed confidence from domestic investors. However, in the weeks since the announcement sentiment has softened, with a 3.2 per cent fall between 14 and 26 July.

Once the barrier of sanctions is lifted, the flow of foreign investment could increase to $100bn over five years, according to Turquoise Partners. Oil and gas, petrochemicals, consumer goods and the financial and insurance sectors are expected to be the first targets.

Concerns remain over accounting standards, transparency and corruption. “Iran is a risky, difficult market for investment but you can’t compare it to other frontier markets, which are underdeveloped,” says Mashayekhi. “In comparison, Iran has quite a good legal infrastructure, so the risks are economic and commercial, not legal.”

This figure would increase further if US-based MSCI began looking at including Iran on its frontier or emerging market indices. Despite recent efforts to upgrade the TSE, including the installation of an international-standard trading platform, some reforms will undoubtedly be needed for MSCI approval. MSCI is yet to make a statement on the topic.

The TSE total return index consistently outperforms the MSCI emerging and frontier market indices and is in the mid-range for emerging markets capitalisation.

It has a price-to-earnings ratio (PER) of 5.7 times, which is significantly more attractive than the emerging markets PER of 12.3 times, according to Mubasher Trade.

Foreign investors can own 20 per cent of the stock exchange, while the individual foreign investor limit on a single company is 10 per cent.


A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications