Resurgent Iran Is The Last Great Emerging Market

“Iran is one of the last remaining places, short of Mars and the Moon, where there is significant opportunity”. So says Sir Martin Sorrell, CEO of the global advertising giant WPP and one of the world’s most widely-followed analysts.

I agree that Iran – a country with a vast natural resource endowment and home to 81m people, many of them highly-educated – should rank among the world’s most exciting emerging markets.

Since the 1979 Islamic Revolution, though, and related Tehran hostage crisis, Iran has been isolated by the US and much of the rest of the world – part of George W. Bush’s “axis of evil”. The imposition of long-standing trade “sanctions”, tightened in 2011, reflected not just diplomatic pressure from Washington, but fears (particularly in Israel) that the ultimate goal of Iranian uranium enrichment was a nuclear weapon, rather than electricity generation.

Recently, of course, the geo-political winds have begun to shift. Less than a year ago, the five permanent members of the UN Security Council – the UK, US, China, Russia and France – agreed, together with Germany, to bring Iran back into the international fold. In mid-January, the International Atomic Energy Agency then verified Iran had met its related monitoring and decommissioning obligations.

Now, with Iran able to sell oil on international markets, and preparations being made to reconnect to the crucial SWIFT international payments transfer network, outside commercial interest in Iran is starting to grow. Optimists are likely to be buoyed by Iranian elections last week that, were our media not so understandably fixated on “Trumpania” and early Brexit skirmishes, would have received much more attention.

The notion of a Western rapprochement with Tehran has been in play since mid-2013, when Hassan Rouhani replaced Mahmoud Ahmedinejad as President. Instead of a firebrand religious hardliner, Iran was now represented by a seemingly moderate, English-speaking cleric.

“Our country has never sought, nor seeks, anything other than peaceful technology,” Rouhani opined at Davos in early 2014, one of many early trips abroad. “Iran is open for business,” he declared, insisting that “over the next three decades, we could become a top-10 global economy”. Many dismissed this claim as a pipe-dream, given the role of vested interests across the economy – particularly connected to the Islamic Revolutionary Guards Corps – and the continued political influence of religious hardliners.

I’ve just spent the last week in Iran – witnessing the elections and holding numerous meetings with financial and commercial leaders. Rouhani-supporting reformists secured a third of seats in the national parliament. Together with moderate, pragmatic conservatives, that amounts to a majority in the 290-seat assembly. While notable ultra-hardliners lost their seats, Rouhani himself secured election to the influential Assembly of Experts, as did his ally, former President Rafsanjani.

It’s true that, ahead of the election, many reformist candidates were “disqualified” on dubious procedural grounds, as some tried to protect the isolationist principles of the Islamic revolution. Despite that, or perhaps partly because of it, Rouhani’s “Coalition of Hope” fared extremely well – suggesting the majority of voting Iranians (and there was a high 76pc turn-out) feel the nuclear deal and global engagement are the best way to generate economic and social benefits.

Particularly striking was the outcome in Tehran, where reformist and centrist candidates won all 30 seats in the local parliament and 15 of the 16 seats in the regional Assembly of Experts. As the main theatre for the power struggles between competing factions and state institutions, the Iranian capital shapes the broader political climate across the Islamic Republic. This bodes well for Rouhani – expected to seek a second Presidential term in 2017.

If the politics allow, Iran’s economic potential is head-spinning. Its spectacular resource endowment includes 160bn barrels of proven oil reserves – the world’s third or fourth-largest haul, depending on how you count. Add to that confirmed natural gas treasures of 33 trillion cubic metres – more than Russia on the most recent estimates – and you have the makings of an energy colossus.

With sanctions lifted, Iranian oil exports could soon rise from 1.1m to 3m barrels a day, the average level during the mid-1990s when sanctions were looser. Back in the early 1970s, during the days of the Shah, over 5m barrels of Iranian crude hit global markets daily. Restoring those kind of flows would make Iran twice as important a supplier as Kuwait – complicating the politics of the Opec exporters’ cartel, but generating billions of dollars for the Iranian economy.

In 2012, just before Rouhani took office, Iranian GDP shrank by over 5pc, the economy gripped by sanctions. Since then, growth has returned, with independent Western analysts estimating a 1pc expansion last year, rising to 4.5pc in 2016 and 5.4pc the year after, as sanctions fade. Already, Iran is comfortably in the world’s 30 largest economies in dollar terms, and among the top-20 when adjusted to local living standards.

Along with natural commodities, the country also boasts a largely literate, highly-skilled population – its numerous universities long-producing a steady stream of scientists and engineers. Ayatollah Khomeini’s revolution, with its theocratic clampdown on enterprise, meant Iran missed the emerging markets revolution that, from the mid-1980s onwards, ignited the rapid expansion of economies like China, India and Turkey. Rouhani campaigned to reverse that, stating repeatedly that he wants Iran to “join the rest of the global economy”, positioning it as “a major international investment destination”. These Iranian elections, no doubt imperfect, soundly back that agenda.

Following my visit – which took in the Tehran Stock Exchange ($100bn market capitalization), meetings with leading paper, glass and internet providers and side-trips to the ancient cities of Qom and Kashan (where I visited the site of one of the world’s oldest settlements, dating back to 4,000BC) – I have a few observation.

The first is that, for all the opprobrium directed at Iran, this country isn’t short of smart, hospitable people. In addition, while Iran has national debt of less than 10pc of GDP, and a population share with higher education exceeding 50pc (above many Western countries), wage levels are highly competitive – comparable to Vietnam.

It’s also clear that Iran is well-placed to regain its traditional role as a trading hub. Bigger than Peru and South Africa, and with a huge, often multi-lingual population, it’s a natural gateway to a broader 300m-strong regional market. In fact, as a natural transit region between Europe and China, Iran is very much part of “the New Silk Road” – an idea increasingly popular in the minds of large institutional investors.

We shouldn’t get carried away. For all Rouhani’s momentum, real economic reforms will be tough. A decade of sanctions has created a lot of shadowy practices benefiting those less well-disposed towards legitimate business folk, from Iran or elsewhere. Those gains won’t be given up lightly.

US politics is also on a knife-edge – and, after elections to the White House this November, America may well become more outwardly belligerent, at least in rhetorical terms. That could spark a hard-liner backlash in Iran.

It’s also worth saying that, even if Rouhani has a chance to deliver significant economic progress, Iran could be more interested in partnering less with the West, than with China – already its largest trading partner. In January, during President Xi Jinping’s latest visit to Tehran, the two countries agreed to increase bilateral trade to $600bn over the next ten years.

Even the Supreme Leader – Khomeini’s successor, Ali Khamenei, who remains highly influential – voiced his approval for greater cooperation between China and Iran. It could be a while before he says that about the West.

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