Our next newsletter (Issue 72) will be published in September 2017.
Published: August 2017
In this issue:
- Iran’s momentous deal with French oil major, Total, delivered an early boost to the incoming Rouhani administration’s economic prospects. The US$4.9 billion gas production deal has raised hopes of a new era of international economic engagement.
- Total’s gamble has reverberated around the international investor community, potentially blazing a trail for international investors from outside the United States to find the confidence, and the payment channels, to make business with Iran viable.
- The Total investment could be seen as a reward for the Rouhani administration’s compliance with the JCPOA. The contract is a testament to the faith the French company has in Iran’s ability to avoid sanctions “snap-back”.
- The deal irked some hard-liners, however, including IRGC leadership figures, who have been embroiled in an ongoing spat with the administration over the military body’s domineering role in the Iranian economy.
- Khatam al-Anbia insist the deal should have remained Iran-only, rejecting the premise for how foreign investment can benefit the Iranian economy with capital, jobs, technology and know-how.
- The President is correct to point out the IRGC’s role in the economy has been damaging. It is not unpatriotic to say so. In fact, replacing the IRGC with private enterprises would be good for the Iranian people: reducing corruption, encouraging competition and creating jobs.
- President Rouhani has firmly placed economic objectives at the heart of his agenda for his second term as President of the Islamic Republic. The focus is squarely on jobs, but wide ranging reforms are necessary to make a difference.
- Many businesspeople are waiting to see how the new President will deliver on his pledge to root out corruption. He has started positively by publicly criticising the counter-productive role of the IRGC and armed forces in the economy.
- There is a widening gap between Iran’s improving macroeconomic performance and the real experience of small businesses and ordinary people: corruption is clogging up the transmission mechanism. Business surveys continue to reveal a sentiment amongst small business owners that the economy remains stagnant, despite strong macroeconomic growth.
- The President also renewed his pledge to free the Islamic Republic from economic sanctions. Atmospherics are not positive with the United States, especially given Saudia Arabian rift with Qatar, but US actions has been constructive. The JCPOA is still on track, as are substantial business deals such as Boeing’s multi-billion dollar aircraft sale to Iran air.
- The Financial Action Task Force extended its temporary hiatus on sanctions, subject to Iran’s compliance with FATF requirements, including greater transparency about financial dealings. Many Iranian elites object, but why? Perhaps a fear of exposing corruption at the highest levels of government and throughout the system.
- President Rouhani’s landslide win in the 19 May Presidential election made a clear statement: the people of Iran want to open up and reengage with the world.
- A demanding public will not wait forever for economic results, but Rouhani must prioritize achieving meaningful and sustainable long-term growth and employment. There is no quick fix for stubbornly high unemployment. It requires structural reforms that will facilitate a greater role for small and medium sized enterprises and foreign investment.
- A lack of access to international finance clearly remains a significant obstacle for private firms; but one that can be overcome. The government must press ahead with banking reforms and build faith in its financial system overseas, bringing Iranian banks up to international standards.
- The electorate gave Mr Rouhani a powerful mandate to clean up Iran’s business environment, root out corruption and thus open the economy up to effective international interaction. A striking 57% of Iranians think corruption has gotten worse in the last five years.
- The President found great support for his plans for faster and more effective privatization, which will bring more opportunities for entrepreneurs and a fairer business environment. This means reducing the role of the IRGC and state entities in the economy and can be achieved by structural reforms, regulatory changes and enforcing the rule of law.
- Rouhani needs to place business at the heart of his agenda. This means cutting the fat in government spending and reconsidering expensive military adventures. The Syrian conflict alone has cost the Iranian tax payer close to $6bn in loans, which may not be repaid and for which any benefits will accrue to well-connected IRGC players, not ordinary firms.
- On the 19th May, the Iranian people will cast their votes in the Islamic Republic’s 12th Presidential election.
- The successful candidate must move quickly on a number of vital, structural economic reforms. Stubbornly high levels of unemployment cannot stagnate for four more years. The solution lies in the private sector.
- Three decades of poorly managed privatisation policy have created an unbalanced and non-transparent business environment in Iran. A general lack of faith in the rule of law and the independence of the judiciary have kept out foreign investors. This has to change.
- The domineering presence of the state in Iran’s economy has a directly negative impact on business dealings. Foreign investors see blurred lines as to who they can and cannot deal with and the state presence suffocates private enterprise.
- Considering the field of available candidates on the 19th May, the international business community would endorse a second term for President Rouhani who has stated clearly that preserving the JCPOA and building on Iran’s position as a fully functional member of the international trading and financial system is a priority.
- If he wins a second term, Mr Rouhani would have to do more to tackle unemployment and boost the role of the private sector. As the candidate positioning himself as the enemy of corruption on the campaign trail, if he can successfully separate the functions of the state and military from the economy he will unlock the jobs and growth the Iranian electorate sorely needs.
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