Iran's pivotal moment

By:
Chris Wright
Published on:

The security crisis brought on by the rise of Islamic State could turn Iran from pariah to much-needed partner to the west. Financial sanctions have hit both Iran’s economy and its banks hard. Inflation is rampant, NPLs are soaring, while banks lack capital. Corporates can’t get the funding they need. Local bank chiefs are itching to open their doors once again to foreign counterparties. If sanctions are lifted, what will the world’s bankers find in Tehran and beyond?

Iran

Iran is at a crossroads. The year ahead will determine which path it takes: a resource-rich, rejuvenated success story, returned to the international fold and relied upon by western states as a stable force in an increasingly troubled region; or a recession-hit, bad loan-addled failure still barred from western trade and getting steadily, inexorably worse. The view in Tehran is that it could go either way.

Geopolitics, the most unpredictable of forces, are slowly shifting in Iran’s favour, largely for external reasons. One would never have imagined it a few years ago, but Iran is suddenly a natural ally to the US, which badly needs a stable government in a region where Islamic State (ISIS) – which, being Sunni in its ideology, is never going to be a friend of Shi’ite Iran – is gaining worrying traction, particularly in neighbouring Iraq.

The aligning of the stars feels like a once-in-a-generation opportunity: a leader in Hassan Rouhani who wants to reach out to the west coinciding with a US president who wants to make peace and who badly needs a foreign policy success.

 Further reading
p]
•  Modern Middle East Bank shows there is no escape from sanctions
Ayandeh's DIY mega-merger sets template for Iranian bank consolidation
The long business arm of the Iranian state

At the same time, Europe has good reason to want better relations with Iran as its own relationship with Russia deteriorates. European reliance on Russian energy, chiefly gas, is clearly problematic; Iran has vast fields of the stuff and pipelines that already reach the Caucasus.

All of these things are bargaining chips for Iran as it tries to negotiate an end to nuclear sanctions in Geneva, and they raise the prospect of a sanction-free Iran ready to resume global trade and to make the most of its many advantages.

"I know that there are a lot of foreign entities – companies, contractors, investors – who are scrutinizing the situation," says Mohammad Amir Davoud, general director of international affairs at Bank Pasargad, one of the biggest and strongest private banks in Iran. "They are waiting to see the results of the negotiations between Iran and the P5+1 [the five UN Security Council states plus Germany with whom Iran is in negotiation around its nuclear programme, the initial cause of the sanctions] so they can rush back to Iran for further investment. History shows the Iranian market has always been a secure and positive haven for investors."

Indeed, Euromoney hears frequently of European businesses and banks that have informally visited Iran lately, assessing opportunities for when the right moment arises.

Such visits, and indeed the hopes of many in Iran and beyond, might have appeared premature when at the end of August the US Treasury announced a new range of sanctions-related actions against five Iranian banks. These included Bank of the Middle East, until then the biggest private Iranian bank to evade US sanctions.

But those inside Iran hope this is the last blow of the iron fist before the velvet glove of rapprochement is slipped on. They hope that sanctions relief could come as early as November.

And if that moment comes, what will the international financial community find when it gets to Iran? It is a mixed picture indeed. There is vast resource wealth, not just in hydrocarbons but minerals; a highly educated population keen to work hard in renewed international commerce; and a reformist government.

But there is also a bloated banking sector that is riddled with bad debt, odd accounting and a shortage of deployable capital, and an economy within which your business partner might well turn out to be the Revolutionary Guards. Nothing is simple in Iran.

First, the positive view.

Demographically, Iran has a lot going for it. Its population of 78 million is well-educated, it holds 9% of the world’s oil reserves alongside a broad-based manufacturing sector, and has a stock-market capitalization that stood at $170 billion earlier this year, similar to Poland’s and with a free-float bigger than Kuwait or Nigeria. It has a reformist president, Rouhani, who wants to engage with the rest of the world.

"We have a lot of competitive advantages," says Hojatollah Saydi, managing director of Kharazmi Investment Co, one of the vast investment conglomerates that dominate the Iranian stock markets and economy. "Firstly there’s the population: not only its size, but its youth. Secondly, there is our geopolitical position, [between Europe, the Persian Gulf and the growing resource-rich markets of central Asia] Then there is the level of education, very different from other countries in the region."

This is a huge source of pride: they say locally that the engineering graduates from Tehran’s Sharif University of Technology are right up there with the best of MIT. "And there is the potential: not just the oil and gas reserves, but our reserves of minerals." He lists a long and bounteous inventory: copper, gold, nickel, zinc, cobalt, phosphate, gypsum, limestone (he doesn’t mention the uranium, but that’s another story.) "For a young population, if some doors open for us, we can do many things."