Amir Behroozi, The Simorgh, The Essentialist, Atieh International, iran

Was Iran Just a Hype?

Bijan Khajehpour

Five reasons to re-evaluate Iran’s opportunities.

In the run-up to the announcement and implementation of the Joint Comprehensive Plan of Action (JCPOA) that initiated the lifting of nuclear-related sanctions against Iran, there were high expectations for the last major frontier market that would offer massive opportunities to Western companies. Today, almost a year after the JCPOA implementation, there is a sense of disappointment.  

Evidently, the pace of re-engagement of the international business community in Iran has been slower than many expected.  This was partly due to the significant changes in the international financial sector and the difficulties that international and Iranian banks have faced to reconnect. These processes take time, which many seem to have underestimated.

Nonetheless, despite financial and other operational issues, EU exports to Iran have increased by more than 25% in 2016 compared to 2015 and experts believe that the EU could recover its previous position of becoming Iran’s largest trading partner with an annual trade volume of more than €30 billion.

Fact is that Iran as a country has its own pace and its own approach to developing a long-term relationship with the EU. For some, this pace is too slow. For others, it is that different approach to long-term relationships that is too foreign, as they consider Iranians tending to politicise trade and investment issues, which creates additional challenges in dealing with the market. Notwithstanding, those who come into contact with the market feel the enormous potential.  

The core question is whether this potential will be long-term or whether there will be hidden risks that will undermine the activities of Western companies in Iran. Was Iran just a hype? Or is it a still underestimated opportunity?

In this article, I will present a number of facts and trends divided into five categories to underline that Iran offers a major medium- to long-term potential and that this economy is moving towards gaining more significance as an economic and technological power.

Market characteristics that need to be appreciated in Iran include the following:

  • A moderate society with a sizable middle class

Experts and observers agree that Iran has the most moderate Islamic society among all Islamic nations. Contrary to many of its peers, Iranian society has left revolutionary sentiments and extremist religious views behind and is experiencing a period of moderation and belief in evolutionary processes. This is often one of the many surprises people who travel to Iran experience. The new Iranian mindset especially of the young generation is modern and open to arts, science and new technologies.

bildschirmfoto-2017-01-23-um-15-50-46

Experts agree that this trend of moderation will be sustainable and that Iran will remain a market with minimal social or political upheaval, even though it is surrounded by a number of countries that are experiencing violent processes and socio-economic challenges. The expected period of economic growth will also expand the country’s middle class, which will be the main engine behind a sustainable social development.

  • Rich in resources

Iran has a unique combination of different natural and human resources. It is known for its energy resources (the largest gas reserves and the fourth largest oil reserves in the world, according to the BP Statistical Review 2016), but it also houses 31 billion tons of known mineral resources such as the largest zinc reserves, second largest copper reserves and major reserves in rare metals. More important than the massive natural resources are the country’s human resources, i.e. a young, educated and dynamic society that is ready and eager to engage in the global economy.

  • Socio-economic trends

One of the most significant aspects of Iran’s more than 80 million population (March 2016 estimates) is its demographic profile. After the 1979 Islamic Revolution, the government discontinued birth control policies and as a result the population doubled, with the growth rate averaging 3.2% during 1980-1990. The growth dropped off to 1.5% in the 1990s and 1.24% in 2012 as the socio-economic implications of uncontrolled population growth became apparent and a successful birth-control programme was implemented. The following graph portrays the age distribution of Iran’s population (based on 2015 figures).

This young population presents both challenges and opportunities, but the main potential it produces is a society that will connect to global trends very efficiently. Furthermore, Iran has a very urbanised and modern society that presents a sustainable market for modern products and services.

  • Geo-strategic position

Iran’s geo-strategic position is one of the characteristics that has generated both advantages and disadvantages.

On a positive note, Iran connects two of the most important energy hubs in the world, i.e. the Persian Gulf and the Caspian basin including the Caucasus and Central Asia. As such, Iran will gain in significance as a transit route, not only for energy, but also for goods transport. This potential is reflected in the fact that Iran features strongly in China’s “One Belt, One Road” project (both on the land and the sea route) as well as in the Indian-Iranian project entitled “North-South Corridor” to create a transit route from the Sea of Oman to Central Asia.

  • Economic diversity

Iran has the most diverse economy among all OPEC producers.  A closer look at the sector distribution of GDP indicates that it is a relatively diversified economy. Though the oil sector contributes to about 15%, the service sector with about 54% enjoys the lion share of the GDP. Agriculture, industries and mining are the growing segments of the country’s economy.

bildschirmfoto-2017-01-23-um-15-48-37Graph: Distribution of the Iranian GDP (2015 figures, Source: Statistical Centre of Iran)

Another important phenomenon in the Iranian economy is the genuine growth of the private sector. This growth will gradually improve the business climate and remove some of the obstacles that international companies face when they engage in the Iranian market.

Overall SWOT Analysis

In order to assess whether Iran genuinely offers major opportunities to international companies, one needs to analyse the overall social and economic conditions in the country. Within the limits of this article, the strengths, weaknesses, opportunities and threats (SWOT) of the Iranian market have been summarised in the following tables.

Table 1:       SWOT Analysis of Social Conditions

Strengths:

  • Urbanised, wealthy society with a desire to connect to global trends, including technological advances
  • Interested in a peaceful transition rather than a violent upheaval
  • Young, dynamic and ready to learn and endorse modern concepts
Weaknesses:

  • Social tensions due to unjust distribution of wealth and subsidy reforms
  • Unemployment and underemployment
  • Social limitations, especially in dress code
Opportunities:

  • Investing in the Iranian society’s loyalty to foreign companies as long-term friends of Iran
  • Investing in the long-term potential of Iran
  • Becoming pioneers in introducing new technologies to the market
Threats:

  • Security issues emerging from the socio-economic tensions in society
  • Sporadic hiccups due to the young and impatient nature of the society’s majority
  • Sporadic unrest due to economic conditions
  • Spillover effects from regional tensions

Table 2:       SWOT Analysis of Iran’s Economic Conditions

Strengths:

  • Resource-rich economy (oil, gas, minerals etc.)
  • Expanding through an export-led growth
  • Diverse economic base
  • Geo-strategic position
  • Expected stability in economic and trade policies
Weaknesses:

  • Inflationary environment
  • Underdeveloped infrastructure
  • Shortcomings in business climate
  • Distorted economic realities due to revolutionary policies such as subsidies
  • Current transition due to subsidy reforms
  • Ambiguities in the economic doctrine entitled “Economy of Resistance”
Opportunities:

  • Utilising Iran’s enormous natural and human resources to create economic value
  • Taking advantage of relatively low cost of entry and consolidation in the market
  • Using domestic and/or international capital flows to reduce project risk (financing, partnerships etc.)
  • Partnering with Iranian companies to take advantage of the growing regional markets
Threats:

  • Overconfidence in economic terms might slow down the process of change
  • Negative short-term impact of lower oil prices
  • Undesired side effects of economic reforms (such as inflationary impact of subsidy reforms)

Essence

The above outline underlines the key characteristics of the Iranian market, which is now more open to international business. Evidently, there are still many issues that international investors will face and that is why the process of reintegration into the global economy has been slower than many expected. The overall trends, however, are positive.

Based on the above facts and trends, it is valid to argue that Iran will offer a major medium- to long-term potential to international investors. Due to its political and cultural characteristics, many developments will be slower than expected, but it will offer a more sustainable long-term outlook.

Learn more about economist and strategist Dr. Bijan Khajehpour. This article was first published in the print Essentialist in late 2016. Photo by Amir Behroozi via thesimorgh.org.

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