Mar. 25, 2022

How investment insecurity pushes Iranian money outside Iran

Iran/Economy
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As Iran’s economic actors anticipate the outcome of the negotiations in Vienna to restore the 2015 nuclear deal, one thing is certain: Iran cannot count on massive investment from western countries even if an agreement is reached. Simply stated, large western enterprises will not risk investing in Iran for as long as there is a real possibility of yet another American unilateral exit from the accord after the 2024 US presidential elections.

Looking ahead Iran’s economic development will rather be dependent on potential investments from eastern powers, especially China and Russia, and most importantly, its own domestic businesses. This raises the question: how investor friendly is the current business climate in Iran for non-governmental domestic investors?

The latest available data from the World Bank’s “Ease of Doing Business Index” is from 2019 and not sufficient for a current analysis. But since 2018, the Majlis Research Center (MRC), an arm of the Iranian parliament, has produced a quarterly report called “Study on Investment Security in Iran.” Its findings rely on questionnaire-based research among business owners as well as public economic data. The report presents interesting findings on the current business climate in the country.

The report’s main objectives are to gauge whether domestic investors feel secure in the existing investment climate and to identify which parameters play a positive or negative role on perceptions of investment security.

Below is an overview of the key findings of the latest MRC report that relied on responses from almost 8,000 businesses in the spring of the previous Iranian year (Mar. 2021-Mar. 2022). This is notably before the change in presidential administrations in Aug. 2021, but it is almost certain that the trends have continued to the present time because little has changed in the key areas of interest.

The findings of the report make clear that investment security has deteriorated over the past few years. The report also outlines the factors that have strongly contributed to this trajectory.

  • Government policies: Investors view the government’s erratic policies as very destabilizing. The most damaging aspect of this trend for businesses has been misguided policies on subsidized exchange rates, fuel subsidies, weak management of the Covid-19 pandemic, and the lack of a clear economic doctrine. There is also a reference to empty promises and government plans and agendas not being realized.

  • Macroeconomic instability: A healthy investment climate needs stability, a phenomenon that has been in short supply in Iran over the past few years. High inflation, a budget deficit, the devaluation of the national currency, etc., have all been inhibiting factors for investment activity.

  • Lack of transparency and administrative cleanness: There is no doubt that corruption is a key inhibitor for businesses in Iran. The level of corruption depends on whether the investor is active in lucrative sectors, but various corrupt practices and the rentier mentality of many economic players provide for increasingly unfavorable conditions. The report clearly identifies the interference and collusion by government officials in business processes and tenders.

  • Lack of protection for intellectual property (IP): Even though there is a vibrant startup scene in the country, genuine innovation is severely undermined by the fear of IP theft. As such, lack of protection for IP is one of the key impediments to the development of new technologies in Iran. IP theft is often carried out by corrupt networks that rely on the weaknesses of the judicial system.

  • Lack of business morals/culture of dishonesty: Many economic actors are influenced by the level of dishonesty from the government as a whole. Like the other factors outlined above, many survey respondents believed that there was a growing trend of dishonesty and a decaying of business morals.

  • Lack of consistency in governance: It is one thing to suffer from weak and unstable policies, but another to face a governance structure whose behaviors fluctuate within the same legal and political reality. Changing interpretations of existing laws and regulations are most damaging for businesses that must deal with a high degree of uncertainty. The report refers to differences in the application of laws across provinces and institutions.

Interestingly, the only parameter on investment security that experienced an improvement in the MRC study was the safety of human and material capital against crime. This is a good start, but certainly not sufficient to attract investment.

The report also offers sectoral insights, asserting that the most favorable investment climate is in the mining sector, while the worst indicators were encountered in telecommunications, wholesale, distribution, transportation, and storage services. With respect to these industries, one needs to consider the negative impact of widespread smuggling activities on investment security.

All in all, the undesirable business climate in Iran has resulted in an exodus of domestic capital to foreign markets. In fact, the Tehran Chamber of Commerce assesses that more than 100B USD of domestic funds have left the country in the past decade because of investment insecurity.

The capital flight appears to be one reason for the conservative administration of President Ebrahim Raisi’s attempts to turn to the Iranian diaspora as a source of investment. But their associated statements and initiatives are half-baked and lack any credibility. A case in point is the foreign ministry’s invitation to the diaspora to check their legal status to see if they will face any troubles if they return to the country.

Speaking on condition of anonymity, one Iranian dual national who has been a target of the authorities said that he had applied to see if he would be cleared to return. After nearly six weeks, he was told he had no legal issues. Despite this, he has no plans to return. He told Amwaj.media, "I checked with contacts in Tehran, and nobody took it seriously. One person asserted that while I may not face formal charges from the judiciary, the issue is that the parallel security services have their own agenda and care little for formalities, including things like rule of law."

The reference to “parallel security services” is key to understanding the complexities of Iran. Not only in the security realm, but in almost all key sectors there are opaque and competing institutions that add to uncertainties. From an investor’s point of view, such parallel authorities translate into vulnerability, insecurity, and unpredictability—all of which serious investors want to avoid.

There is no doubt that President Raisi’s agenda of neutralizing the impact of external sanctions will depend on attracting Iranian investors to engage the domestic market. As such, addressing issues such as corruption, macroeconomic instability, and governance inefficiency should gain a higher priority. It remains to be seen whether the country’s political realities will allow for policy shifts that could pave the way for improving the business climate.

Bijan Khajehpour
Bijan Khajehpour
Bijan Khajehpour
Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - a Vienna-based international consulting firm. ... Full Bio
فارسیPersian
فارسیPersian
عربيArabic
عربيArabic